UAE’s pension system ranked 23rd globally

Mercer index benchmarks retirement income systems of 47 countries

The UAE pension system has performed well in the areas of adequacy and integrity, according to Mercer. Getty Images

The UAE’s retirement income system improved in the Mercer CFA Institute Global Pension Index, which ranked it 23rd among 47 countries with long-standing pension systems such as the US, Singapore and France.

The overall ranking reflects the “sound structure” the country has put in place for a funded pension system for Emiratis, with both the public and private sectors setting aside mandatory contributions during an employee’s tenure, according to the survey, which includes the UAE for a third consecutive year.

The UAE’s ranking also accounts for the progress being made to put in place a new retirement savings programme to support private sector employers and foreign employees as they plan for their financial future.

Globally, Netherlands took the top spot, followed by Iceland and Denmark, while Argentina was ranked last, according to the index.

The index is a study of global pension systems that account for 64 per cent of the world’s population. It benchmarks retirement income systems around the world.

“The UAE’s index score improved this year, reflecting the continued drive to support economic growth and attract skilled talent, including recent changes to end-of-service benefits,” Robert Ansari, Mercer's head of investment and retirement for India, the Middle East and Africa, said.

“The UAE has fared better than a number of more established global peers. Like many of its peers, the UAE is preparing for an increased population size entering retirement, necessitating a well-run and adequately provisioned pension scheme.”

The UAE pension system scored highly, compared with global peers, in the areas of adequacy and integrity, Mercer said on Tuesday.

The UAE’s retirement income system comprises a minimum means-tested state pension and an earnings-related national employment-based scheme.

Within the UAE, the pensions of Emiratis are administered by different agencies such as the Abu Dhabi Pension Fund, the Sharjah Social Security Fund and the General Pensions and Social Security Authority.

Emiratis working in government and private sectors are eligible for pensions and other retirement benefits after reaching the retirement age of 49 or after having served a minimum of 20 years, according to the UAE government.

Employees contribute 5 per cent of their salary, and employers contribute 12.5 per cent to 15 per cent, with benefits guaranteed by the government.

Non-Emirati employees have their end-of-service entitlements covered by the UAE’s gratuity programme.

Gratuities are lump-sum payments to which all employed residents are entitled after completing at least one year of service. They are covered by the UAE labour law and the sum depends on an employee’s length of service and basic salary.

This year, the country introduced an optional savings retirement plan that allows employees in private and free zone sectors to invest their end-of-service benefits to build long-term wealth.

The scheme will involve the formation of savings and investment funds that will be overseen by the Securities and Commodities Authority in collaboration with the Ministry of Human Resources and Emiratisation.

Dubai also launched a savings retirement initiative for non-Emirati employees working in the emirate’s government and public sector last year.

Foreign employees working in Dubai’s public sector will be enrolled in the savings programme by default and employers will contribute the total gratuity to the plan from the date of joining, without including the financial dues for previous years of service.

The Dubai International Financial Centre was the first body in the UAE to overhaul the gratuity system when it introduced the DIFC Employee Workplace Savings (Dews) plan in February 2020.

The initiative allows participants to choose a plan in line with the type of investment risk they are willing to take.

National Bonds, the Sharia-compliant savings and investment company owned by the Investment Corporation of Dubai, unveiled a Golden Pension initiative last year to help private-sector foreign employees with their financial planning.

Under the scheme, the employer has the choice to either invest the entire end-of-service benefits accumulated over the years as a lump sum or invest a portion, while employees have the flexibility to contribute as little as Dh100 ($27.22) a month.

The amount will be invested in money markets, sukuk and National Bonds’ property portfolio.

The UAE had an overall index score of 62.5 in Mercer’s Global Pension Index. The index uses a weighted average of the sub-indexes of adequacy, sustainability and integrity.

The country had the highest score, 72.2, in adequacy due to the generous retirement benefits, which ensure a continued income to sustain a good quality of life with a suitable minimum pension relative to earnings, according to Mercer.

It scored 45.4 in sustainability, driven by the high labour force participation rate, especially for people above the age of 55, and the sound structure of a funded pension system with mandatory contributions set aside for retirement benefits.

The country scored 70.8 in integrity, owing to the strong governance structure around the pension system, it said.

Globally, the Netherlands had the highest overall index value at 85, followed by Iceland at 83.5 and Denmark at 81.3. Argentina had the lowest index value of 42.3, according to Mercer.

For each sub-index, the pension systems with the highest values were Portugal, in terms of adequacy (86.7), Iceland for sustainability (83.8), and Finland, in terms of integrity (90.9).