UAE's new end-of-service savings scheme for private and free zone workers begins

The pension plan does not have a minimum salary requirement and will allow employees to make voluntary contributions, ministry says

The initiative scheme is expected to boost competitiveness in the private sector and make employers more attractive to talent. Sarah Dea / The National

The UAE government's new savings retirement plan for employees in the private and free zone sectors to invest their end-of-service benefits and build long-term wealth takes effect from today and does not have a minimum salary requirement, the Ministry of Human Resources and Emiratisation said on Wednesday.

The Voluntary Alternative End-of-Service Benefits Savings Scheme, which was announced by the UAE government in September, is not mandatory but will require employers to register with the ministry if they choose to take part in the plan.

For full-time employees who have worked for a company for less than five years, employers will contribute 5.83 per cent of their monthly basic salary to the investment fund and 8.33 per cent if the worker has served more than five years, the ministry said.

“There is no minimum salary to be eligible for the scheme,” Abdulrahman Al Awar, Minister of Human Resources and Emiratisation, said.

“We encourage companies to choose this plan. It is based on successful practices in the private sector in the UAE and elsewhere. The scheme will boost competitiveness of the private sector and make employers more attractive to talent from around the world.”

Watch: UAE launches new gratuity scheme

The savings scheme aims to ensure that employees receive their end-of-service benefits, protect them from inflation, default or bankruptcy, and provides them with an investment programme that allows them to save and invest their benefits, according to the ministry.

It also aims to take advantage of investment opportunities in various economic activities in the UAE, it said.

To participate in this savings scheme, employers must select and contract with licensed investment funds and decide which employee categories and levels should be included in the programme.

They must discontinue the use of the current end-of-service benefits system for employees who are selected to participate in the new scheme.

Subscribers to the fund will be able to voluntarily contribute a percentage of their salary or an additional amount, either monthly or a lump sum, in addition to the basic subscription payment made by employers.

“The voluntary contribution will be deducted from his or her wage. The voluntary subscription percentage cannot exceed 25 per cent of the total salary while, in case of a lump sum, it cannot exceed the same percentage annually,” the ministry said.

Employees can withdraw part or all of the voluntary contributions or their investment returns at any time during their employment, in accordance with terms set forth by the fund manager.

The initiative is voluntary for employers to join, but they are required to participate in the system for a minimum of one year once registered, the ministry said.

However, once a company has selected employees to participate in the retirement fund, the subscription becomes mandatory. Employers must also ensure that the employee entitlements from the previous period are preserved.

It will also be prohibited to withdraw the basic subscription amount, as well as any profits or returns derived from the investment fund before an employee leaves the company, the ministry said.

However, the employer has the right to recover the basic subscription amount upon termination of the employee within one year of the start date.

The fund administrator will be approved by the Securities and Commodities Authority in partnership with the ministry and will provide services that include a fund manager, custodian and other entities to operate as a broker.

Fund managers can also accept voluntary subscriptions from self-employed people and independent business owners, expatriate employees working for government agencies and institutions, as well as Emiratis in the public and private sectors, it added.

“[This] is provided the employers continue to pay contributions to the General Authority for Pensions and Social Security,” it said.

The investment programme also offers employers the choice of making voluntary contributions that will “enhance [the] attractiveness and flexibility of the labour market”, the ministry added.

The scheme is made up of a number of investments, including a capital guarantee portfolio option that offers a risk-free choice for capital preservation if the beneficiary is an unskilled worker.

It will also offer various investment portfolios that carry varying levels of financial risk based on expected returns, as well as Sharia-compliant funds for skilled workers with a monthly basic salary of at least Dh4,000.

If the employee switches jobs, the new company may complete the basic subscription in lieu of the previous employer.

After termination of employment, the worker also has the choice to either receive financial benefits or continue investing in the scheme.

The employer may change the fund manager and transfer all amounts and returns to an alternative investment fund, after obtaining the approval of the ministry and the SCA, based on factors such as the level of service performance.

“It’s a great scheme because it protects two things. One, it protects the employees from squandering their end-of-service pay entitlements by virtue of the employer contributing and transferring those funds on a regular basis,” said Ludmila Yamalova, managing partner of HPL Yamalova & Plewka DMCC Legal Consultants.

“Transferring those funds into a licensed financial institution, whose very job is to protect that investment, removes the risk of bankruptcy and litigation for employers.

“Right now, it’s up to the employer to transfer those end-of-service benefits after an employee’s termination or resignation. Whereas, under this scheme, this money will sit with a third party.”

The scheme is a form for fiscal responsibility for the employer, said Ms Yamalova.

It also allows companies to gradually set aside end-of-service funds for employees – currently organisations accrue these amounts on their books but do not actually have them in their accounts, she said.

Therefore, when an employee is terminated or resigns, if the company is financially struggling, they do not know how to source this money, she said.

This money will be held with investment funds that are specifically licensed for this purpose. The investment decision will not be up to the employee but the fund manager to decide, Ms Yamalova said.

The new scheme will result in an influx of savings coming into the financial system and help to develop the UAE's financial services industry even further, according to Michael Brough, senior director at global advisory company WTW.

“Hopefully, there will be a great deal of flexibility in options that subscribers can choose from, both in terms of providers and investment choices because people have different risk appetites. It's important to have both low-risk and high-risk options for people to invest their money,” he said.

“One of the biggest concerns would be around caps on the fund manager's fees and charges. Other countries tend to cap charges to make sure that for people who pay low levels of contribution, their fund values are not significantly eroded by the impact of the charges.”

For instance, Poland caps the charges at 60 basis points while the UK limits charges for those people in a default fund at 75 basis points, he explained, adding that the DIFC charges 157 bps or 1.57 per cent on its DIFC Employee Workplace Savings plan, or Dews.

Subscribers must look for good diversification within the fund range, he said. Invest in equities, bonds or sukuk, property, cash and multi-assets to have a broad spectrum of risk to achieve better outcomes, Mr Brough said.

The system will act as an alternative to the UAE's existing gratuity scheme, under which employees receive a lump-sum payment when they leave their jobs.

Gratuities are payments that all employed residents are entitled to after completing at least one year of service with a company.

The end-of-service payments are covered by the UAE Labour Law, and the sum depends on an employee’s length of service and basic salary.

For example, if an employee has worked for a company for less than five years, their gratuity is based on 21 days of basic salary for each year of work. After five years, this increases to 30 days of basic salary for each year thereafter.

The Covid-19 pandemic placed employee financial issues in the spotlight and many companies in the UAE are now formulating plans to help workers to bridge their retirement savings gap.

Retirement savings are the biggest financial challenge faced by employees in GCC countries, according to a survey by WTW in January.

However, a survey by Sharia-compliant savings and investment company National Bonds, in July, found that 82 per cent of employees in the UAE were open to employers investing their end-of-service benefits.

The UAE has taken steps to promote the benefits of long-term savings in recent years.

Dubai’s savings retirement programme for foreign employees working in the emirate’s government and public sector came into effect in July last year.

The pension fund offers the government’s foreign workers a choice of investment plans, including Sharia-compliant options, Sheikh Hamdan bin Mohammed, Crown Prince of Dubai, said at the time.

The fund will be supervised by a board of trustees, with assistance from the DIFC.

Foreign employees working in Dubai’s public sector are automatically enrolled in the savings scheme and their employer contributes the total gratuity to the plan from the date of joining, without including the financial dues for previous years of service.

The DIFC was the first entity in the UAE to set up a new gratuity system when it introduced Dews in February 2020.

The free zone’s employers are required to make monthly contributions of 5.83 per cent or 8.33 per cent of an employee’s wage, depending on their length of service, to a fund administered by Zurich International Life Middle East.

Employees can also choose to make voluntary contributions to the Dews plan.

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