End of service gratuity could do far more

Incorporating aspects of pensions into end of service payments could help improve savings rate

How much are expatriate workers in the UAE saving for when they eventually return to their country of origin? Erik De Castro / Reuters

The reports that nine out of 10 Filipinos in the UAE are failing to make contributions to their national pension scheme reflects a phenomenon that is unlikely to be restricted to that country. The reality is also unlikely to be quite as bad as that figure would suggest, because some expatriates will be investing directly to fund relatives' education costs or to pay mortgages on homes in the Philippines, while others do not trust the integrity of the national pension scheme, find the remittance system unworkable or see the low interest rates as a disincentive to save.

Whatever the true figure, the reality is that the generally stagnant wages in the UAE and the rising cost of living means a significant proportion of the expatriate workforce is unlikely to be putting enough aside to ensure financial security for when they eventually leave this country.

What this issue does show are the benefits – long promoted by this newspaper – of reforming the gratuity system to adopt elements of a traditional retirement, or “provident”, fund. At present, employers see the gratuity as an unbudgeted liability – they can’t tell how many people will quit in a given year, how much each might be eligible for, and therefore cannot set aside an amount to cover this. On the other hand, regular, budgeted pay-ins into a retirement fund takes the guesswork out of gratuities, with the added benefit being that the savings pot could be put to use to invest in the country. The effect of this would be doubled if the employee also makes extra contributions. The result would be a win for everyone: for the employer, for the employee and for the UAE.

This change is not without risk, of course. Stocks, bonds and other investment assets go up, they go down. But there are plenty of models to choose from with varying levels of risk, from Hong Kong, Malaysia and Singapore, for a start.

One aspect of expatriate workers failing to save enough for their retirement is the relative youth of those in the UAE – a time when retirement seems so far off as to be of no consequence. However this is also a time when discretionary income tends to be higher before the expense of families and mortgages kicks in.

It is often said that people sometimes need a gentle prod towards acting virtuously. Reforming the gratuity system would provide just such an incentive, benefiting not just the employee but also the employer and the UAE as a whole.