World Bank advises Dubai to offer pensions to foreign workers

Proposal would attract more workers to emirate, help to fill rising amount of vacant property and improve local money markets.

DUBAI // The Dubai Government is assessing plans to offer pensions to foreign workers in a move that could transform the workplace.

The World Bank is advising officials about options for improving employment laws, including those related to staff benefits.

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"We are providing technical assistance in the area of employment policy," said a senior World Bank official in the region. "It covers the areas of expatriate benefit treatment including pensions.

"There's a lot of experience globally on pension schemes including some that pertain to portable pension schemes, which could be applied to expatriate labour."

The prospect of a pension could help to attract more foreign workers to the emirate, financial experts say. Most employers in the emirate do not provide pensions.

Under a federal law dating back more than three decades, companies have to provide only end-of-service gratuities to employees who have completed one or more years of service.

As a result, many expatriates make their own retirement plans through offshore investment schemes, or do without. Most other workers on lower incomes are unable to afford to set aside money for pensions.

Emirati workers in the public and private sectors already have pension schemes.

One of several options being considered is whether the end-of-service gratuity system could be developed into a pension scheme, an informed source said.

Any such move would require changes to federal legislation.

A pension scheme could help to encourage workers to stay longer in the country, while improving flexibility in the labour market if pensions could be transferred between employers.

Job creation has picked up gradually this year but the emirate needs to attract more workers to help fill excess supply in the property market, where 25,000 new units are expected to be delivered this year.

A mass departure of foreigners after job losses in the global downturn exacerbated problems in the property market.

"The requirement to provide retirement income is a massive challenge, not just for the Dubai Government but for many around the world," said Tim Searle, the chief executive of Globaleye, a financial advisory company with offices in Dubai.

"There's no pension scheme at the moment and it would be an attractive option for anyone to take up employment here if there was."

A simple and cost-effective change to labour laws would require companies to invest the gratuity they already provide into money-purchase schemes, Mr Searle said.

Under such schemes, cash is paid into a retirement fund, which is then invested, possibly in local stock or bond markets.

When the employee retires or leaves a job, the fund is used to buy an annuity, a financial product that provides an income for the rest of that person's life.

Developing such schemes would also play an important part in helping to foster growth in money markets. Building a greater presence of local institutional investors in markets would ensure more stability than that provided by shorter-term retail investors, experts say.

Institutional investors account for a smaller proportion of trading on local markets than in foreign bourses.

The existing gratuity equates to 21 days' pay for every year completed for the first five years of work, and 30 days' pay after that.

"Any improvement would encourage people to stay here longer and invest more of their lives here," said Sara Khoja, an employment lawyer at Clyde & Co in Dubai.

"At the moment, the big draw for foreign workers is that their salaries are tax-free, but the disadvantage is that people who don't make provision for retirement planning can walk away with nothing when they leave."

In response to a request for advice from the Dubai Government, the World Bank will produce a report in the next few months on options for reforming employment policy.

The report will also cover ways to provide more accurate information on factors including labour flows, sectoral distribution of workers and compensation trends.

"This is a very important initiative for the UAE to design better employment policies based on better data that's more timely," the World Bank official said.

There was no comment available from the Dubai Government.

Officials from the UAE and the International Labour Organization have previously discussed the possibility of establishing a pension fund for expatriates.