DIFC
Uncategorized

DIFC pushes new trust-based saving scheme to replace workers’ end-of-service gratuity

Dubai International Financial Centre is pushing ahead with plans to replace expat workers’ end-of-service gratuity with a funded, trust-based savings scheme that offers employees a choice of up to 12 passive investment funds.

During the DIFC employers’ town hall meeting on Thursday, the centre said the new scheme will charge employee members an annual management fee of about 1.25 to 1.5 per cent or lower depending on the administrator appointed to oversee the project set to go live on January 1, 2020.

If the DIFC will apply this plan, it will be the first body in the UAE to overhaul the current gratuity system – a defined end-of-service benefit that all expatriate employees are entitled to after completing at least one year of service. The amount is calculated on the number of days worked and the departing employee’s final salary.

At the Workers Incentives and End of Service Benefits Conference in Dubai in February, the government announced plans to “enhance” the gratuity payment and move it to a defined contribution scheme where contributions are paid based on their salary as they progress through employment with contributions invested on an employee’s behalf.

This is the plan set to be adopted by DIFC, which began reviewing the benefit in 2016 by setting up a working party to assess whether there was an appetite for change. The centre then sent a proposal letter to all employers earlier this year, asking for feedback by March 28.

The results of the survey of 339 respondents found the average DIFC employee earns Dh43,800 with the average staff tenure nine years. Seventy-eight per cent of DIFC employees support the proposal to reform the gratuity and 54 per cent of employers already fund the existing end-of-service gratuity system.

Under the DIFC’s proposal, workers would see their existing benefits leading up to the January 1 implementation left untouched. That liability would remain an obligation for employers who will have to pay out when the employee leaves based on their final salary.

Then, from January 1, employers will contribute to the new scheme at the same level of benefit as the gratuity system, which the working group calculated as equivalent to 5.83 per cent of an employee’s monthly basic salary under five years and 8.33 per cent after five years of service.

Some attendees at yesterday’s event questioned whether they would lose out as the contributions made into the new scheme will be based on their existing salary rather than their final salary as the current gratuity system is, making it a cheaper proposition for employers.

“The potential investment growth has a better compounding effect than slow salary growth,” said Martin McGuigan, partner at Aon Retirement Solutions and McLagan in Dubai and a member of the DIFC’s working party, who added that his firm would pitch for the tender.

“Whilst there is still some associated risk on the investment side, global research shows the investment growth is better over the longer term than wage growth.”

SOURCE

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.