Dubai International Financial Centre (DIFC) proposed a reform to its minimum end of service gratuity which is expected to take effect on 1 January 2020, its chief legal officer told Zawya.
The DIFC has reassessed the current end of service gratuity system by considering global trends and changing demographics. It concluded that it needs to be reformed to reflect global best practice. Its proposed plan, DIFC Employee Workplace Savings (DEWS) Trust, is a funded, trust-based savings scheme.
“The anticipated cost will be between 1.25 to 1.50 percent per annum, although this is still subject to the competitive tendering process that will commence shortly,” Jacques Visser, Chief Legal Officer at DIFC, told Zawya in emailed responses to questions.
On whether DIFC’s Visser expects gratuity reform to extend to other parts of the United Arab Emirates, he said: “We cannot speak for the rest of the UAE but the work done by the DIFC over the past three years has certainly gone a long way in terms of showing what is a workable solution when it comes to a establishing a defined contribution scheme in line with global best practice.”
Anir Chatterji, a director and leader of PWC’s Middle East immigration & employment practice, said it is likely that the change to the end of service gratuity regime within the confines of the DIFC will spread to other free zones and the mainland, in an attempt to standardise employee benefits and entitlements.
“The model proposed in the DIFC is intended to stand as a savings fund, not a pension scheme. Overall, the change to the existing end-of-service gratuity (ESG) regime and its replacement with this mandatory employer savings fund is a positive step, especially when looked at from the prism of the deficiencies inherent within the existing regime – mainly, ESG being an unfunded and open-ended liability; it doesn’t accord with international standards and best practice; and the need to provide a more protected and fixed service-linked benefit,” Chatterji said to Zawya in emailed comments.
While the UAE Labour Law already contains provisions regulating the manner in which ESG payments dovetail with discretionary employer savings funds and pension schemes, the law does not mandate or oblige employers to set up a savings fund, he said.
The unfunded, defined-benefit nature of the existing end of service gratuity is a disadvantage to both employees and employers, as it exposes the former to risksthat the benefit might not be paid in full or at all, and creates an open-ended liability for the latter, according to a DIFC document emailed to Zawya.
The DIFC document on re-thinking end of service benefits also notes that the UAE’s accelerating development as a place to live and work means the end of service gratuity “is no longer appropriate when competing on a global stage for attracting and retaining talented workers”.
In February, a UAE official told a conference in Dubai that there is an urgent need to establish investment funds to manage retirement and end of service benefits for people working in the country.
“These funds will help employees plan properly by taking advantage of end of service benefits, enabling them to make use of their financial resources, and create jobs for new generations,” Abdulrahman Abdul Mannan Al Awar, the head of the department responsible for human capital development said.
With many UAE residents having little or no savings, retirement saving remains a major issue for many expatriates who face the consequences of inadequate financial planning later in life.
There has been a debate for several years now about the need to revitalise and modernise the existing ESG scheme with a funded and managed system that mandates employers to create schemes into which they fund employee benefits from commencement of employment, according to PwC’s Chatterji.
“The protective nature inherent in the savings fund proposed by the DIFC shines a brighter spotlight on these issues and the need for reforms to permeate across the other free zones and mainland. The added benefit of the proposed savings scheme is that it would be invested and thereby potentially give a higher return than may be available under the existing gratuity scheme,” he added.