UAE pension plan may spell end of staff gratuities  

End-of-service payouts to expatriate workers could be shelved to clear the way for a proposed pension plan, analysts said, signalling the end of a 40-year gratuity scheme.

The Gulf state is said to be in early talks with the World Bank to map out a pension scheme for foreign workers that would see employers pay a portion of annual salaries into a fund.

The scheme is a “work in progress,” said Dubai’s Department of Economic Development (DED), which attended a roundtable on the subject.

“We do have a starting point of about eight percent contribution of basic salary from the employer,” said Harun Kapetanovi, of the DED.

In the absence of mandatory pension schemes in the Gulf, firms are required to provide an end-of-service payout to employees, calculated on the length of the employment and basic salary.

Saudi Arabia has no cap on the total amount employees can receive while the UAE and Kuwait cap payouts at equivalent to two years’ pay.

It is not clear whether the UAE’s proposed pension plan would be compulsory, or the amount foreign workers would be expected to contribute.

Kapetanovic said the capital would not be used to fund government development projects, but would aim to “enhance the welfare of expatriates”.

Nigel Sillitoe, chief executive of research consultancy Insight Discovery, said the existing scheme was “failing…companies, staff and the wider economy.

“GCC countries lack organised systems to provide adequate retirement incomes for expatriates.”

The Gulf saw a surge in disputes between companies and employees in the wake of the financial crisis, which spurred a wave of job cuts at firms across the region.

Many firms now ringfence funds rather than leaving it as working capital, after struggling to meet hefty gratuity costs caused by widespread redundancies.

A pensions plan would be unlikely to increase the contributions already made by companies into savings funds for gratuities, and could protect staff against the risk of corporate insolvency.

“It removes the risk of the loss of end-of-service benefit due to insolvency of the employer,” said Meena Raza, head of global benefits at HR consultancy firm Aon Hewitt.

“If it replaces the end-of-service benefit and it is an eight percent contribution for employers, it shouldn’t technically affect balance sheets as you are supposed to be accruing… for your end-of-service benefit anyway.”

“Given the turmoil some local companies have been through, you don’t necessarily want to be in a gratuity scheme with a company that is on the brink of going into receivership,” said Sillitoe.

A pensions plan could raise hundreds of billions of dollars in capital, which could be used to help grow the UAE’s fledgling asset management and boost local bourses.

A number of companies already farm out the management of end-of-service funds to external firms, creating a lucrative niche for investment firms.

‘The asset management business in the MENA region is at a very nascent stage. Currently, we're seeing cash leave the region for allocation - but this move could encourage more people to look to regional asset management,” said Dan Rudd, of HSBC Global Asset Management.

“Most multinational employers in the UAE will make funded provisions for their gratuity obligations under the law, and increasingly these are managed externally,” said Samir Kantaria, partner and head of employment at Al Tamimi & Company.

“In certain instances, depending on the size of the organisation and the level of the funding, the fund becomes self-funding through the interest the fund amount accrues.”