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Thu 10 Nov 2011 10:30 AM

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Expats split on value of UAE pension plan

Poll shows foreign workers feel state-backed scheme could offer valuable nest egg for retirement

Expats split on value of UAE pension plan
The UAE is said to be in early talks with the World Bank to map out a pension scheme for foreign workers

UAE expatriates are split over the value of a proposed
pension scheme that could replace end-of-service payouts for foreign workers in
the Gulf state, an Arabian Business poll has found.

Some 31 percent of those polled said a pension plan
underpinned by employer contributions could aid foreign workers in creating a
nest egg for their retirement.

A further 32 percent of the 400 respondents said a pension
scheme would be welcomed if the contributions were optional, as many
expatriates have savings to offset the lack of pension fund.

But 19 percent said the roll-out of a pension plan would
deter foreign workers from moving to the UAE, after seeing how stock market
falls have decimated pension funds in developed markets.

A further 18 percent said they preferred the existing
system, which sees foreign workers receive a lump sum at the end of their
employment, calculated on the length of their contract and 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.

The UAE 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.

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.”

Previous research from the consultancy has raised concerns
over the lack of savings among expatriates in the Gulf, with Stillitoe blaming
the “spend culture” among foreign workers.

“There is too much of a spend culture among a lot of
expats,” he said. “There should be more education over here about why it’s so
essential to save for your retirement. The worst thing you can do is spend a
lot of time in the Middle East – five or ten years – and not save a nest egg
when you are in a tax-free environment.”

Dubai’s National Bonds Corp in October warned of a “national
crisis” over the lack of savings culture among citizens in the Gulf, after research
showed 84 percent of nationals feared they had not put aside enough money to
secure their future.

The research from the Islamic savings scheme revealed that
64 percent of 1,107 respondents across the GCC admit less than a fifth of their
monthly salary is put aside into a nest egg.

“[We’re] excited
about the news that DED is seriously contemplating the launch of a provident
scheme for expats in Dubai,” said CEO Mohammed Qasim Al Ali. The company’s
own employees saving plan “confirms
the willingness of [blue chip firms] to contribute to their employees’
financial wellbeing,” he said.

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.

“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.”

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SAM 8 years ago

Why this sudden concern and love towards expats' welfare circa leaving Dubai? I would be more than happy to have my end of service gratuity kept in a separate bank account, whereby I can take it all with me when the time comes for me to leave this country and head back home. Forget accrued interest, nowadays you are lucky to keep the principal amount safe. A pension scheme for nationals is definitely needed but as an expat, I should not be forced into it, since I will not benefit from it. I do not trust fund managers and the facts speak for themselves and I definitely do not trust the judgement and intentions of someone stating "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." Hundreds of billions of dollars? Really? Maybe in a hundred years, if you are lucky.

Elan 8 years ago

Americans in the UAE would be negatively impacted by such a move, as our retirement plans are tied into our income tax structures. It's hard enough to file our tax returns and try to obtain legitimate deductions for foreign earned income - yes, we must pay tax on ALL income, including that which is earned abroad. I hope and pray that this program will be voluntary, or Americans will be in a difficult position that may make many of us leave.

Billy 7 years ago

Expats should not be fooled by this pension plan. The reason is nothing to do with expats welfare - t- the real reason is summed up in one paragraph in the above article - "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."

Believer 7 years ago

The primary purpose of a program like this is to promote a mind-set of retirement planning in the expat community. A gratuity lump sum as the only end-of-service payout is a very risky bet, and without a supplemental pension-like payout to assure any predictable income source during the later years when the earning capability is dramatically reduced, can spell financial disaster.

In addition, to effectively compete internationally, features like this go a long way to achieve that goal.

That said, a well thought out strategy to address all stakeholders' interests through a strict governance process, including a framework around how this will be initiated, managed, communicated, promoted, ensure legal controls to prevent abuse, by requiring full disclosure and transparency into every aspect of this initiative will be a minumum requirement for people to whole heartedly participate in this program, and make the most of the intent of this program - predictability of retirement income.

Telcoguy 7 years ago

Two points:
Most expats are here for the short term, if we are to believe the local posters this will increase (the number of short term vs long term)
You spend a whole paragraph with platitudes about regulation. do you mean an equivalent of RERA or the TRA? I can see why people may prefer to handle their financials themselves.

kelly 7 years ago

Would this mean that the employee has to wait until they retire at 60 or 65 before they have access to their pension as they do in Europe. No one has mentioned access and if they are given an annual fixed sum at official retirement spread out over the rest of their retirement life.

The annual amount depends on how well or not the investment fund has done. That means your money is locked up with a financial institution for decades. How is the money to be ringfenced against other Funds the institution is investing in should it go into receivership. Just a thought.