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Sun 30 Oct 2011 01:46 PM

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UAE mulling rollout of expatriate pension scheme

Employers may have to contribute up to 8% of annual salaries to fund, says report

UAE mulling rollout of expatriate pension scheme
It is not clear whether the pensions system would be compulsory for expats

The UAE is mulling a pension scheme for expatriate workers and may use some of the capital to build a local asset management industry and boost financial markets, it was reported on Sunday.

The Gulf state’s more than seven million foreign workers may be asked to contribute to a pensions system if plans progress, newspaper the Financial Times reported.

“We do have a starting point of about eight percent contribution of basic salary from the employer,” the Dubai Department of Economic Development’s Harun Kapetanovic, who is heading up a team looking at the option for establishing a pensions scheme, told the paper.

It is not clear whether the plan would be compulsory, or the amount expatriate workers would be expected to contribute.

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, Nigel Sillitoe, chief executive of research firm Insight Discovery, told the paper.

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

In the absence of a 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.

In recent years, Gulf firms have increasingly set aside capital to fund end-of-service employee payoffs following a rise in the number of disputes with staff, a report from consultancy firm Towers Watson said in June.

“The proven practice has been for end-of-service benefits to be simply accrued, accounted for on the books but the actual cash for that remaining within working capital,” said senior consultant Iain Collins. “[Companies] are beginning to separate funds out…either in whole or in part.”

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.

A number of companies are already farming out the management of end-of-service funds to external firms, creating a lucrative niche for investment firms and the same system could be adopted if a pension scheme were to be introduced.

“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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Steve Kaby 8 years ago

I assume that a western "Brain" is certainly behind such a move like this because these practices have already been ongoing in their countries. The primary aim of this idea is to raise some initial money for the 'Asset Management' company to invest in many portfolios similar to that of a mutal funds. So the government may get some capital to run the current shows.
Even though this is a totally acceptable idea, the benefits of this has to be properly educated to the expats or else there maybe constant whining on this.

SAM 8 years ago

I do not understand why would someone on a work visa have to contribute to a pension plan of a foreign country that will provide absolutely nothing in return. A good idea for locals, but to apply this scheme for the purpose of stimulating a stock market and asset management companies is an outright robbery.

Grant Holt 8 years ago

Whats wrong with the present Gratuity system? Its simple and risk free to the employee.

This on first impression, is just trying to create an un-needed local industry, that isnt working particularly well elsewhere in the world.

martin 8 years ago

This sounds more like tax than a pension scheme!

dubeee 8 years ago

How do we account for the proposed/current situation where expatriate work visas are limited to 2/3 years and will the scheme be open ended so that the exiting employee can cash in at his/her will? What if these so called asset managers invest in toxic products and the market goes down. Will there be liquidity to settle the schemes liability to the beneficial employee?

Lots of work required for sure before this is rolled out.

ahmed 8 years ago

Pension for a 3 year work visa?...which is also no guarantee of a 3 year stay?

Deepak Sharma 8 years ago

A good thought but before this Think of offering nationality, free education and free medical...why should i participate when my work visa is only for 2 years??? Please enlighten me !!!

Jon 8 years ago

I agree Sam - why build up a pension in a country you can't retire in anyway, and then run the risk of currency fluctuations if you cash it in. On the surface appears a good idea, but underneath, not so good...

Austin 8 years ago

May be worth noting that Saudi has had the GOSI pension service for decades but they realised in the 80's that, for a variety of reasons, it couldn't be implemented with expats . For example, imagine the hassles of checking on the actual health of pensioners all over the world to prevent families fraudulently continuing to claim long after the pensioner had passed away.

GOSI had to go through a complicated adjustment phase where they repaid all the expat contributors but now seems to be working well; taking in contributions from the Saudi workforce, investing in the local market and paying out to the Saudi pensioners.

Billy 8 years ago

This is simply unworkable and probably unwanted by most expats. It is also inappropriate to offer long term products such as pensions to short term "guests" such as expats who have no guarantee of employment or residency here. Far better to get the healthcare scheme up and running than start to get involved in pensions for people who don't want it. My other concern is Dubai's ability to actually organize it - again referring to the healthcare scheme which has far fewer issues to resolve, this still hasn't materialised. Dubai needs to make a choice - offer long term residency for expats, and then it can consider pensions or stay with it's insistence on short term visas in which case healthcare for the duration of stay is more appropriate.