Pensions Framework or End of Service Payout?

To clarify a news, that appeared in many media publications during the last few days, the  Dubai Department of Economic Development has announced it is looking to set up a pension scheme. The framework will be tailored-made  for the 1.79 million expatriates living and working in the emirate.

“The Dubai Department of Economic Development (DED) has stated that establishment of pension fund in the United Arab Emirates is one of several initiatives which are meant to improve the investment environment in the country,” said Ali Ibrahim, Deputy Director General for Planning and Development at DED. The study related to the establishment of a pensions fund for expatriates in the private and public sector is one among these initiatives, but it is still in preparatory stages with the DED evaluating the idea, its viability and potential impact. A dedicated team has been formed to develop the idea and present the findings to the concerned authorities for appropriate action. DED is expected to announce the details of the findings after approvals by the concerned authorities.

Following this development, the UAE authorities are proposing a plan to provide adequate retirement incomes in the form of pensions for expatriates working in the UAE, that make up nearly 93 per cent of the almost 8 million UAE population.

The UAE has been consulting with international bodies, on a pensions framework for the expatriates with a starting point of about 8 per cent contribution of basic salary from the employer.

It is not yet clear whether the pension scheme will be mandatory. The framework would also help employers attract and retain talent by offering employees better benefits.

End of Service payout

A pensions framework would replace the current gratuity system in UAE, where employees are entitled to a significant amount when they finish working. The pension framework means employees would be expected to pay into their pension scheme too, but no contribution level has been set yet. The payout to employees is now calculated on the length of the employment and basic salary.

Currently end of service benefits are treated as liabilities on company balance sheets and are not invested with pension benefits in mind. Invested pension funds over the longer term are usually inflation protected and provide capital appreciation. Most companies in the UAE have not ring-fenced end of service benefits and this could be a potential risk to employees.

Both employers and employees benefit from a pension system as employers no longer need to dedicate time and resources to managing end of service benefits, whilst employees enjoy the benefits and advantages of fully fledged institutional money managers looking after their assets and interests.

Pension systems support economic growth by adopting long-term investment strategies for which it is well suited and for which banks are not well suited.

An introduction of a pension scheme would benefit both international and local firms.