Background
In the UAE and most of its free zones, excluding the Dubai International Financial Centre (see Lockton Compliance Alert) employers are not legally obligated to provide expatriates with pension or retirement savings plans. Employers are however mandated to provide expatriates with a lump-sum EOSG at termination based on salary and years of service as follows:
- 21 days’ final pay for each year of the first 5 years of service.
- 30 days’ final pay for each additional year of service.
With the existing EOSG, employees do not have the opportunity to benefit from the investment of funds nor to contribute to their future retirement savings. In addition, they face the risk of an incomplete payment upon termination, as there is no statutory obligation for employers to externally fund EOSG obligations in a secured account. Employers are themselves exposed to the risk of litigation over gratuity claims and breach of directors’ duties.
Key details
The new voluntary scheme is jointly regulated by the Ministry of Human Resources and Emiratization (MOHRE) and the Securities and Commodities Authority (SCA). It gives employers the option to make monthly contributions to external accounts, enabling employees to invest their gratuity into an investment fund offering a risk-free capital guarantee option, a risk-based investment option, or an investment option compliant with Islamic Sharia law. Employees would then receive the accrued savings and investment returns at the end of their employment contract. They would also have the option to make additional voluntary contributions of their own.
Participation
Interested employers can subscribe to the new scheme by submitting an application through the MoHRE website and must participate for a minimum duration of one year. During this period, withdrawal from the scheme is only permitted with the approval of the MoHRE and in the following exceptional circumstances:
- Application for the dissolution of the business.
- Acquisition or transfer of the business ownership.
- Evidence of bankruptcy or insolvency of the business.
Employers who withdraw from the new scheme before the minimum duration won’t be allowed to recover the contribution amounts that they paid into the investment fund. However, if an employee’s employment contract terminates prior the one-year minimum duration, the relevant contributions can be recovered by the employer.
Employers can find detailed information on the participation process as well as the contact details of the investment fund providers that are licensed by the SCA on the MoHRE website. Employers may choose to include all their employees or specific employee categories or professional levels. Once approved by the investment fund provider of their choosing, employers will be able to establish their account and will be required to:
- Stop accruing the EOSG of their selected employees starting from the implementation date of the new scheme.
- Ensure that their employees’ accrued benefits entitlements are preserved for the period prior to the implementation of the new scheme.
Contributions
Employer contributions to the new scheme for full-time employees are as follows:
- Employees with five years of service or less: 5.83 percent of the employee’s monthly basic salary.
- Employees with more of five years of service: 8.33 percent of the employee’s monthly basic salary.
For employees under other employment patterns (part time or job sharing), the contribution rates based on service are the same as full-time employees, but the calculation differs depending on the number of hours worked.
Penalties: Contributions must be transferred by the employer into the investment fund within 15 days of the beginning of each calendar month. Penalties for late payment may include fines of AED 1,000 per employee and per month and/or other administrative actions such as the suspension of the employer’s ability to apply for new work permits until payments are remitted.
Voluntary employee contributions: Employees may make voluntary contributions up to 25 percent of total annual salary to the new scheme. Such contributions can either be transferred by the employer on behalf of the employee through salary deduction of a certain percentage as instructed by the employee or can be transferred directly to the fund by the employee in instalments or as lump sum.
Accrued EOSG
The legislation and regulations implementing the new scheme do not provide employers with the option to transfer accrued EOSG into the investment fund. Therefore, upon termination of employment, employees will be entitled to an EOSG from their date of hire until the implementation of the new scheme. The accrued EOSG will be based on the basic salary paid to the employee as of the new scheme implementation date rather than the employee’s final basic salary.
Employee rights
Employees are entitled to all the funds accumulated during the subscription period which includes the employer’s contribution, their voluntary contribution (if any), and the investment returns. At the end of their employment, employees may:
- withdraw all the funds within 14 days after the termination of employment, or
- continue investing in the scheme (depending on the rules of the scheme provider).
During employment, employees are not allowed to withdraw the contributions made by their employer but may withdraw part or all their voluntary contributions as well as their investment returns at any time, in accordance with terms and conditions set by their investment fund provider.
Supervision of the scheme
The MoHRE is responsible for investigating complaints related to this new scheme and administering relevant penalties when violations are discovered. The SCA is responsible for addressing complaints regarding the performance of the investment fund providers.
Next steps
As expatriates continue to extend their years of service in the UAE, the new voluntary EOSG would enable employers to reduce their balance sheet liabilities, better manage their cash flow, and provide their employees with a sense of security and participation in their retirement savings.
Approved Investment Fund Providers have started to appear on the MOHRE website, and more are expected in the coming months. It is expected that there will be significant interest in this alternative option and that it will eventually become mandatory in the UAE, and in time, the GCC as a whole. In addition, transitioning to a fully funded system would put the UAE on par with global best practices and eventually help them to attract and retain talent.
Written in collaboration with:
Paul Colley, FCIPD – Head of Workplace Savings
Lockton Insurance Brokers LLC – Dubai Branch
RESOURCES
Resolution No. 96 of 2023
Cabinet Resolution No. (96) of 2023 Regarding an Alternative End-of-Service Benefits System (2).pdf
End of service benefits for workers in the private sector | The Official Portal of the UAE Governmentate sector | The Official Portal of the UAE Governmentnt