End of service gratuity not enough to fund retirement, UAE residents say, amid calls for savings culture

'There needs to be a significant shift in attitude to encourage a savings culture to defuse retirement funding time bomb.'

National Bank of Abu Dhabi has begun offering employers schemes that they can provide to their employees. Silvia Razgova / The National

Banks and insurers said yesterday that more should be done to foster a retirement savings culture in the country to avoid a “retirement funding time bomb”.

The vast majority of residents do not believe that their end of service gratuity, the bonus they receive when they end employment with a company here, will meet the needs of their retirement, according to a survey by the insurer Zurich International Life.

Of the 1,000 respondents to their survey, 83 per cent said the end of service gratuity, which is calculated on basic salary and excludes accommodation and other allowances, is inadequate to fund their golden years, with only one in five saying that they would use the leaving bonus to fund their retirement.

“It is very concerning that the majority of UAE residents do not have a retirement savings plan; nor use their gratuity towards their retirement,” said Peter Cox, the head of international pensions at Zurich International Life. “There needs to be a significant shift in attitude to encourage a savings culture to defuse this retirement funding time bomb.”

“Employers can help to facilitate this cultural shift by providing a cost-effective way for their employees to save for their retirement rather than just focus on paying their gratuity liability,” he said. A number of banks, including National Bank of Abu Dhabi, have already begun offering employers schemes that they can provide to their employees. Two years ago, the NBAD Trust Company, the wholly owned Jersey-based subsidiary of NBAD, introduced a plan called Today Wealth Builder Plan, which allows employers to offer their expatriate staff corporate savings and pension schemes.

NBAD’s offering was specifically designed for companies that employ expatriates and includes investment fund options. Other banks, including Abu Dhabi Islamic Bank, are also creating similar schemes.

“ADIB’s latest survey on financial awareness showed that only 36 per cent of UAE residents save for their retirement,” said Daffer Luqman, global head of liabilities and wealth management at ADIB. “This is due to the fact that a lot of them have pressing financial demands that make it tempting to put retirement planning on the back burner.”

Financial advisers, including Tim Denton at Dubai-based Abacus, say that employees should start their own saving schemes as early as possible.

For an employee to receive an end of service gratuity, which is obligatory under UAE labour law, they have to have worked one full year with their employer.

According to the Zurich survey, only 22 per cent of respondents use their gratuity to fund their retirement, while 24 per cent said that they would use their bonus as a deposit to fund a property purchase. Seven per cent said they would use the money to fund a holiday or large luxury item. And that worries many bankers who say there is a lack of awareness among the general public about the importance of saving.

“While the issue depends on the nature of the end of service gratuity, we believe that individuals can be better off with proper financial planning,” said Sumeet Singla, head of UAE corporate affairs at Standard Chartered. “In addition to our savings schemes that we offer our employees, we believe that financial education plays a major role in empowering people to make informed financial choices.”

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