GCC gratuity system no substitute for retirement pension, survey finds

Retention of talent and competitive pressure are the main reasons for enhancing end-of-service benefits, new survey finds

Companies that fund their end-of-service liabilities typically tend to keep the money either under a separate trust or by using a contract vehicle. Getty Images

Although a majority of organisations in the GCC provide end-of-service benefits, only 31 per cent of employers say they are highly effective in providing adequate retirement for workers, a survey by global advisory company WTW has found.

Thirty-six per cent of GCC employers polled in the survey cited the retention of talent as the top reason for enhancing end-of-service benefits, while 27 per cent highlighted competitive pressures.

The survey polled 96 multinational and domestic organisations that operate in the GCC between June and September 2023, using a three-year window of data.

“Reforms in the GCC states introducing defined contribution funding in place of the defined benefit ESB obligations have arrived with the UAE’s DIFC changes introduced in February 2020 and now with the recent 2023 UAE government reform introducing a voluntary alternative system for end-of-service benefits,” said Michael Brough, senior director of integrated and global solutions at Dubai WTW.

“This means employers in the private sector and free zones will be able to fund future ESB accruals for employees via contributions to individual defined contribution accounts."

End-of-service gratuities are lump-sum payments that all employed residents are entitled to after completing at least one year of service.

Gratuity payments are covered by UAE labour law and the sum depends on an employee’s length of service and basic salary.

The DIFC was the first entity in the UAE to set up a new gratuity system when it introduced the DIFC Employee Workplace Savings (Dews) plan in February 2020, through a defined contribution funding model to people working within the financial centre.

The initiative allows participants to choose a plan that is in line with the type of investment risk they are willing to take.

“Previously, employers – with the exception of the DIFC free zone – were required to pay a defined benefit lump sum based on pay and service to employees at the end of employment [including upon retirement, resignation and death]," Mr Brough said.

"This change will likely result in other GCC states following suit with a new DC funding model and sweeping aside the DB system for the future.”

In 2022, Sheikh Hamdan bin Mohammed, Crown Prince of Dubai, launched a new savings pension plan for non-Emirati employees working in the emirate's public sector, with the scope of expanding it into the private sector at a later date.

Foreign employees working in Dubai’s public sector are enrolled in the pension plan by default. The employer contributes the total end-of-service gratuity to the plan from the date of joining, without including the financial dues for previous years of service.

Similarly, the Ministry of Human Resources and Emiratisation rolled out a savings plan for employees in the UAE’s private and free zone sectors to invest their gratuities last year.

The Voluntary Alternative End-of-Service Benefits Savings Scheme is not mandatory for employees or employers and does not have a minimum salary requirement to participate.

About 70 per cent of employers polled by WTW said they do not fund end-of-service benefits, but settle employees’ benefits as they become due from company assets, the survey said.

For organisations that fund these liabilities, they typically tend to keep the money either under a separate trust or by using a contract vehicle, the findings showed.

However, 55 per cent of companies polled said that providing enhanced end-of-service benefits is industry best practice, while 18 per cent say it is local best practice, according to WTW.

Recent regulatory changes in the GCC indicate a shift towards funded solutions for end-of-service benefits, the research said.

Almost two in five organisations expect the gratuity model to shift to a contributory system of private plans over the next five years, while one in three expect it to be a system of contributory government plans, it added.