DIFC considering new savings scheme instead of end of service gratuity

The free zone has sent a proposal for a workplace savings plan to senior executives

New employment law will come into effect on August 28. Courtesy DIFC

The Dubai International Financial Centre is looking into replacing the end of service gratuity with a funded workplace savings plan for its expatriate workforce.

In a letter sent to all DIFC companies and signed by its governor Essa Kazim, the centre is proposing phasing out the gratuity payment and introducing "a trust-based savings vehicle to handle contributions, invest monies and pay benefits".

"Rather than being paid by their employer when leaving, the plan requires employers to contribute funds into the plan on an on-going basis," a DIFC spokesperson told The National, when asked about the letter. "The contribution rate will be the same as the current gratuity accrual rate. However, employees will be allowed to contribute additional funds out of their salary, if they so choose."

DIFC said the letter titled ‘Rethinking End of Service Benefits: DIFC survey’ is a key part of its consultation phase and dependent on feedback it aims "to go live on January 1, 2020".

"The DIFC established a Working Group over two years ago to examine the various options available for reform of the end-of-service-gratuity. Implementation is on-going and will incorporate feedback from our partners in the centre," the spokesperson added.

[The DIFC proposal] is a significant move towards off balance sheet funding of end of service liabilities.

At the Workers Incentives and End of Service Benefits Conference in Dubai last month, the government announced plans to "enhance and improve" the gratuity payment - a defined benefit decided by an employee's length of service and final basic salary at the time of leaving.

Abdulrahman Al Awar, director general of the Federal Authority for Government Human Resources, said studies are being carried out “to establish investment funds to manage retirement and end-of-service benefits”, to help companies attract and retain talent and ensure they can adequately fund the liability.

DIFC said under its current proposal, the reform would only affect future benefits and gratuities earned. This means, from the date of implementation "all new accruals will be paid in cash into employee accounts, administered externally to the employer under a DIFC master trust," the spokesperson said. "Pre-existing benefits leading up to the implementation date will remain untouched."

The free zone said under the current plan, there will be an enabling DIFC law establishing the overall architecture and requirements of the scheme.

"The Dubai Financial Services Authority, our independent regulator, will regulate the fund administrator. The master trust housing the scheme will be domiciled in the DIFC," the spokesperson added.

DIFC “has recognised the need to reform its labour law" in line with the wider corporate world, which is migrating towards defined contribution plans, Mr Kazim wrote in the letter. “Employers will be required to use this vehicle except where they already provide a trust-based defined-contribution savings plan whose employer contribution rates at least equal the minimum proposed by these reforms.”

Martin McGuigan, partner at Aon Retirement Solutions and McLagan in Dubai, said the DIFC proposal “is a significant move towards off balance sheet funding of end of service liabilities".

The retirement specialist said the move has three purposes: “To protect DIFC employees against unexpected business failures by putting their contributions into a trust-based structure; cleverly establishing DIFC as the regional hub for the embryonic pension industry; demonstrating to FAHR that a viable alternative to the current end of service regime can work on a large scale.”

According to the DIFC letter, by keeping employee contributions similar to the existing gratuity scheme, it will keep the new system "cost neutral" for employers.

Employees enrolled in the scheme will be able to pick how their contributions are invested, choosing between low-, medium- and high-risk options. Then when they leave the DIFC, they would receive both the end of service gratuity for service earned up to the date of the change, in addition to the contributory fund.  According to the letter, employees can choose whether to cash out the fund or to hold it without any new contributions.

When it comes to the charges, the DIFC spokesperson said the fund administration and fund management costs will be borne by the employee via a small management fee.

"We believe the fee represents excellent value because the plan removes the risk of employees not receiving what is due to them when they leave should their employer be unable or unwilling to pay what is legally owed to them," said the spokesperson. "It also allows their retirement savings to be responsibly and professionally managed where the fees concerned will typically be much lower than if they were to pay for it themselves individually."

Mr McGuigan said a new plan would make the free zone “a regional centre of excellence and over time it would provide a boost to a number of industries including asset managers, trustees and bundled providers”.

“Access to a well-run and well-regulated system will prevent employees having to run the gauntlet of badly designed high-commission saving schemes, which put the adviser’s interests ahead of the saver,” Mr McGuigan added.

First set up by the government more than 40 years ago, experts say the gratuity no longer serves the needs of modern-day employees in the Emirates. With expatriates now staying between five to 10 years, according to a 2018 study by Willis Towers Watson, this creates a cash risk for employers.

“If a lot of people leave at the same time, you have to find a lot of money and that could prove difficult especially for distressed companies. That then exposes employees to a benefit risk – are they certain they will receive the benefit in full or at all?” Philip Wheeler, senior manager and pensions actuary at Ernst and Young, told delegates at last month's conference.

DIFC said recipients had until March 28 to respond with their thoughts. The current proposal may still be subject to change depending on feedback received during the consultation phase, the spokesperson said.