DIFC pushes ahead with low-cost savings plan to replace gratuities

The Dubai financial centre will offer employees a choice of up to 12 passive investment funds at annual charges of 1.25 to 1.5 per cent

DIFC District. Courtesy Dubai International Financial Centre Authority
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Dubai International Financial Centre is pushing ahead with plans to replace expat workers' end-of-service gratuity with a funded, trust-based savings scheme that offers employees a choice of up to 12 passive investment funds.

At a DIFC employers’ town hall meeting on Thursday, the centre said the new scheme will charge employee members an annual management fee of about 1.25 to 1.5 per cent or lower depending on the administrator appointed to oversee the project set to go live on January 1, 2020.

We are looking for liabilities to be funded but we are also looking for that cash liability to be taken off the balance sheet and managed by a third party organisation. The employee's money is being managed separately from the company.

“People are realising that the current defined benefit scheme is not working and, instead of shying away from the really complex and sensitive issues involved, it was imperative that the DIFC, as the most compelling and leading financial hub in the country, steps up to play a leading role in this project,” said Jacques Visser, the chief legal officer at DIFC.

If the DIFC goes ahead with its plan, it will be the first body in the UAE to overhaul the current gratuity system - a defined end-of-service benefit that all expatriate employees are entitled to after completing at least one year of service. The amount is calculated on the number of days worked and the departing employee's final salary.

At the Workers Incentives and End of Service Benefits Conference in Dubai in February, the government announced plans to "enhance" the gratuity payment and move it to a defined contribution scheme where contributions are paid based on their salary as they progress through employment with contributions invested on an employee's behalf.

This is the plan set to be adopted by DIFC, which began reviewing the benefit in 2016 by setting up a working party to assess whether there was an appetite for change. The centre then sent a proposal letter to all employers earlier this year, asking for feedback by March 28.

The results of the survey of 339 respondents found the average DIFC employee earns Dh43,800 with the average staff tenure nine years. Seventy-eight per cent of DIFC employees support the proposal to reform the gratuity and 54 per cent of employers already fund the existing end-of-service gratuity system.

“That’s good news because it means many firms will not see cash flow effects from our proposal,” said Christopher Payne of DIFC Group strategy.

However, of those that do fund the liability, 79 per cent do not keep the assets outside employer control.

“That is an important part of our proposal,” added Mr Payne. “We are looking for liabilities to be funded but we are also looking for that cash liability to be taken off the balance sheet and managed by a third-party organisation. The employee’s money is being managed separately from the company.”

Under the DIFC’s proposal, workers would see their existing benefits leading up to the January 1 implementation left untouched. That liability would remain an obligation for employers who will have to pay out when the employee leaves based on their final salary.

Then, from January 1, employers will contribute to the new scheme at the same level of benefit as the gratuity system, which the working group calculated as equivalent to 5.83 per cent of an employee’s monthly basic salary under five years and 8.33 per cent after five years of service.

“We are not seeking to change the level of benefit or costs,” said Philip Wheeler, senior manager and pensions actuary at EY, adding that employees will have the option to contribute more into the scheme as will employers who might want to use it as a talent attraction method.

While the master trust will be domiciled in DIFC for policy reasons and the Dubai Financial Services Authority will regulate the fund administrator, both the role of trustee and administrator of the investment platform will be put out to tender, with the DIFC looking for "global tier 1 service providers", according to Mr Payne.

When it comes to the funds selected, Mr Visser said there will be a maximum of 10 to 12 passive funds on the restricted platform, to ensure the annual management cost stays low.

Mr Wheeler said employees will be able to control how their money is invested, choosing between a cautious, balanced or aggressive portfolio. However, there will be a “sensible” default option for those unsure of what choice to make.

Some attendees at yesterday’s event questioned whether they would lose out as the contributions made into the new scheme will be based on their existing salary rather than their final salary as the current gratuity system is, making it a cheaper proposition for employers.

“The potential investment growth has a better compounding effect than slow salary growth," said Martin McGuigan, partner at Aon Retirement Solutions and McLagan in Dubai and a member of the DIFC’s working party, who added that his firm would pitch for the tender.

"Whilst there is still some associated risk on the investment side, global research shows the investment growth is better over the longer term than wage growth.”