How DIFC’s new savings scheme is evolving as it nears January roll-out

Details of the plan’s fees and how it will work are emerging, but questions and concerns about implementation remain

Jacques Visser, the DIFC Authority's chief legal officer, said the DIFC is 'heading steadfast towards the January 1 deadline'. Pawan Singh / The National

At a seminar for Dubai International Financial Centre employers on the free zone’s new Employee Workplace Savings scheme — set to go live on January 1 — Jacques Visser made what he called a Freudian slip.

Addressing concerns about the viability of going forward with the plan by the set deadline, the DIFC Authority’s chief legal officer said at the session on Tuesday, “We firmly believe that it still cannot be done”, before quickly correcting himself: “can be done”.

The room erupted in laughter, perhaps because the slip represented what was already on people’s minds: can it be done?

“This is a self-imposed deadline. There is no reason why it can’t be extended, but we are keeping our eyes on the ball,” Mr Visser said. “With so many different stakeholders involved … we are still heading steadfast towards the January 1 implementation date.”

The importance of this plan regionally can't be overstated. It's the right step.

The stakeholders include not only DIFC employers and employees, but the plan’s master trustee, Equiom, administrator Zurich Middle East and investment adviser Mercer, who all appear acutely aware of the precedent this move will set for the UAE and the region. If successful, the DIFC 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 importance of this plan regionally can’t be overstated. It’s the right step,” said Peter Cox, head of international pension plan sales at Zurich Middle East. “It’s worked in other jurisdictions and it’s the best way forward.”

The DIFC's intention to replace the end of service gratuity with a funded workplace savings plan was reported by The National in March. The move is meant to more closely align benefits with global retirement savings standards.

Further details of the DIFC Employee Workplace Savings (Dews) plan have emerged in recent months, including the providers, the average fees and the types of risk profile options available. However, specifics on what “alternative qualifying schemes” will be eligible, the range of fees for various risk profiles and expected returns have not been specified.

Earlier this month the DIFC issued proposed amendments to the new employment law that came into effect in June, in relation to the Dews plan. For example, it clarified that existing DIFC employees will have a right to gratuity payments prior to the introduction of the new regime. It also noted that employers will be obliged to fund benefits into Dews or another qualifying scheme from the start date of the new regime going forward on a monthly basis.

The amendments are open to public consultation and the deadline for providing comments is November 18.

“It is an incredibly tight schedule. And I feel for [the DIFC Authority] because it’s a really hard thing to try to do,” says Martin McGuigan, a partner at McLagan and Aon Retirement Solutions in DIFC. “You have people that are running flower shops with five employees and you have multinational banks, and you’re trying to treat them all in the same way — over 2,000 employers. It’s a tough ask.”

As the DIFC enters uncharted territory for the UAE, here we outline the advantages and potential challenges of the new plan.

Why is the DIFC doing this?

The 2005 DIFC Employment Law required employers to provide an end-of-service benefit for expatriate workers based on years of service and final basic salary — a “defined benefit” entitlement. However, over the past 20 years, many corporates globally have adopted a “defined contribution” plan.

Mr Visser said there are three main reasons why DIFC is making this change. The first is that “the defined benefit nature of the existing scheme is becoming less prevalent compared to global practice, which has been moving towards defined contribution schemes for quite some time now”.

Secondly, “the changing demographic of employees in the DIFC who now typically remain much longer”, which means catering to longer term residency in relation to savings and retirement.

Thirdly, the DIFC is part of a “fiercely competitive global stage for attracting and retaining the most talented workers”.

The DIFC began reviewing the current system in 2016 by setting up a working party to assess whether there was an appetite for change. A 2018 survey found that over 85 per cent of respondents were in favour of a transition to a defined contribution plan. Earlier this year, the centre sent a proposal letter to all employers, asking for feedback by March 28.

How will the new plan work?

Under the current gratuity scheme, employers have to pay 21 days of an employee’s basic wage for each year of the first five years of service and 30 days of the wage for each additional year of service. This amounts to 5.83 per cent and 8.33 per cent. These percentages will now be funded by the employer to the Dews scheme or another qualifying scheme on a monthly basis.

Employees can choose from five risk-profiled funds: low, low/moderate, moderate, moderate/high and high. The low-risk fund is aimed at capital preservation. The low/moderate risk fund will be the default fund, which is also conservative but will include an allocation to growth assets. There will also be Sharia-compliant options available.

The plan applies to expatriates and does not include UAE nationals or GCC nationals who are accruing a social security benefit separate from the requirements of the DIFC Employment Law.

Who are the plan providers?

Equiom, a global trust services provider registered in the Isle of Man, will be the master trustee. It set up its first office in Dubai in 2016 and has five offices across the GCC. It has been the trustee for Emirates Airline’s pension-style scheme, which started in 1991.

As trustee, Equiom ensures everything is carried out as agreed and holds the assets. “Not only is it protected — so if a company goes into liquidation, the money is still there — but money will grow on a month-to-month basis,” said Gary Hales, head of Equiom Fiduciary Middle East.

Swiss insurer Zurich Middle East, which has been in the region for 30 years, will be the administrator. The Zurich Group currently administers over 750 workplace savings plans constituting $5 billion in funds. “Our role is to facilitate employers in rolling into the Dews plan,” Mr Cox said. It will open an office in DIFC for that purpose.

Global consultancy Mercer will be the investment adviser with “the ultimate aim to help members achieve financial security in the future”, said Claudia Maldonado, principal at Mercer Financial Services in Dubai.

Peter Cox of Zurich says the insurer's role will be to help employers roll into the Dews plan. Leslie Pableo/The National

What about fees?

Initial proposals suggested annual charges between 1.25 to 1.5 per cent. “This has been settled now at 1.33 per cent per annum for the first few years, after which we would expect for it to reduce,” said Mr Visser. “This is a fraction of what people would pay elsewhere.”

But Tuan Phan, a board member of SimplyFI, a non-profit community of personal finance and investing enthusiasts in the UAE, says the fees should be lower. The 1.33 per cent would apply to the default, low-to-moderate risk option. Lower risk options usually have more allocation towards bonds than stocks.

“At the moment, the bond returns are very low and they are charging 1.33 per cent. That’s going to eat up nearly 100 per cent of all your earnings,” says Mr Phan. “Inflation is 2 per cent. You need at least 3.5 or 4 per cent to make gains. That’s mathematically impossible with that portfolio.”

Mr McGuigan says there is “as yet, little transparency on the types of investment structures being offered and the targeted return rates”.

“Under the new scheme, if it’s only returning 2 per cent on the default fund, and you’re paying 1.33 per cent, it means your pot is growing by .77 per cent instead of the 4 per cent growth indexed to pay [on the existing gratuity plan],” he says.

It is also unclear whether the fees will be higher for higher risk options and Sharia-compliant options, which are traditionally more expensive.

Martin McGuigan, of Aon Retirement Solutions, says reform of the gratuity system is needed, but the fine-tuning remains. Leslie Pableo / The National

What are the main advantages?

Mr McGuigan says “the end of service is not enough for retirement” and reforming the system is the way forward.

“In countries that have bit the bullet, such as the US, Australia and the UK, it has been a resounding success,” he says. “The idea is excellent. I think the details and the fine-tuning is something that will work in time.”

What are the next steps?

Shiraz Sethi, regional managing partner and co-head of employment at legal services firm DWF Middle East, has suggested a five-point action plan to prepare for the coming change.

He says employers should: decide whether they will opt for the Dews plan or a qualifying alternative scheme, speak to the experts, have internal consultations with key stakeholders, look into what is needed from a legal perspective and decide what to do with the gratuity up until December 31.

“Doing nothing is not an option,” Mr Sethi said. “The law does stipulate that there are going to be fines for non-compliance.”