Anna Ingram is not particularly worried about her retirement.
The British expat has not started saving for it, nor is she topping up payments she has missed to the public pensions system in the UK while she works here.
She is not even planning to use the end of service gratuity payment she will receive from her job at a family fitness club in Abu Dhabi to help fund it.
“I never thought about putting the gratuity towards retirement because I haven’t thought that far into the future,” says the 24-year-old. “I will probably use it for flights or something, or to help towards housing or putting a deposit down on a house, depending on how much I get.”
She is not alone.
According to a survey by Zurich in January of 1,000 UAE residents, just 22 per cent plan to use the gratuity payment for their retirement.
Almost a quarter intend to use it as a deposit to buy property, while 22 per cent will put it towards debt. Eight per cent will use it to pay for school fees, rent or another bill and 7 per cent will spend it on a holiday or other large purchase.
The payment is calculated on a person’s base salary – a sum often considerably less than take-home pay once benefits like housing are stripped out. The law dictates employees must complete 12 months’ service to be eligible. They receive 21 days’ salary for each of the first five years of employment and 30 days for each year thereafter. The maximum payment is two years’ basic salary.
A majority of those surveyed by Zurich, 83 per cent, said they believe the end of service gratuity is an “inadequate” method of saving for their silver years.
So what was it designed to be?
“It’s a good question. I’m not sure, to be honest,” says Peter Cox, head of international pensions at Zurich International Life. “I don’t think it was originally designed to be a replacement for a retirement savings pot because for a start in the UAE it is capped at two times’ basic salary, so it is never going to be a life-changing experience. It could be a fairly significant sum if you have been here for a long time. But in terms of being sufficient enough to retire on, our evidence shows that people certainly think that isn’t the case.”
The alternative is an International Pension Plan (IPP).
Zurich has noted a “significant” rise in the number of big UAE companies signing up to IPPs, with a 40 per cent increase in the past two years. The company now has around 50 large corporate clients across the region.
“[IPPs] are fully funded at the point of joining,” explains Michael Brough, director of consulting services for Towers Watson. “So basically the money is taken from an individual’s salary, the company pays their contributions, the money goes into the individual pot and normally the majority of plans will have an independent trustee to make sure that the monies are being paid when they should be, that they are set aside outside of the company’s affairs and therefore if the company is to go bust the money is still there safe for the employees.”
And that is an important point because according to SEI Investments, which sets up schemes to safeguard gratuity payments by separating them from the balance sheet, the vast majority of UAE companies do not even keep the money in a different account from their working capital. “We think that’s a massive risk, especially given the market environment today where companies continue to grow their head count and salaries are higher than they ever have been before,” says Samer Kader, the head of SEI Investments in the region.
“And the key change over the last few years, or over the last decade, is expats who come to Dubai intend to stay in Dubai for a long time.”
A survey of international pension plans in 2014 by the professional services company Towers Watson revealed that of the 584 IPP schemes it looked at worldwide, around 7 per cent, or 37, were based in the Middle East.
The number of companies offering their employees retirement savings schemes in the UAE is likely to be around 3 to 5 per cent, according to Glen Crosfill, senior wealth manager for Acuma Devere. And the vast majority are either European or United States-based companies with offices here, he says.
“If you look at it from an Emirati point of view, Emiratis are paid by the government scheme whereby whatever they earn at the end of their career is what they get for the rest of their lives. So in the eyes of an Emirati employer there has never been a need to put anything in place,” adds Mr Crosfill.
And they probably assume the governments of expats working here will take care of them in the same way, he adds.
However, a small number of Emirati employers offer staff retirement savings schemes, including Emirates Airline.
The carrier originally introduced its provident scheme, a long-term savings and retirement plan, back in 1991, although the current arrangement dates to 1997.
“The Emirates Group wanted a way to introduce a securely-funded retirement arrangement for its staff with the intention of providing greater benefits than the statutory end of service gratuity,” says Abdulaziz Al Ali, executive vice president of human resources for the Emirates Group.
But if you are not lucky enough to work for an employer offering an IPP or do not want to rely solely on your gratuity to fund your retirement, what should you do?
Just start saving, say the experts.
As a rule of thumb, people need a minimum of around 70 per cent of their pre-retirement income to maintain their current standard of living in their retirement, says Jessica Cook, a private client adviser with AES International.
By starting early rather than delaying saving for a few years, you can considerably reduce the amount you need to put aside each month, she adds.
It is a lesson Rodger Macfarlane received from a Gulf old- timer when he first moved to the region. His company did not offer a pension, so the onus was on him to organise his own.
“He said to me: ‘It is really important to leave your time in the Middle East with more than a suntan and a gold watch – to have something to take back that you can say is an investment for the future’,” says Mr Macfarlane, 54, a client of Mr Crosfill’s who has lived in Dubai for almost eight years.
His financial adviser suggested setting up a pension and taking his two existing UK pensions offshore, both of which he did.
Mr Macfarlane’s says his offshore pensions should give him enough to buy a small house in the UK, while the fund he invests in on a monthly basis will be enough to offer an income.
And Ms Ingram? She aims to set up a fund of her own in the next five years.
“The earlier the better, really,” she says.
Financial adviser Ms Cook agrees.
“Millions face an impoverished old age because they are putting away a fraction of what they need for a comfortable retirement,” she says. “What is certain is that the end of service gratuity should not be relied on as a form of pension.”
Comparing two retirement plans offered by UAE employers
Zurich administers the same type of IPP for its employees that it operates for its corporate clients.
In Zurich’s case, the company makes a monthly contribution to cover employees’ end of service entitlements. Zurich contributes 12 per cent of the employee’s salary when they start work, although the sum is not paid into the pot until they complete 12 months’ service.
The 12 per cent contribution is invested into a risk-averse defensive fund – made up of around 80 per cent bonds and 20 per cent equities.
If the payment is less than the value of the end of service benefit when the employee leaves, Zurich makes up the shortfall. But its employees are entitled to whichever payment is higher.
Employees can also make voluntary contributions – either a flexible percentage of their salary or a fixed sum.
Employee contributions can be withdrawn twice a year and at a maximum of 75 per cent of the total contributions while the employee is with the company. The portion Zurich pays can only be withdrawn when the employee leaves service. However, employees can let the money remain in the plan once they leave.
According to Abdulaziz Al Ali, executive vice president for human resources at Emirates Group, the group’s provident scheme is set up as an offshore trust with an independent trustee company called Equiom, based on the Isle of Man.
The trust structure keeps the assets of the scheme entirely separate from those of the company and the arrangement is governed by Isle of Man law.
Emirates Group currently has approximately 6,000 active members in the scheme.
“The scheme is quite unique in the GCC region and is a valuable part of the overall staff remuneration package, which in turn helps with recruitment efforts,” adds Mr Al Ali. “Emirates has among some of the highest retention rates in the region. Currently, more than 8,600 staff have served for 10 years or longer and in excess of 2,100 have been with the company for 20 years or more. The scheme has a vesting schedule attached to company contributions, which helps support staff who have been in long service. The scheme also helps the company control its statutory end of service liabilities.”