DIFC end of service gratuity reform expected to take effect in early 2020 - authority

Employer contributions will instead be placed into trusts that can be invested in global funds

The Gate - Main building of Dubai International Financial Centre, the world's fastest growing international financial centre. August 13, 2013 Dubai, UAE. Image used for illustrative purpose.

The Gate - Main building of Dubai International Financial Centre, the world's fastest growing international financial centre. August 13, 2013 Dubai, UAE. Image used for illustrative purpose.


A proposal by Dubai International Financial Centre (DIFC) to reform its minimum end of service gratuity is expected to take effect on 1 January 2020, its chief legal officer told Zawya.

The DIFC has reassessed the existing end of service gratuity system by considering global trends and changing demographics. It concluded that the current system, which was created to pay lump sums to expatriates after their employment ended, needed to be reformed to reflect global best practice. Its proposed plan, DIFC Employee Workplace Savings (DEWS) Trust, is a funded, trust-based savings scheme.

“The anticipated cost will be between 1.25 to 1.50 percent per annum, although this is still subject to the competitive tendering process that will commence shortly,” Jacques Visser, Chief Legal Officer at DIFC, told Zawya in emailed responses to questions.

“The current thinking is that the number of funds on the DEWS investment platform will initially be in the vicinity of 10-12 passively managed global funds across the investment risk range (also with a default option, for those who do not choose an option, and a Shari’a compliant option),” he said.

“There will also be the possibility of adding more funds as the scheme grows, inclusive of actively managed funds,” he added.

On whether DIFC’s Visser expects gratuity reform to extend to other parts of the United Arab Emirates, he said: “We cannot speak for the rest of the UAE but the work done by the DIFC over the past three years has certainly gone a long way in terms of showing what is a workable solution when it comes to a establishing a defined contribution scheme in line with global best practice.”

Anir Chatterji, a director and leader of PWC’s Middle East immigration & employment practice, said it is likely that the change to the end of service gratuity regime within the confines of the DIFC will spread to other free zones and the mainland, in an attempt to standardise employee benefits and entitlements.

“The model proposed in the DIFC is intended to stand as a savings fund, not a pension scheme.  Overall, the change to the existing end-of-service gratuity (ESG) regime and its replacement with this mandatory employer savings fund is a positive step, especially when looked at from the prism of the deficiencies inherent within the existing regime – mainly, ESG being an unfunded and open-ended liability; it doesn’t accord with international standards and best practice; and the need to provide a more protected and fixed service-linked benefit,” Chatterji said to Zawya in emailed comments.

While the UAE Labour Law already contains provisions regulating the manner in which ESG payments dovetail with discretionary employer savings funds and pension schemes, the law does not mandate or oblige employers to set up a savings fund, he said.

‘Phasing out’

“It is likely that going forward, the UAE Labour Law will be amended to reflect a similar mandatory employer savings fund scheme and a general phasing out of the existing ESG regime. Employers in the market have expressed a genuine desire to put into practice broader employee retention measures and mechanisms and so the appetite for such a savings fund is certainly welcome and timely,” he added.

The unfunded, defined-benefit nature of the existing end of service gratuity is a disadvantage to both employees and employers, as it exposes the former to risksthat the benefit might not be paid in full or at all, and creates an open-ended liability for the latter, according to a DIFC document emailed to Zawya.

The DIFC document on re-thinking end of service benefits also notes that the UAE’s accelerating development as a place to live and work means the end of service gratuity “is no longer appropriate when competing on a global stage for attracting and retaining talented workers”.

There have also been discussions at a federal level in the UAE to potentially put into a new system for the mainland.

In February, a UAE official told a conference in Dubai that there is an urgent need to establish investment funds to manage retirement and end of service benefits for people working in the country.

“These funds will help employees plan properly by taking advantage of end of service benefits, enabling them to make use of their financial resources, and create jobs for new generations,” Abdulrahman Abdul Mannan Al Awar, the head of the department responsible for human capital development said. (Read more here).

A recent survey has shown that around half of expatriates in the UAE are only able to save 5 percent or less of their monthly income, and only 16 percent of expatriates have set retirement planning as a financial priority. (Read more here).

With many UAE residents having little or no savings, retirement saving remains a major issue for many expatriates who face the consequences of inadequate financial planning later in life.

There has been a debate for several years now about the need to revitalise and modernise the existing ESG scheme with a funded and managed system that mandates employers to create schemes into which they fund employee benefits from commencement of employment, according to PwC's Chatterji.

“The present regime fails to address the very real risk of companies not having accrued for the ESG. Realistically it is only calculated on termination of the employment when an employee’s eligibility is fully determined, (e.g. 1 year of service and a non-gross misconduct termination) and thus a company may not have financially accrued for this amount,” he said.

“The protective nature inherent in the savings fund proposed by the DIFC shines a brighter spotlight on these issues and the need for reforms to permeate across the other free zones and mainland. The added benefit of the proposed savings scheme is that it would be invested and thereby potentially give a higher return than may be available under the existing gratuity scheme,” he added.

(Reporting by Nada Al Rifai; Editing by Michael Fahy)


Our Standards: The Thomson Reuters Trust Principles

Disclaimer: This article is provided for informational purposes only. The content does not provide tax, legal or investment advice or opinion regarding the suitability, value or profitability of any particular security, portfolio or investment strategy. Read our full disclaimer policy here.

© ZAWYA 2019

More From Policy