Expats could benefit from pension reform

Dubai: Retirement and health care are employment benefit issues of the 21st century globally and addressing these effectively can help the UAE achieve its own economic vision.

A 2011 global study undertaken by MetLife shows that employer and employee needs worldwide are converging around the issue of employment benefits and especially retirement provision. Employers share the desire to attract and retain the right staff, improve job satisfaction and productivity.

Employees share fears about having sufficient funds to last their retirement and pay for health care. The common ground is security of employment and reward for long service.

In the Gulf, the end-of-service gratuity system offers a method of saving and pension provision, but it is limited in scope and not protected or underwritten by the employer in the event of bankruptcy, making it unlikely to produce sufficient income for retirement.

Reported talks in 2011 between the World Bank and the UAE on pension reform suggests that, in the future, there may be some form of plan for expatriate employees which would be viewed positively, especially in today's volatile economic climate.

There is an opportunity for reform that would allow expats to benefit from a pension after working for years in the country and ensure maintaining a certain standard of living.

Positive implications

Offering pension would have very positive implications for employees, employers and the wider economy. The UAE has a unique opportunity to establish a Mandatory Defined Contribution Pension scheme without the related ‘transition costs' associated with shifting from a Social Security "pay-as-you-go" System to a funded one, such as the one launched by Hong Kong in 1999.

In a defined-contribution plan, the employer and employee jointly contribute a given amount per period (monthly, annually, etc.) to the plan, after which the employer no longer has any responsibility for the future value of those funds and is not exposed to any risks.

The employee can choose investment fund allocations and plans can be tailored to fit investment and risk profiles — from more aggressive investments with potentially higher returns but exposure to volatility, to capital guaranteed solutions which protect the investments.

These plans can be customised at the request of the employer to be a traditional defined-contribution or profit sharing plan,

Attractive destination

Offering a mandatory defined-contribution pension scheme would certainly make the UAE a more attractive destination for expatriates. Pension reform can help attract and retain qualified workers and encourage employees to stay longer with the employer and within the country. This can positively impact the economy as well as the labour and real estate markets. Creating a mandatory scheme could also be expected to stimulate further development of the local capital market, by driving demand for diverse long-term saving products and attracting professional institutional investors.

Long-term savings

A mandatory pension scheme could help expatriates adopt a systematic approach to long-term savings and help those who cannot afford to invest in private plans. Ideally, when an employee leaves an employer, the combined contributions would be invested in an annuity which guarantees an income at retirement for the lifetime of the retired employee. In the event of the employee's demise, beneficiaries would have a pension income or a lump-sum amount.

The writer is corporate solutions director at MetLife Alico — Gulf.