Golden Pension Scheme UAE
Many UAE employers have some serious catching up to do to make their end-of-service benefit programs work. Many have not even started on it. Image Credit: Shutterstock

Dubai: Pension investment schemes are starting to gain serious momentum in the UAE, with more employers realising they need to make their gratuity funds work to better effect than in the past.

At the same time, employees too are taking a more hands-on approach to what their pension contributions should be.

Read More

But where employers are concerned, it’s still not an easy task to get them to sign up and release the gratuity funds at their disposal. “Most of these (gratuity-linked) funds, especially in the SME sector, are only on paper,” said Mohammed Qasim Al Ali, CEO of National Bonds.

“I have spoken to a couple of big corporates who are on the right track and keep the funds aside in a bank so that they generate something.

“The most important thing is to convince the employer that it is time to start - even if they cannot fund the previously accumulated amount, which may be Dh1 million, Dh2 million or whatever.

“Start fresh - because eventually the government may decide to make it mandatory for the private sector to fund end-of-service (pay-outs). It is better to be ahead of the game and look after your employees.”

Start ‘small’

UAE authorities are streamlining what could eventually become a full-fledged pension framework in the country, for citizens and expat-residents alike. In this regard, Dubai passed a scheme from last year where all employees at government entities can make monthly contributions towards their end-of-service benefits. These funds are managed by third-party entities to provide for optimum returns. (Called ‘DEWS’, the pension program was initially for DIFC licensed entities.)

When it comes to employer contributions towards end-of-service funding, the National Bonds’ CEO says employers, especially SMEs, need to start with smaller contributions and then build their way up. “The message is getting through to big companies, but smaller ones still struggle with liquidity and cash flow,” said Ali. “They need a longer time – but what they have to do is start now.”

“As we all know, most end-of-service benefits are only sitting in the books of many companies. Most times, they are not being invested on behalf of the employees and not generating any income or growth.

“We thought that there was a niche market for a simple pension scheme for the employers and employees.”

With pension programs, you are changing cultures and mentalities of employers in the UAE

- Mohammed Qasim Al Ali of National Bonds

Transition time

There has been talk for some time that the authorities would introduce major changes to the decades-long end-of-service benefits program. In this regard, pensions are seen as the natural progression to make, and recently, a revamped one was introduced for UAE Nationals.

‘Golden’ pension

Businesses, the small and mid-sized ones in particular, have typically been amiss in making regular contributions to their gratuity schemes. More so, in a tougher economic environment where the cost of debt has risen sharply since March 2022 after successive rate hikes. So, where possible, businesses have dipped into their own funds rather than set aside for gratuity payments.

Industry sources say that some transition time will be needed for businesses to be in control of such schemes internally.

This is where schemes such as the National Bonds’ ‘Golden Pension’ program, introduced last October, will help. Companies, big and small, could place their gratuity funds with the company, which would then deploy them for varied returns. So far, the likes of Dubai Taxi with 9,000 employees have signed up.

“When we talk to corporates, we talk on different levels,” said Ali. “First is the end-of-service benefit funds they park with us, and they have the choice either to have it as one account registered under the company's name. And then they divide the returns and the prizes to their staff.

“Or they ask us to open an individual account for each staff member so that the staff can see their end-of-service.

“When you look at employees, there is the financially unaware and then there is the sophisticated, higher-level employee who can decide which investments they want to put their money in, which risk profile they should adopt, and which asset classes to be in.

“When it comes to the former, he just wants to see his end-of-service benefit in a safe place where it's growing at a rate that, at least, counters the inflation. That was our approach and we had an overwhelming response from the market once we announced it.”

How the National Bonds’ ‘Golden Pension’ works

  1. The employer will start deducting the equivalent of the employee’s end-of-service on a monthly basis. They could add the fund to the National Bonds’ account.
  2. Either they keep it under the employer’s name or under the individual employee's, at their discretion.
  3. The employee too can contribute additionally to the savings, either through the company or directly with National Bonds, which gives him/her the account number to make direct contributions.
  4. The deductions made by the employer for the end-of-service cannot be redeemed or refunded. Anything on top of that is voluntary by the employee.