Dubai: Looking for chance to get inflation-beating returns at the time of your retirement – or when putting in your papers at your current employer?
That’s the prospect UAE employees get to choose with the recently announced reforms to be introduced to the country’s end-of-service benefits scheme. And any return that comes in higher than inflation rates is the core of planning one’s retirement savings.
“One thing that UAE employees need to understand is when they get their end-of-service benefits, say, after 10-15 years, it hasn’t grown to fight the inflation,” said Mohammed Qasim Al Ali, CEO of National Bonds. “Because inflation is about 2.5-3 per cent, and the ‘real value’ you get after 10 years is less by 30 per cent.
“So, what the Government has done is safeguard the pension and gratuity that’s accumulated. The second thing is when the employee leaves the company, what he or she gets as gratuity is ahead of the inflation curve.”
The full set of changes to the end-of-service scheme are to be released in the near-term.
To put it simply, the change would allow employees greater flexibility – it will be voluntary - in managing their contributions to their gratuity payout rather than the current employer does it all process. The employee decides what he or she should set aside towards their gratuity. The contributions – done monthly – will still be routed through the employer.
Shadow of high inflation
In the last 3-4 years, pension funds globally have had a fight on their hands to deliver returns over and above surging inflation. It hasn’t helped that inflation in many countries touched 20-year highs during this period. (Which set off the succession of interest rate hikes, which too have proved to be a curb on consumer spending.)
That the UAE’s decades-old end-of-service gratuity scheme was up for a revision was much anticipated. “Some employers did invest the sums meant for the gratuity, but the majority did not,” said Al Ali. “They were just figures on their balance-sheets, either because they don’t know how to invest it. Or they don’t have the liquidity to do it.
“What companies don’t understand – especially those that have been around 30-40 years – it’s a huge end-of-service payout that’s building up.”
• Under the new law, what changes is that instead of the the lump sum paid out as gratuity at the end of the employee’s tenure, the employer would have to make a monthly contribution into a fund on behalf of the employees. The fund comes under the supervision of Securities and Commodities Authority.
• The scheme is completely voluntary, and it will be up to the employee to decide whether to participate, and if he/she does, then how much the monthly contribution must be.
• What the change also will achieve is ‘remove the risk’ of the employer not factoring in their end-of-service provisions onto their balance-sheets. It will thus ‘provide protection’ in cases where the employer organisation faces insolvency issues.
Plan well ahead
After the 11 interest rate hikes since March 2022, a lot of that is reflected in what banks are offering on deposits, and which is higher than the current inflation numbers in the UAE. Plus, those with investments in the local stock markets too are sitting pretty, cashing in on the IPOs and the rebound in prices of many of the blue-chip stocks.
“People are keeping a lot of their funds in the money market, deposits with banks, and where they get returns of 3-5 per cent depending on the amount placed and the duration of the deposit,” said Al Ali. “At the moment, they are not taking longer-term decisions because the money market gives them returns that fights inflation.”
With pension planning, the need for the employee is to look well beyond. It’s a point that the National Bonds’ CEO emphasises.
“They are enjoying high interest rate environment, but that will not be sustainable. It’s only a matter of time before interest rates go back to 1.5-2 per cent. Employees have to think long-term.”
So, what will National Bonds look for once the full details of the new law come out?
“Remember, it’s a voluntary scheme, and there has to be some kind of incentives for employers to participate,” said the CEO. “At the end of the day, though, it’s down to the employee to decide whether to participate, and if he/she does, decide what the monthly contribution needs to be.
“The employee has to decide what risk appetite to take for their pension funds.”
Anything that beats inflation would then be a good place to start…
