DIFC's employee savings plan will be the first move in transitioning from the employer-funded gratuity schemes. Image Credit: Gulf News Archive

Dubai: Exactly two months after a new workplace savings plan came into effect at Dubai International Finance Centre, over 850 companies with a combined 16,000 plus employees have enrolled. That leaves another 450 or so DIFC licensed entities that are yet to do so.

Initially, the deadline to register was set for end March, but that has now been moved to April 30 in light of the coronavirus pandemic and the disruption it has caused businesses everywhere.

The DIFC Employee Workplace Savings Plan replaces the end-of-service gratuity given by employers.

“With the economic turbulence we have now, we can see governments stepping in, we can see free zones stepping in to give economic relief to companies,” said Reena Vivek, senior executive officer at Zurich Workplace Solutions, the administrator of the plan.

“But there is still a risk that some employers may not be able to sustain this. So, if they were to go under, the protection becomes absolutely critical.

“If the [April 30 deadline] gets extended further, the risk is that the money kept with employers will be used to meet short-term cash needs. And when it actually should be paid out to employees, it may not be available.”

Focussing attention

Administrators of the DIFC plan said the virus outbreak and the strain it has put on businesses highlights the importance of having such safety nets for employees.

“The intent is to protect employees if there were a situation where the employer is unable to pay end-of-service gratuity,” said Vivek.

Market watchers have already warned that the slowdown in business activity is hurting the liquidity of companies. Many airlines, for example, have enough cash and cash reserves to last them for two months, while many other industries have even less than that.

If employers were to burn through that cash amid a slowdown, there may not be much left to pay employees their gratuity as per the law when their contracts are terminated, Vivek warned.

The new DIFC savings plans can provide financial security in times of uncertainty and offer reassurance to employees, according to the company. There are ongoing discussions about rolling out the plan across Dubai, and there’s already a committee to oversee the DIFC implementation to assess its impact.

Grades of risk

Essentially, instead of receiving a lump sum at the time their contract is terminated, employees will now have savings accounts managed by professional fund managers who will invest that money into different asset classes.

The accounts have five settings, from low to high risk. The default one assigned to employees is a “low-moderate” risk, but each user can log into their account to tweak that based on their risk appetite.

With the current sell-off in markets. Vivek said that most employees have chosen not to change their risk appetite or switch to cash funds.

“In all our communications to employees, we’ve re-emphasized the fund range that is available and the fact that they have the option to switch,” she said. “We’ve not had that many switches yet.

“Interestingly, a lot of the [ones that did come through] have gone into higher-risk funds, because some individuals consider that entering the market when it’s at a low period will give them that benefit in the long-term.”

But employees better not have knee-jerk reactions based on market fluctuations.