Dubai: In March, Dubai International Financial Centre marked one year of the implementation of the DIFC Employee Workplace Savings Plan (DEWS). It marks a clear shift from the usual defined benefit model (a lump sum calculated at end of service) to a defined contributions model (employer makes recurrent contributions as part of end of service benefits).
Since the February 1, 2020 rollout, 19,182 members of DIFC workforce from 1,187 of the free zone’s licensed firms have been enrolled in the plan. The DEWS plan has $127 million in assets under management, while $4.4 million have been paid out as gratuity to members who left DIFC.
*This is net of fees and only indicative performance based on unit prices from State Street and Mercer calculations. Past performance is not a guarantee of future performance.
What is DEWS?
In Dubai and across UAE, gratuity or end of service benefits are given to employees as a lump sum at the end of their service. It is calculated based on the employee’s final basic salary, kind of contract and years of service. There is no element of investment or employee contribution here.
In DIFC, with DEWS, gratuity is paid by the employer monthly and it goes into a trust which is under the independent legal ownership of a master trustee (Equiom) under the purview of a financial regulator. The funds in the trust are managed by an administrator (Zurich Workplace Solutions) who will manage enrolment, contributions, withdrawals etc. The funds will be invested by the master trustee based on the advice of an investment advisor (Mercer).
Rate of growth for the High Growth Fund, from April 2, 2020 to January 29, 2021
So there are four key differences between DEWS and traditional UAE gratuity plans:
1. Monthly contributions paid out instead of one lump sum
2. Gratuity gets invested as soon as it is contributed into the fund
3. The gratuity contribution is calculated based on current salary of each month instead of final basic salary
4. Once monthly contribution is done, the money is directly put under the employee’s name in the trust.
5. Employees can also make voluntary contributions to the fund – which is deducted and transferred from the salary during the payroll process.
The main difference is that total gratuity paid this way is put into low-cost long-term investments that can help grow employees’ wealth. It also allows long-term savings by employees through their own voluntary contributions.
Gulf News spoke to Reena Vivek, Senior Executive Officer, Zurich Workplace Solutions for more clarity about the plan. She said, “[DEWS] was driven from an overall governmental perspective. Now in the UAE, we have a vision to attract expat workers to come here and [global] talent, and you’ve seen, we are also encouraging people to stay here with longer-term visas, retirement visas being issued.”
“So in that context, there is a need to bring global best practices when it comes to end of service benefits and gratuity, and the defined contribution model is seen as a fairly successful model in most of the economies where it has been implemented. It is also a model that is familiar to a lot of expats themselves… It was recommended by a working group to adopt this kind of an approach.”
Zurich Workplace Solutions (ZWS) is the day-to-day administrator of the fund and handles all the incoming contributions, new enrolments, facilitating investments, withdrawals and maintaining employee records. It is through ZWS that employees and employers can view and manage the funds in the trust.
“What DIFC did was start and be the first one to take the lead on this. DIFC had set up a working committee for a period of time, and it was almost three years [for this].” She added that this working group, at the highest level, recommended what changes needed to be made to the employment law. They defined the structure of the plan such as having a trustee, an administrator and an investment advisor.
How much is the contribution?
The minimum monthly contribution by employers is 5.83 per cent of basic salary (service less than 5 years) and 8.33 per cent of basic salary (service of 5 years of more). These contributions are the minimum limits and are paid in to the fund based on current basic salary, and is not deducted from current salary.
This would mean that if an employee was earning Dh5,000 (as his/her basic salary) the employer would pay either Dh291.5 (service less than 5 years) or Dh416.5 (service of 5 years or more) per month. In addition to this employees can set up voluntary contributions from their side, which is deducted from current salary and transferred into the fund.
The percentages set for this minimum contribution more or less match the amounts that are currently applied in gratuity calculation.
A fear of investment
Investing one’s gratuity is very new to Dubai’s workforce, which is already characterised by a vast diversity in ages, income, cultures and financial knowledge – some of which can result in a fear of investments due to market fluctuations.
We kept the fund range deliberately small, so it’s clear and not confusing for people, especially when moving to something new you don’t want to overwhelm them with too much choice
“To be honest, when we initially did our town halls and several sessions to explain what was changing, this was an overriding concern. People felt ‘I have almost like a guaranteed amount now, and now you’re telling me you’re putting it into a plan. What if the markets crash, and everything goes..?’”
Reena said these fears and concerns had been taken in to consideration for all four aspects of the investment management process – simple and clear communication, specifically created investment options, reasonable pricing and easy access to the platform for employees.
“We kept the fund range deliberately small, so it’s clear and not confusing for people, especially when moving to something new you don’t want to overwhelm them with too much choice.”
DEWS’ investment adviser, Mercer, creates and recommends the investment options for the members to the trustee. “We clearly communicated to the members, and still do periodically, that you need to look at DEWS as a long-term retirement savings plan. It is not meant to be like a trading platform.
“If you go and look at it every day, the prices moving up and down, it would be quite worrying.” But that is not how DEWS works, Reena added. The plan is meant for you to keep the money in for a longer term and then benefit from that long term growth, she explained.
What are these funds?
Mercer, the investment advisor, made five funds exclusively for the DEWS scheme. There is a default fund that the funds are put into but employees can choose to move their money into another investment option with a different risk profile through the DEWS portal. Each investment fund has its own costs and risks, which are explained in the portal before the employee makes a switch.
Reena said, “They [Mercer] closely monitor the performance of these funds, each fund has an underlying fund manager. Those underlying fund managers are amended, moved or replaced on a regular basis to make sure that they are actually delivering a certain performance to the members. [For example], on the default fund, the target performance is to meet your salary inflation.” The salary inflation rate has been calculated as 4 per cent as per the current scheme, Reena added.
“Each fund is clearly labelled from a risk profile perspective and there is always the default fund. If the person is not investment savvy and does not know where the money needs to go, the default fund is recommended to the trustee who is holding the assets on behalf of the member.”
The funds have diverse portfolio made of cash, equity (stock) and debt (fixed income) instruments, and these change on a regular basis based on performance or lack thereof to get the best growth for the member’s funds while staying in the chosen risk profile.
The six funds as per the official website of Zurich Workplace Solutions are:
• Low Growth Fund
• Low/Moderate Growth Fund [Default fund]
• Moderate Growth Fund
• Moderate/High Growth Fund
• High Growth Fund
• Emirates NBD Islamic Money Market Fund [Sharia]
All funds are automatically moved to the default fund which employees can change later using their DEWS portal. After one year, Reena said, 70 per cent of employees are still in the default fund. However, 30 per cent have changed their fund from default, out of which 12% have chosen the high risk-high growth funds.
“In our experience, the percentage of members who shift out of the default fund is much lower than this. But I think it’s also because we are in DIFC, and so we may have more members who are more knowledgeable about finance, and comfortable managing investments.”
As for costs, the only direct costs for the members i.e. the employees are the fund management costs, which is around 1.36% for the default fund. “We had to make the process cost-effective, and get a price fit for everyone,” Reena added. Fact sheets on the website shows approximate charges, distribution of stock between equity, debt and cash instruments and other details of each fund.
How much will my money grow?
The major advantage touted for this scheme is the fact that your gratuity would be able to grow in a diversified portfolio, subject to market fluctuations and risks. But by how much does it actually grow?
The default fund, from the period of April 2020 to January 2021, has grown by 17.9 per cent. However, it will be a couple of years before an average rate of return can be computed for this fund and the others.
“We definitely had the benefit of the timing of our launch, we launched just around when the markets were at their lowest due to COVID-19… so we’ve benefited from the overall growth.”
Employees can set a fixed amount as their own voluntary contribution into their fund. This is also through payroll processing and the chosen amount is deducted from the salary to transfer to the fund. This saving also benefits from being invested along with the employer’s contribution.
As of now employees cannot withdraw the funds contributed. But Reena said that this might change, depending on regulatory approval. She added that Dubai Financial Service Authority had distributed a consultation paper on whether members should have access to the voluntary contributions element in case of an emergency. This, if approved, will be based on strict terms and conditions as the fund is supposed to be locked-in throughout the employee’s service period.
Employees have two options at the end of service, either keep the fund invested in the scheme for more growth, or withdraw the entire money in the member’s name. If he or she chooses to keep the fund invested, there will be no further contributions as the member will also not be allowed to make further voluntary contributions.
Reena explained that this was to ensure that the source of funds is always clear, and to comply with anti-money-laundering rules in UAE. The funds that are put into the DEWS trust is always through payroll processing of the employers, which stops once the employee leaves the firm. The funds already contributed, however, can stay invested or withdrawn in his or her name.
Advantages of such plans
Type of contract immaterial
The type of contract (limited or unlimited) has no effect on the monthly contributions. For example, in an unlimited contract as per the traditional gratuity law for UAE, an employee with a service period of 1 to 3 years can get only 1/3rd of his or her total gratuity payment if he or she resigns.
Employers make monthly contributions, and with each passing month and year these contributions are the only responsibility of the employer. The pressure to pay a lump sum each time an employee leaves service is eliminated. For DEWS in particular, accrued EOSB until the beginning of the plan remains the responsibility of the employer if it is not transferred in to the DEWS trust.
Employee is guaranteed the end-of-service-benefit (EOSB) in the trust that has been contributed by the employer regardless of the financial condition of the employer. So even if the employer firm goes bust or faces financial issues, the trust protects the contributions made up until that time for the employee.
Helps in overall retirement plan
Gratuity in itself is not enough to retire, however, with voluntary contributions as savings and the growth rate, employees can slowly build up their total benefits to withdraw and use as a lump sum at the end of their service.