UAE official calls for investment funds to help expats manage retirement

Opening an unprecedented dialogue on an issue that concerns millions of employees in the UAE, both in the government and private sector, he said: “These funds will help employees plan properly by taking advantage of end-of-service benefits, enabling them to make use of their financial resources and creating jobs for new generations.”

With accelerated global technological advancements and the increased retirement age and years of service, there is an urgent need in the region to establish investment funds to manage retirement and end-of-service benefits.

- Dr Abdul Rahman Abdul Manan Al Awar, Director-general of the Federal Authority for Government Human Resources

Dr Al Awar added: “I believe that creating saving schemes and funds in all sectors is an important strategic step and a new experience of its kind in the region. There are successful global practices in this field, as well as in the UAE with leading organisations such as Emirates airline, which has added to its competitiveness. Such projects will have a significant impact on social and economic levels, according to latest actuarial studies recently done in the UAE.”

The one-day conference, which brought together international and local speakers, discussed the challenges that the world, including the UAE, faced in this context.

According to Mazen Abukhater, consultant and actuary, Mercer, the gap between the value of pension benefits around the world and what pensioners really need to live a decent life is $70 trillion, which is more than the gross domestic product (GDP) of the world’s 10 largest economies.

“A financial gap of this kind will lead to a ‘black swan’ situation, which indicates a possible global financial crisis,” a Mercer report said.

In the local context, a survey conducted by Wills Towers Watson (WTW) pointed to how 87 per cent of companies in the region do not fund end-of-service benefits, but settle employees’ benefits as they become due from company assets.

Michael G. Brough, WTW senior director, said the survey covered 300 companies, of which 222 have operations in the UAE. “Only 20 per cent of respondents in the UAE indicated that they offer a retirement or long-term savings plans for their employees,” he noted.

Ernst and Young manager Philip Wheeler set the audience thinking with an example of how gratuity can pan out. His presentation highlighted how an expat employee who has worked in a UAE company for 15 years with a basic salary of Dh10,000 at the time of leaving would be entitled to Dh135,000 as the minimum end-of-service gratuity, less any amount he owed the employer as dues.

The conference made a strong case for moving from just defined benefits to defined contributions.

Sean Kelleher, CEO of Mondial and head of the conference’s organising committee, said that while gratuity is fine, there is also a need to evolve a savings mechanism which is adequate and sustainable.

He said: “A well-managed end-of-service benefits scheme could be used to improve worker productivity through improved financial wellness at the same cost as what is already absorbed into the balance sheet. The practical problem is that mandatory funding — if it ever happened — would impede cash flows of small and medium-sized companies. However, the UAE has already weathered a similar change when it enforced mandatory health care coverage. That was a cost which was managed in with very little complaint.”

Yannick Ramsamy, counsel, Clyde & Co, spoke on how end-of-service benefits goals aligned with local laws.

Gratuity in the UAE

As per Federal Law No 8 of 1980 as amended, gratuity is calculated as 21 days of basic pay per year of service for five years of service and 30 days basic pay per year of service thereafter. Gratuity does not include allowances. To qualify, an employee must have 12 months of uninterrupted service.

Source: Clyde & Co

Retirement challenges in region

■ Improvement in life expectancy.

■ Low participation rates and incentives for early retirement.

■ Low growth/low interest rate environment.

■ Governance and transparency.

■ Lack of adequate savings plans and incentives.

Source: Mercer