The Dubai International Financial Centre (DIFC) recently rolled out a new savings scheme for its workforce that went live starting from February 1, 2020. It raises the question if the transition from defined benefit (DB) to defined contribution (DC) is something that needs to be evaluated on a wider scale.
We take an in-depth look at the new DIFC Employee Workplace Savings (DEWS) scheme that will replace the existing employees’ End of Service Benefit (EoSB) settlement system in DIFC.
Under the DEWS Plan, all employers in the financial free zone (DIFC) must contribute on behalf of employees for their End of Service Benefit (EoSB).
Unfunded vs funded
Jacques Visser, Chief Legal Officer, DIFC Authority, says that the existing EoSB system is classed as unfunded: “The end-of-service gratuity system is an unknown liability, it merely accrues for an employer based on the time of employment served by an employee, and the employee’s salary at the date of termination.”
The end-of-service gratuity system merely accrues for an employer based on the time of employment served by an employee, and the employee’s salary at the date of termination
The new DEWS scheme is classed as funded. He added: “It is funded on a defined contributions basis [i.e. as a specific percentage of basic monthly salary] by employers every month into a low-cost professionally managed savings plan. Employers pay these payments every month into DEWS where it would be invested on behalf of employees into their chosen investment profiles.”
Will an employer contribute more in DEWS than the earlier EoSB?
Minimum contributions into DEWS will broadly match minimum accrual rates under the existing EoSB system, confirms John Benfield, Head of Wealth and Investments, India, Middle East, Africa, Turkey at Mercer.
Mercer has been appointed as the investment advisor to the DIFC Trust and Trustees, as well as the investments provider for DEWS Plan.
Benfield explains that specifically, employers must make a minimum monthly contribution of:
- 5.83 per cent of base salary per month for all employees with less than five years’ services (this is broadly equivalent to the 21 days for EoSB under the DIFC Employment Law) and;
- 8.33 per cent of base salary per month for all employees with 5+ years’ service (this is broadly equivalent to the 30 days for EoSB under the DIFC Employment Law).
He adds that an employer can elect to make higher contributions if they wish. “There is no maximum limit set for employer contributions. There is no vesting period, which means an employer must make mandatory monthly contributions on behalf of employees when they start permanent employment with the employer.”
“Under the plan, benefits only accrued after the employee completed 12 months service. At end of service years, but not during employment, employees will be entitled to 100 per cent of the invested benefit,” he says.
What does it mean for the employer and employee?
The new DEWS Plan lets the employers fund and prepare for their payment liability towards employees, whereas for the employees, it gives them assurance about obtaining EoSB without any uncertainty.
Benfield says: “For employers, the DEWS Plan will allow them to attract and retain the best professional talent into the region. It allows employers to offer employees the ability to earn returns on their benefits from a regulated and reputable investment provider.
The DEWS Plan allows employers to offer employees the ability to earn returns on their benefits from a regulated and reputable investment provider
“It also helps them create greater cash flow certainty with EoSB entitlements spread over their employees’ tenure. It facilitates access to a best-in-class, cost-effective solution that will be based on current salary rather than the final salary. They also have clarity about their EoSB liability to employees at all times, with the assurance of no further obligation once paid.”
For employees, Benfield says the DEWS Plan will allow visibility of their EoSB entitlement and certainty of payment. “Employees benefit from a facility to make voluntary savings on top of employers’ contributions to secure their long-term savings goals. The plan allows a choice as to how their savings will be managed, catering to a range of risk appetites and including Shariah-compliant options. It also offers the opportunity for contributions to be managed professionally, cost-effectively and flexibly with the opportunity to earn returns,” he added.
Is it mandatory for an employee to contribute?
DEWS does not bind or require employees to contribute towards the plan. So, they do not have any compulsion and risk of losing the job for not contributing to the savings plan.
However, Visser says employees can make voluntary savings into DEWS. “It allows employees working in the DIFC to plan and secure their financial future with ease, flexibility and at a very low cost compared to what else is available in the market at the retail level.
“In this case, employees can take out their savings from DEWS whenever they want. But they can access their employers’ contributions only when they leave service or can leave it in the scheme for as long as they wish [even after they have left the employment] to be continued to be managed professionally. There will be no hidden charges and changes, and withdrawals will be without any cost,” he adds.
What do I need to ask my employer about the DEWS enrolment plan?
Visser explains the enrolment by employers into the DEWS Plan will be done with a digital registration process that takes not more than 15 minutes.
Once the first contribution on behalf of an employee is made into the scheme, the employee will get a registration email.
All their queries will be answered with employee guidance, video tutorials and 24/7 helpline assistance when they register into the DEWS Plan, he explains.
“If they need any investment advice about the risks associated with their savings, they will need to get independent advice. Typically, employers assist employees in this regard in other parts of the world. However, there is a default investment option here, which has been chosen by the investment adviser to the DEWS Plan as serving employees best in line with salary inflation.”
Employees can see exactly what their projected savings over a particular time horizon would be, in line with chosen investment risk profiles
Visser adds that the savings and investment option provided under DEWS is in line with savings, retirement and savings plans in developed countries, wherein employees can see daily the value of their savings and investments.
“The website and software applications provided for mobile devices will provide employees with state-of-the-art functionality to see exactly what their projected savings over a particular time horizon would be, in line with chosen investment risk profiles and their planned voluntary savings over time. This provides much greater clarity and ownership to employees to plan for certain life goals, such as their retirement or kids’ future educational needs.”
How do such savings plan work globally?
Michael G. Brough, Senior Director, Willis Towers Watson, says the transition from defined benefit (DB) to defined contribution (DC) is a common global trend.
“Many countries, in recent years, have introduced various forms of mandatory DC systems. These are often through auto-enrollment, often with both employee and employer contribution requirements. This has happened in Australia, New Zealand, Turkey, the UK and Poland [among many others].”
“The DEWS contribution rates [5.83 per cent and 8.33 per cent depending upon service] are somewhere between Developed World and Emerging World contribution rates. There are very wide differences in these levels of contributions, but of course, many of these other countries also offer social security pensions in addition to their mandatory DC requirements,” he adds.
Why is this change needed in the workplace?
Brough believes that saving for the future is becoming an increasingly important issue for employees in DIFC and the wider UAE, mainly as foreign workers are increasingly staying extended periods.
“Our 2019 End of Service Benefits Survey indicates that companies expect their employees to stay with them for five to 10 years, which is a shift compared with 10 years ago, where typically expatriates only stayed between three and five years.”
“With longer service in the UAE comes a need for the long term and retirement savings to prepare workers financially for their time after work finishes,” he added.
End of Service Benefit is among the key sources of retirement income for employees, which highlights the need to transform this unsecured benefit into a longer-term savings arrangement
“Our Global Benefits Attitudes Survey found that nearly three among five employees in the UAE worry about their future financial state and are looking to their employers to take the lead on the provision of retirement benefits.”
“The GBAS Survey also found that the EOSB is among the key sources of retirement income for employees, which highlights the need to transform this unsecured benefit into a longer-term savings arrangement that is fit for purpose,” says Brough.
How can this plan help in savings after retirement?
When an employee (a member of DEWS) leaves service (including following retirement), they have several options with respect to their accumulated savings, says Benfield. “They can take their savings as cash, transfer their savings out to a different arrangement, or leave their savings invested in the DEWS Plan.
“Also, those members are able to make partial withdrawals from the DEWS Plan, while leaving their remaining holdings invested [albeit additional contributions into the DEWS Plan are not permitted after leaving service]. The DEWS Plan, therefore, offers a wide range of flexibility depending on individual circumstances and needs. Members who wish to remain invested after retirement are encouraged to seek independent financial advice from Equiom, Zurich Workplace Solutions or Mercer,” says Benfield.
How is the new funded workplace savings plan different from the end of service benefit?
There are several key differences between the DEWS Plan and the previous EoSB regime.
Benfield points out some of the main differences:
End of service calculations with both EoSB and DEWS
Benfield explains the calculation with an example. Let’s assume the employee joined service on June 1, 2016 at Dh10,000 per month basic salary. The employee left service on July 1, 2022 on a Dh15,000 per month basic salary.
Plus
Benfield says employers are not required to pay out all accrued EoS gratuities to the staff on January 31, 2020, and they are not required to fund past service benefit into DEWS.
He adds: “When an employee leaves the service, the employer will pay the EoSB that accrued for that employee up until January 31, 2020 [i.e. the years of service up until January 31, 2020] based on their final salary [at the date of exit]. The employee will then also claim their fund value [made up of employer contributions, voluntary employee contributions if applicable and investment growth] from DEWS, which would have grown from February 1, 2020.”
However, the DEWS Plan allows for the employer to fund the accrued EoSB into DEWS, he adds. This can be done at any time, but it’s an employer’s decision whether they will transfer the accrued EoSB or not. There is no legal requirement to fund the past accrual.
What happens if my employer decides to transfer my past service accrual from EoSB into the new plan?
If your employer decides to transfer the past service accrual into the plan, there are two options as below, explains Benfield:
- Without employee consent – the employer transfers the amount as one pool into the plan. The employer retains investment making decisions on how it should be invested. The employee does not have visibility of this past service in their DEWS account. The employer can then use these monies to pay out the EoS as per the current law as and when the liability arises, which would be the years of service to January 31, 2020 at final salary per employee exiting. In this way, the employer is funding their liability with assets and aiming to grow the investment to match the increasing liability (as the employees’ salary changes)
- With employee consent – the employer can enter into consultation with employees and get their written consent to transfer the past service accrued into the fund in their name. The employee then has visibility in their account and has discretion on how to invest this money. With written consent, the employer discharges their future liability in terms of the employee and EoS. There is no longer the EoS payable at the date of exit from employment. The employee has to provide explicit written consent that the funding into DEWS removes any future obligation on the employer for the EoSB.
- The writer is a UAE-based freelancer.
