Will DIFC’s New Workplace Savings Scheme be a Positive Change?
by Dennis Varghese – Al Dahbashi Gray
With the recent introduction of its New Employment Law, which came into effect on 28 August 2019 (click here for an update on DIFC Law No. 2 of 2019 (“New Employment Law”), the Dubai International Financial Centre (DIFC) is at the forefront of cementing its position as the leading financial hub in the Middle East, Africa, and South-Asia region.
The DIFC is now working on replacing its end-of-service gratuity (“ESG”) benefits scheme with a defined contribution scheme known as the DIFC Employee Workplace Savings (“DEWS”) trust scheme. This article aims to provide everyone, especially employers and employees based in the DIFC, with a brief overview of the current ESG scheme and the highly anticipated DEWS scheme which is expected to come into effect on 1 January 2020. At the end of this article is a Q&A section which aims to respond to any queries readers may have about the upcoming changes.
Al Dahbashi Gray can assist you – If you need any help in understanding the changes and the potential impact it may have on you, your organisation and/or your employees, please feel free to contact us.
First, what is an End-of-Service Gratuity (ESG) Payment in the DIFC?
It is worth noting that ESGs are not unique. The UAE and the other five countries in the Gulf Cooperative Council (GCC) – Saudi Arabia, Bahrain, Kuwait, Qatar, and Oman – all operate similar ESG schemes (albeit with certain variations in calculations and specific termination conditions). But it has been a topic that has been causing much debate over the past decade, both in the DIFC and the GCC as a whole.
ESG schemes were introduced to ensure that when an employment relationship was terminated, employees without pension benefits received a lump sum payment to assist them during the period following termination or for them to put towards their savings.
Regulated by a common law system, and with an independent court system, the DIFC currently implements the defined-benefit ESG scheme. The minimum criteria for a DIFC employee to qualify for the ESG scheme is one year of continuous service. The ESG payment is calculated at 21 days basic salary for each year of service, for up to five years of service, and thereafter 30 days basic salary, for each subsequent year of service.
Key Takeaways of ESG in the DIFC
The EGS payment cannot exceed the amount equivalent of two (2) times the annual wage of an employee. It is calculated as follows (Article 66 of the DIFC Law):
- An amount equal to twenty-one (21) days of the employee’s basic wage for each year for the first five (5) years of service; and
- An amount equal to thirty (30) days of the employee’s basic wage for each additional year of service.
Employees have the option to receive pension contributions into a non-UAE retirement fund (or substantially similar scheme) instead of an ESG scheme payment, provided the aggregate contributions made by an employer is not less than the ESG payment the employee would have been entitled to receive (Article 66(7) of New Employment Law).
Why has the DIFC decided to shift away from the ESG?
While the concept of being paid lump-a sum of money at the end of employment may seem very attractive, ESG schemes cannot always be relied upon.
Data provided by a leading international law firm revealed that the combined ESG liability of all employers operating in the GCC is estimated at more than AED 54.75bn (USD 15bn). Another survey, by Wills Towers Watson, which covered 300 firms, pointed out that a fifth of UAE companies face ESG liabilities of over US$15 million, with 88% of GCC companies surveyed having no plan to fund gratuities.
The Chartered Institute of Personnel and Development (CIPD), the professional body for HR and People Development, provided that one of the reasons ESG is seen as a high-risk is because businesses keep employees’ gratuities in the corporate bank account and use the monies as working capital until it is due to be paid – which means the risk of an organisation not having access to the gratuity when it is required is very real. To make it worse, it is not currently mandatory for companies in the UAE to set aside payment for the ESG scheme. Therefore, where an employer is in financial difficulties and/or dissolves, employees may have limited prospect of recovering their full entitlement to an ESG. This can be a particular cause for concern during an economic crisis when many businesses may experience financial difficulties
The ESG scheme also does not take into account the full lifespan of an employee – only the years they have worked in each period of employment. This becomes a problem, especially for expatriates, when they reach their retirement age and are relying on the ESG payment to supplement their retirement fund.
A survey carried out by Insight Discovery disclosed that around 49% expatriates in the UAE are only able to save five (5) per cent or less of their monthly income, and only sixteen (16) per cent of expatriates have a fixed retirement plan. In comparison, the savings rate is much higher in other countries, for example, Switzerland, where the savings rate is forecasted to reach approximately eighteen (18) per cent in 2019/20. The survey also made it indisputable that UAE expatriates are eager to start a savings plan.
The move towards the DEWS scheme comes in line with the recent global employee benefits trends – see figure 1.
Figure.1: Source – The DIFC Employer’s Meeting: The Proposals for Reforming the minimum end of Service Gratuity (May 2019)
Highlights of the Proposed DEWS Scheme
To put simply, the DEWS Scheme is an opportunity to boost an employee’s retirement savings using a workplace pension scheme. The aim is to create a default position whereby all employees are signed up to a workplace pension in order to increase the proportion of employees saving for retirement.
The DIFC DEWS scheme will eventually eliminate the ESG scheme by offering employees a portfolio of global funds to invest their money in. The word ‘invest’ is key here, as employees will be able to allow their money to grow, instead of sitting idle in a bank account. It is expected that employers will contribute a percentage of the monthly salary to DEWS (the contribution rate is set to be the same as the current gratuity accrual rate), while the employees will also have the option to top up to their portfolio by making voluntary contributions through their salary. Employees will also be able to pick how their contributions are invested, choosing between low, medium and high-risk options. When leaving employment in the DIFC, employees will then receive both ESG scheme for service up until the date of the proposed change (1 January 2020) as well as the benefit from the new DEWS scheme.
Key points to note
- A DIFC supervisory board will oversee the establishment of the DEWS Trust.
- DEWS will be managed by Equiom, an international professional services group, as the master trustee and Zurich Insurance as the scheme administrator.
- The DFSA will regulate the trustee and the administrator. The trustee will oversee the governance of the trust. The administrator will perform the operations of the trust.
- The DEWS Trust will operate on a funded, defined contribution basis, investing contributions on behalf of employees and paying benefits on leaving service later, if requested.
The proposed changes also benefits employers by allowing them to know what their exact liabilities towards employees are at any given point. For example, in 2016, the DIFC Court of First Instance awarded a penalty of USD$ 1.5million against a company in breach of Article 18 of the DIFC Employment law, for failing to pay the employee his benefits within fourteen (14) days of termination of employment (a doctrine that has been partially overturned recently; you can read more about the recent change under Section-5 of our article on the DIFC’s New Employment Law.
Under the new DEWS scheme, employers will be required to make contributions every month, meaning cash-flow will be smoothed out over the entire employment cycle of an employee, rather than lump-sum payments having to be determined at the date of termination. The terms of existing ESG arrangements – for example, employees’ eligibility, the definition of the basic wage and the timing of payments — would remain in place to ease the administration of the DEWS. Failures by employers to comply with their obligations will likely lead to fines and other potential sanctions. It is also anticipated that employers will be able to establish their own qualifying schemes outside of the DEWS scheme, the rules of which are expected to be announced soon. We shall continue to monitor developments and keep you informed in due course.
Meanwhile, employees will benefit from:
- receiving their full end-of-service gratuity, irrespective of an employer going out of business.
- having their contributions professionally managed, cost-effectively and flexibly.
- the chance to earn a return on their contributions through investments, which is currently not the case. DEWS contributions could be invested in a range of funds with varying risks.
- visibility and a choice as to how their savings will be managed, catering to a range of risk appetites and including sharia-compliant options.
- voluntary savings options on top of employers’ contributions and investments, offering an incentive to save more towards their retirement, of up to 100% of their salary and other forms of compensation via payroll.
A similar initiative, the Workforce Protection Program, is under discussion to be implemented by the Jebel Ali Free Zone (Jafza) soon. It is considered likely that the change to the ESG regime within the DIFC will spread to other free zones and the UAE mainland in order to modernise and standardise employee benefits and entitlements.
Question & Answers
- What happens if my employer shuts down?
Any pension contributions you and your employer make will be held with the pension provider – not your employer. If your employer dissolves or becomes bankrupt, your pension fund will be ring-fenced, so your retirement savings will not disappear.
- Is the scheme voluntary?
No, all DIFC employers and employees are required to participate in the DEWS scheme unless an employer operates a qualifying system of their own.
- Who makes contributions to the scheme?
Employer contributions will be mandatory under the DEWS scheme. Employees will also be able to make voluntary contributions to it, up to 100% of their salary and other forms of compensation via payroll. As it stands, based on a fixed statutory formula based on the employee’s years of service and final salary, the contributions are expected to be cost-neutral compared to the existing gratuity system. These have yet to be finalised but are expected to be around 5.83% of basic salary for where service is below 5 years and around 8.33% above 5 years of service.
- Can employers still provide a defined-ESG payment on leaving service?
From 1 January 2020, DEWS will be the minimum benefit basis. Employers can, however, choose to top-up DEWS benefits, if they wish to do so.
- Can an employee undertake investments?
Yes, employees will be given the option to make investments or use the trustee’s default investment option, which is set according to the employee’s risk appetite. A Shari’ah investment option will also be available.
- Who will influence or make the decision on the risk profile of the investments made in DEWS?
It is currently envisaged that the employers will be able to dictate a default risk profile option for investments made using employer contributions to ensure the investments undertaken by the employees are safe. It is also our understanding that employees will be able to choose their risk profile for investments, however, this is yet to be confirmed
- What happens to the existing benefits?
The default position is that the ESG will accrue up to the changeover date (31 December 2019) between the current scheme and DEWS but will only be payable to the employee on their eventual termination and will be based on the employee’s final salary on termination.
- Will the funds in the new scheme be forfeited if the employee is terminated for cause?
No, the funds will not be forfeited, and will continue to be the property of the employee. Contributions will be made from day one of employment. This will, however, require an amendment to the existing DIFC Employment Law, which currently does not entitle ESG payment to an employee who has not completed a minimum of 12 months of employment.
- Will employees have the option to withdraw funds from the DEWS if they are still in DIFC employment?
No, whilst the employment with the contributing employer continues employees will not be able to withdraw funds. Withdrawing funds will only be possible when employment is terminated.
- What happens when an employee leaves employment or transfers his employment?
When an employee leaves DIFC employment, they will receive ESG for service up to the changeover date i.e. 31 December 2019 and thereafter the benefit from the new scheme. If the employee decides to resign or transfer employment, the employee can elect to withdraw or leave their funds in DEWS, but no further employee contributions towards the plan will be possible. The decision to leave funds in the DEWS scheme would see a management fee applied.
- How will an employee be updated about ongoing activities relating to their contributions?
It is currently predicted that employees will have full transparency on their investment portfolios in real-time (via an app on their phone, tablet or computer).