Should UAE companies consider pension schemes?

Despite there being no State pension for Emiratis, there is no culture of saving for retirement in the UAE.

But this does not only affect the Emirati population of the country.

The future is just as bleak for many of expatriates; by being out of their home countries tax system for a number of years, they will not qualify for a full State pension themselves.

Many expatriates also neglect their own retirement savings whilst overseas compounding the matter even further.

A report published by HSBC last week has said that residents of the UAE, amongst other countries, face a 'perfect storm' of demographic, individual and financial elements that are poised to derail their retirement plans - unless they are prepared to act properly now.

Lack of pensions planning

The fifth annual Future of Retirement study 'It's Time to Prepare' shows that there is a continuing lack of pensions planning, even though people are aware that they are likely to live longer. What's more, this is being exacerbated by poor levels of financial understanding, education and access to advice.

Of the UAE's population, the study reports that 87% of people do not have any idea about what their retirement income will look like. Of those surveyed, only 13% of people feel well prepared for retirement.

Other findings in the study suggest that just 38% of people feel they understand their short-term finances very well and only 19% of people understand their long-term finances very well. This is compared with a global average of 27%.

The report also reveals a parallel 'advice gap' linking a lack of preparedness to insufficient financial education and guidance. Of those surveyed, 62% have never accessed any form of general financial education (higher than the global average of 42%) and 51% have never sought any professional financial advice. Again, this is higher than the global average of 46%.

Taking these statistics into consideration, should the UAE's corporate entities follow the West's lead and provide employees with a company pension facility?

This would certainly mitigate many of the concerns in the survey. The employer researching and vetting a pension scheme once, takes away the need for every employee to gain independent financial advice on pension policies.

Of the huge proportion of the workforce who are not saving for their retirement, a vast majority want to and most would happily save a percentage of their salary if this was deducted at source. Many employees simply have not got round to sorting out their finances; often because they do not know who to turn to, or because they are dedicating so much time to their work!

Corporate benefits

It is not only the employees that will benefit. After a one-off expenditure of time, there are potentially huge benefits to the company too.

Both employers and employees are becoming more aware of what kind of employee benefits are available to companies in the Middle East and elsewhere in the world. The long-term implications for those who opt for 'the cheapest' medical insurance package or elect to leave their gratuity contributions festering in a bank account will be huge.

As we come out of the current economic downturn, the demand for the best employees will increase again. Despite the huge influx of expatriates, there remains a shortage of qualified, experienced professionals in many sectors. But the competition is not just within the Emirates; companies in India, China and other markets are also vying for these individuals.

A good employee benefits package, including a company pension scheme, will have a huge influence on where these individuals elect to work. Consequently, adopting a culture of company pensions will put the Emirates, and the companies based here, in good standing for the future; as well as providing an excellent selling point to attract the right staff.

Likewise, company pension schemes are also an excellent tool for retaining staff and therefore an investment in the future of the company.

Numerous studies have shown that it is substantially more economical to offer an employee a benefits package than recruit and train a new employee every couple of years - and no employee 'worth their salt' would leave a company offering a company pension scheme for a company offering a few thousand extra Dirham's in salary and gratuity.

Common misconceptions

Several misconceptions often lead to companies failing to act even when they have identified the potential benefits

Firstly, it is a common assumption that a pension scheme will require substantial capital outlay. In fact, pension providers can often discount or even waive establishment costs where there are regular contributions to the scheme.

Additionally, there is no compulsion for the employer to make contributions if they are not in a position to. If the company decides that the scheme will accept employee contributions only, there will be no ongoing expense to the employer.

However, many companies will elect to contribute 5%+ of the employee's salary in addition to what the employee chooses contribution, in order to reward and retain the employee. Some may link this to other benefits; for example, paying a bonus into their pension if they do not abuse the group medical insurance!

The second misconception is that a single pension scheme cannot meet the requirements of both the various nationalities of the expatriate workforce and the Emirati staff. This simply is not true. Where the pension scheme is established in an offshore jurisdiction, the benefits will grow tax-efficiently for all employees and the benefits can be taken at the employee's preferred age either as an income or a lump sum - at this time, it will only be subject to taxation in the country where the employee retires.

Employee attraction and retention

Indeed, as companies grow internationally, they will need a scheme that can offer employees continuity of benefits regardless of which office they are working in. Many expatriates already expect an arrangement that keeps retirement benefits consistent and which eliminates the fragmentation that occurs when employees move from plan to plan. In most circumstances, an offshore pension scheme can facilitate this too.

The last major misconception is that a company scheme will place an additional burden on the human resources department. Modern schemes accept one monthly or quarterly payment from the company - this is all the HR department need to send.

The pension provider then allocates this to the individual employee's policies, administers these policies and provides regular valuation reports. Indeed, some now offer a facility where the employee can view their personal pension benefits at any time via an extranet site.

The current environment offers companies a chance to reflect and look forward to the future. If the HSBC report does not jolt employees into taking control of their retirement, maybe it will change the way their employers think.

The smart companies have started to address this; they have invested the time into establishing whether they are offering better benefits than their competitors in order to attract and retain the best staff: Whether contributing an additional 5% of salary would reduce their recruitment and training costs substantially and what would make a potential employee choose their company over a competitor.

If a corporate pension mentality is adopted in the Emirates, everyone wins - the employee, the State and the company itself.