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Is your retirement package guaranteed in the UAE?

Financial experts have called for new legislation making it compulsory for employers to set capital aside, separate from company assets, to be used only for gratuity payments.

Experts from leading financial firms in Dubai say the stricter laws would ensure employees were left with nothing if their employer went into insolvency and would also give people more confidence that they will receive the payment, therefore allowing them to make it part of their long-term savings plan.

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Shiraz Sethi, regional managing partner and head of employment at DWF (Middle East) LLP commented “Entitlement to end-of-service-benefit (EoSB) is an integral part of an expatriate’s jobs in the UAE, but, while it is expected it will be paid upon leaving service, few questions how it will be funded.

“Current labor law requires that an employer makes the payment to the employee. However, it does not require the firm to set aside capital to do so. Therefore, when a struggling firm ends up in liquidation, this can leave employees empty-handed.”

In many international markets, these types of gratuity payments do not exist as more traditional company pension schemes are in place. However, the global financial press regularly highlights the similar issue of under-funded pension schemes in numerous countries.

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A study by the World Economic Forum in May 2017 showed that the world’s six largest pension saving systems,  the US, UK, Japan, Netherlands, Canada and Australia — are expected to reach a $224tn shortfall by 2050. This figure includes corporate, public and individual pensions.

Simon Fielder, regional chairman at Praxis IFM, says “Something needs to be put in place to hold employee gratuities as legally separate entities from the employer’s operational assets and balance sheets.

“It is important for the UAE to learn from the final salary related mistakes of western pension schemes. Until gratuity is converted to something that has to be funded, there is little chance of the local financial services industry to grow and for local stock markets to mature from the emerging status where they presently linger.”

In a bid to attract new business and talent to the region, changes were recently announced to the UAE’s visa system that will allow expatriates, in specific roles, to apply for 10-year residence visas. With these changes set to be implemented at the end of this year, experts believe it is now more crucial than ever employers make the right provisions for their expatriate staff.

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Furthermore, recently approved legislation will see the current bank guarantee for private sector workers replaced by a new labor insurance system which will protect employees if a company goes bust and has insufficient funds available, up to $5,000 per person.

Mark Leale, head of Quilter Cheviot Investment Management’s Dubai representative office said: “There are signs that things are slowly changing in the region. Firms are starting to take note and put plans in place, however, more need to follow suit. While legislation may at some point force a change, firms should not wait for this to be the catalyst to start making provisions.

“Where firms have set aside sufficient capital to meet their accrued gratuity obligations, and these are held within a separate entity, the next step is to ensure that the assets are invested appropriately. There is a fear amongst employers that this can introduce a new type of risk, where the capital could be lost. The truth is that no investment is without its risks, even cash, but as long as the money is managed correctly that risk can be significantly reduced and mitigated.

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“The amount of risk should be driven by the investors’ appetite for it. Therefore if they are investing capital for gratuities, it should be spent with a little appetite for risk as the need for the provision of the funds should outweigh the need for higher returns. Diversification is essential to reduce the risk of investing in a single asset type, market or company.”

The subject is a matter of considerable debate in the UAE and was covered in a recent panel discussion organized by the Dubai based Academy of Law. Mark Leale took part in the discussion alongside Simon Fielder and human resources operations manager at the DIFC Dispute Resolution Authority, Samia Al Rajaby. The event was chaired by Shiraz Sethi.

Research conducted by Old Mutual International and Quilter Cheviot last year showed there are mixed messages in the UAE regarding whether a gratuity is a replacement for a person’s pension savings.

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The research showed that only 12% of people are entirely relying on the gratuity to fund their retirement, with 51% relying on the gratuity payment ‘a little’ and 34% are not relying on it at all.

The average amount of time people in the region expects retirement to last is 20 years. This is a long time for any gratuity to last, which is perhaps why so few people in the area are relying on the gratuity in isolation. Experts recommend that the gratuity should form part of a person’s long-term financial plan, with adequate personal provisions being set aside to fund their long-term future.