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Proposed reform to the End of Service Gratuity regime in the DIFC
Introduction
DEWS is designed to replace the existing end of service gratuity effective from 1 January 2020. This information is about DIFC Employee Workplace Savings Scheme (“DEWS”) The law has not yet finalised and therefore may be subject to change.
In brief
On a global level, an integral feature of many government agendas has been the increasing need to focus employee mindsets on the importance of saving for retirement and having access to some form of a robust employee income replacement scheme for those years post-employment.
Uniquely in the UAE, pension or savings fund provisions for the expatriate workforce is not a mandatory legal obligation. Instead, the statutory service-linked benefit of end of service gratuity (the “Gratuity”) has conceptually been perceived as a means for expatriates to provide for retirement. The terms and conditions attached to employee eligibility for, and overall entitlement to, the Gratuity is broadly the same across the UAE mainland and the various free zones.
In detail
The existing Gratuity regime is unfunded and open-ended, exposing employees to the risk that the Gratuity might not be paid in full or at all. Governments and companies internationally are moving away from unfunded to funded benefit provisions as part of a wider strategy to hand responsibility for saving to employees and individuals. Globally, employees expect to be provided with defined contribution savings/retirement benefits.
There has been debate for several years now in the UAE about the need to revitalise and modernise the existing Gratuity scheme and to address the need for greater protection. The Dubai International Financial Centre (“DIFC”) – a unique federal free zone catering to the financial and professional services sectors – has stepped out of the shadow of this debate and proposed a new mandatory DIFC Employer Workplace Savings scheme -Savings Scheme, designed to replace the existing Gratuity regime.
In essence, key elements of the proposed Savings Scheme include the following:
-With effect from 1 January 2020, all DIFC entities will no longer accrue Gratuity and instead will be required to contribute to the Savings Scheme which the employer will have to fund every month. The Scheme will be based in the DIFC and managed by trustees appointed by the DIFC. All DIFC employers and employees will be required to participate in the Savings Scheme unless an employer operates a qualifying system of their own.
-The employer contribution rates will be broadly the same as what they currently are now which is approximately 5.83% or 8.33% for employees with less than five years of service or more than five years of service respectively. The employee will also have the option to contribute to the Savings Scheme should they so wish.
-At the changeover date, benefits earned under the existing formula would freeze, but would continue to be linked to future increases in Basic Salary.
-The Savings Scheme is not expected to be a pension scheme. The employee could withdraw everything from the Savings Scheme when they cease DIFC employment or leave the funds there until a future date if they prefer
-Employers can use their end of service system as long as its contributions/benefits match or exceed the Savings Scheme and it is fully funded via a third-party fiduciary arrangement.
The takeaway
Given the ambitious timetable laid down by the DIFC, employers should start to discuss the ramifications of such changes to their business.
Points for consideration include:
-Changes required to employment contracts and/or policies
-Will you create your scheme, or will you participate in DEWS?
-Does your payroll software allow for such deductions?
-If Payroll is outsourced conversations with the vendor?
-How will employee contributions be handled, can they be varied every month or fixed for 12 months?
-Do you have an employee portal for the employee to state the amount?
-Education for employees in terms of attitude to risk
-Employee communication regarding the changes
-What will you do if you have employees registered at DIFC and mainland/other GCC countries?
Importantly, the DIFC are still in the consultation period and expect to issue further guidance concerning the Savings Scheme in July. Whilst there has been discussion at a wider federal level on introducing a similar regime as the Savings Scheme for the mainland, no further guidance on scope or timelines has yet been issued and so the DIFC stands at the forefront of change in this space.
We will continue to monitor these developments and keep you updated. In the meantime should you wish to discuss the above in more detail please contact us at www.mealc.org
Research by: Sheher Bano
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