KHALEEJ TIMES, Saturday, Mar 16, 2019 | Rajab 9, 1440
Why UAE employees need a proper retirement scheme
The UAE is in a peculiar situation when it comes to employees' end of
service and retirement benefits, mainly because around 90 per cent of its
workforce are expatriates, who will only stay in the country for a certain
period of time.
Analysts also say that companies are not obligated to set aside funding for
end-of-service benefits (EOSB), which are often paid off the balance sheet and
this practice exposes the employees to the bankruptcy of businesses.
Recently, however, reforms are being introduced to boost and rationalise the
end-of-service benefits awarded to employees. These include exploring multiple
policies and models to help companies attract and retain talents and ensure that
retirements will be adequately funded, and not treated as a liability, a senior
UAE official said.
According to Dr Abdulrahman Abdulmanan Al Awar, director general of the Federal
Authority for Government Human Resources (FAHR): "The accelerating global
technological advancements, the increased retirement age and years of service,
leave no doubt that there is an excellent opportunity and an urgent need in the
region to establish investment funds to manage retirement and end-of-service
He explained to Khaleej Times: "What we are envisioning is for the UAE to
provide the best environment to introduce a shift in our traditional way of
thinking. It does not need to be at the federal level or run by the government,
but there should be options for companies to start developing best practices and
provide (investment) options for the employees.
Although there is no timetable set for the program, Al Awar noted that studies
are being carried out to improve the system. This can be combination of an
enhanced gratuity system and private sector employee savings schemes.
"These funds will provide saving opportunities to UAE employees and lift
investment in our domestic economies, while considering market stability and the
low risks associated with such investment opportunities in the country," he
Legal experts and financial analysts added that gratuities should not be
considered as a nice leaving bonus because they are not sufficient to cover the
employee's retirement costs.
According to Barney Almazar, director at the corporate-commercial department of
Gulf Law, "the purpose of severance pay is to assist employees to be able to
provide the needs of his family during the period of unemployment. It cushions
his standard of living while job searching."
"On the other hand, pension benefits ensure the retiree will have comfort for
the rest of his life, which in turn will benefit the government as he will not
be a burden to the society," he added.
Payment of severance benefits to a leaving or retiring employee has always been
a concern in the UAE, noted Almazar. He said: "We have had many instances where
smaller companies have been unable to pay employees end of service gratuity or
severance due to the fact that the company has gone out of business or has no
available funds. It is not uncommon for employers to agree with the employee a
time period where the money will be paid over a six- or 12-month period."
"We have also seen companies offering employees to cash out their accrued
gratuity every three or five years. This allows the company to manage its cash
flow and the employee to advance the receipt of his benefits (although forgoing
the potential increase of salary in the future considering that the basis of
gratuity is the current salary)," he added.
Almazar suggests a scheme where the company and the employee will both
contribute to a retirement fund.
"The contributions of the company can then be in lieu of the end of service
benefits. In this way, the risk of the company not being able to pay the EOSB to
the employee upon termination is eliminated as the fund is credited to the
employee's account on a monthly basis," he argued.
Almazar added that the legal framework may not be as straightforward compared to
other countries as the UAE workforce are predominantly expatriates but the
absence of legal framework should not be a barrier.
"As the UAE has no minimum wage and adopts a laissez faire approach in the labor
market, by giving a better compensation and EOSB/retirement package, companies
can attract the best talents," he underlined.
Sean Kelleher, CEO of inancial advisory firm Mondial LLC, shared the same view.
He said: "There is a real need to provide a high-quality retirement scheme
culture. This will certainly provide a diversification angle to the UAE economy
and will definitely mark an improvement in the country's consumer industry."