UAE: New end-of-service gratuity scheme now in force; here’s what it offers

Vijay Valecha, Special to the Gulf Business Nov 8, 2023

The initiative, which came into force on November 1 is managed by the Ministry of Human Resources and Emiratisation (MoHRE) and the Securities and Commodities Authority (SCA).  The scheme is not compulsory for employees or employers, and it does not have a minimum salary requirement to participate.

The scheme is open to both expatriates and UAE citizens and offers an alternative system to the existing gratuity payment system.

According to MoHRE, the scheme aims to boost the ease of doing business and enhance UAE’s attractiveness to talents and expertise, as it offers investment returns on employees’ end-of-service gratuity by investing it in investment funds approved by the ministry and SCA.

The SCA will grant licences to investment service providers or fund managers for conducting activities under the new scheme.

Regulatory authorities of financial free zones in the UAE will manage the drafting and implementation of legislation, regulations, and rules for the scheme for employers and employees in the free zones.

Impact on employers

Employers have the option to choose the scheme and submit a request to MoHRE to enable it. They can choose the employment categories to benefit from the system and will have to pay a monthly contribution.

There are two types of subscriptions under the scheme: basic and voluntary. The basic subscription is strictly for non-skilled workers and voluntary for skilled workers (whose monthly salary is at least Dh4,000), who can opt to direct their funds to low, medium and high-risk assets.

With the termination of service, the employee will receive their savings under this system.

An advantage for employers is that enrolling in the savings scheme costs less in the medium term in comparison with the current end-of-service scheme.

However, employers have to discontinue using the current end-of-service benefits system for employees who are selected to participate in the alternative system.

They will also have to calculate benefits due to the beneficiaries in accordance with the ‘Decree Law’ prior to implementing the new system and must pay them upon the termination of the employment relationship, based upon the beneficiary’s basic salary as of the time of participation.

Employers must:

Pay the basic subscription amount based on the provisions of this resolution without deducting it from the beneficiary’s salary, bearing in mind that these amounts are not refundable to employers.
Provide all documentation and information pertaining to beneficiaries upon request to investment fund service providers; and others.
Transfer subscriptions into the investment fund account within 15 days of the first day of the calendar month.

Employers can:

Request any amount legally owed to him from the worker’s entitlements under the alternative system upon the termination of the employment relationship between the two parties, subject to approval by the ministry or the enforcement of a judicial decision in compliance with the applicable laws.
Change the fund manager and transfer all subscription amounts and returns to an alternative investment fund, on receiving approval of the ministry and authority, based on factors, including the level of service performance and what supports the beneficiaries’ interests. Employers or beneficiaries are not required to pay for transfers.
Recover the basic subscription amounts only upon termination of the employment relationship within one year of the start date.

As per MoHRE, employers have the right to withdraw from the scheme, with the approval of the ministry, provided they meet certain criteria, including a minimum subscription period of one year, the absence of outstanding administrative fines or unresolved labour disputes, and having measures in place to ensure the withdrawal will have no impact on the rights and gratuities of employees, among other conditions.

Benefits for employees

Vijay Valecha, CIO of Century Financial, says employees can benefit in the following ways: “They will get inflation-, default-, and bankruptcy-protected end-of-service benefits thanks to the new savings plan, which also gives them access to an investment programme that lets them save and invest their benefits. It facilitates accurate financial planning and provides a variety of possibilities for obtaining returns on savings.

“In line with the conditions established by the fund manager, employees may withdraw all or a portion of their voluntary contributions or investment returns at any point while they are employed, which aids in managing their cash flow during difficult financial circumstances.

“It protects the employees from squandering their end-of-service pay entitlements by virtue of the employer contributing and transferring those funds on a regular basis. The scheme serves as a safeguard for employees, ensuring they don’t misuse or lose their end-of-service benefits. Instead of relying on employers to transfer these funds when an employee leaves. The entity then places the money with a licensed financial institution, whose primary responsibility is to protect and manage these funds. By doing so, the risk of employers facing bankruptcy or legal disputes is eliminated.”

Employees can also request the withdrawal of part or all of the voluntary contributions amounts and investment returns to the fund administrator.

However, there are some restrictions on withdrawing the basic subscription amount, as well as any profits or returns derived from it from the alternative system before the termination of the employment relationship between the employer and the beneficiary.

If the employment contract is terminated, employees have a choice to either receive financial benefits or to continue investing in the scheme.

If an employee wishes to continue, a new employer will take over from the previous one and continue paying the subscription to the same fund, after contracting with it. The new employer may also register the worker with another fund manager and pay the basic subscription amounts.

According to a statement by MoHRE, “The scheme also allows voluntary participation for additional categories, giving self-employed individuals, those with freelance work permits, as well as non-citizen employees working in government entities or their affiliated establishments and subsidiaries, as well as UAE nationals working in the government and private sectors (in this case, employers remain responsible for paying contributions to the pension and social security authorities), the opportunity to register in the scheme, with only additional voluntary contributions, aiming to protect, invest, and grow their savings, and then receiving them as an end-of-service gratuity.”

The investment options accessible through the scheme

The capital-guaranteed portfolio is free of any risks and guarantees the preservation of capital. It is mandatory for unskilled workers, and they are not entitled to choose other investment options. Risk-based investment options involve different degrees of risk such as low, medium and high, with skilled workers choosing the investment options. The third option is Shariah-compliant investment fund options.

How the investment works

Employees who have worked less than five years in the company will get up to 5.83 per cent of their monthly basic salary deducted. Those who have worked above five years will see 8.33 per cent deducted.

The voluntary subscription percentage cannot cross 25 per cent of the total salary, while in the case of a lump sum payment, it cannot go over the same percentage annually.

The subscription percentage remains the same for employees working regular hours a day as described above for regular employees.

Workers who were not chosen to register in the scheme by the employer cannot apply for the scheme.

Vijay Valecha says the new scheme will result in an influx of savings coming into the financial system and help to develop the UAE’s economy even further. “When consumers save more, they increase their overall financial security. This confidence often leads to increased spending in the long term. As people feel more financially stable due to their savings, they are more likely to make significant purchases, invest in their businesses, or contribute to various investment opportunities. This heightened economic activity, driven by increased consumer spending and business investments, ultimately results in higher economic growth.
“Adding on, an economy built on a foundation of substantial savings is generally more stable and resilient. It can, better weather, economic shocks such as recessions or unforeseen crises, as individuals and businesses have financial reserves to fall back on during challenging times.”

Source:

Gulf Business