UAE's end-of-service gratuity set for an overhaul

Pedro Gonçalves
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UAE's end-of-service gratuity set for an overhaul

The UAE is looking to "enhance and improve" the end-of-service benefits awarded to employees to help companies attract and retain talent and ensure firms can adequately fund the liability, according to the government.

Studies are being carried out to improve the current system, which could include a combination of an enhanced gratuity system and private sector employee savings schemes in a bid to boost employee benefits and the wider economy, Abdulrahman Al Awar, director general of the Federal Authority for Government Human Resources, said.

Al Awar said the government was exploring "multiple policies" including models that differentiate on pay, without providing specific details, local news outlet The National reports.

There is obviously a great opportunity for those using [private sector] saving schemes to enhance the local economy while also enhancing the benefits the employee will earn for their end of service in the UAE"

"There is obviously a great opportunity for those using [private sector] saving schemes to enhance the local economy while also enhancing the benefits the employee will earn for their end of service in the UAE."

Analysts at the event said the end of service gratuity presents a challenge for expatriate residents as many consider it a bonus rather than a lump sum to be invested for the future to contribute to their retirement pot.

"The end of service gratuity is almost like a mid-career bonus and does not serve its function as a platform for retirement saving," Simon Herborn, senior consulting actuary at Milliman - Middle East and Africa, told The National.

This is because the end-of-service benefit does not take into account the lifespan of the employee when they leave the company - only the years they have worked there.

This causes problems for expats when they later return home for their retirement days, as they do not have the generous pension systems in their home countries that are seen in the GCC.

The payment also comes with risk as it is not mandatory for companies to set aside the payment.

A recent study from financial services companies Old Mutual International and Quilter Cheviot found 59% of UAE residents depend on their end-of-service gratuity payment to fund their retirement. The study highlighted the retirement gap for many, as the gratuity is considered inadequate to fund a retiree's life after work because the lump sum payment only factors in the years of employment at a company, rather than the lifespan of an individual.

Philip Wheeler, senior manager and pensions actuary at Ernst and Young, says UAE expatriate residents could greatly benefit from "appropriate, cost-effective" savings products from their employers.

Employees leaving a UAE organisation are entitled to an end of service payment after completing at least one year of service with the tenure calculated on the number of days worked.