Rethinking ‘End of Service’ benefits – the DIFC story

The DIFC has recently announced plans to replace its end of service gratuity (ESG) scheme, where a lump sum is paid to an employee leaving employment, with a defined contribution savings scheme where employees and employers contribute on a monthly basis. The DIFC Employee Workplace Savings (DEWS) Trust scheme, which is to be introduced from 1 January 2020, will also offer a voluntary savings component for employees.

Under the proposed new regime, all DIFC employers and employees will be required to participate in the DEWS scheme unless an employer operates a qualifying system of its own. It forms part of the new DIFC Employment Law – Employment Law, DIFC Law No. 2 of 2019 – which was enacted on 30 May and is due to come into effect after 90 days on 28 August.

The DIFC reviewed the existing ‘lump-sum’ ESG system against international standards and changing demographics. It is not currently mandatory for companies in the UAE to set aside payment for ESG, which is calculated as 21 days of pay per year of service for five years of service, and 30 days of pay per year of service after. This does not include allowances.

A fifth of UAE companies face ESG liabilities of over US$15 million, with 88% of GCC companies surveyed having no plan to fund gratuities due, according to a 2018 survey by global advisory and brokerage company Willis Towers Watson, which covered 300 firms. Only 20% of these firms said they offered a retirement or long-term savings plans for their employees.

The DIFC concluded that the unfunded, defined-benefit nature of the ESG system was a disadvantage to both employees and employers. It exposed employees to the risk that their ESG benefit might not be paid in full, or at all, while also creating an open-ended liability for employers.

The DIFC noted that the UAE’s accelerating development as a place to live and work meant that the ESG was “no longer appropriate when competing on a global stage for attracting and retaining talented workers”.

The DEWS scheme will enable employers to monitor what they owe to the employee on a monthly basis and the funds will be administered by a trust and managed by a scheme administrator, who will oversee an investment platform. This guarantees that all employees will receive the end-of-service benefits they are due at any given point because the funds will be ring-fenced.

The Dubai Financial Services Authority (DFSA) will regulate the fund administrator and the master trust administering the scheme will be domiciled in the DIFC. The fund administration and management costs will be borne by the employee via a small management fee. Annual charges are predicted to be between 1.25 to 1.5%.

With the introduction of the DEWS scheme, companies based in the DIFC will benefit from:

  • Knowing exactly what their liabilities to employees are at any given point, without any liability once paid
  • Cash flow requirements that are smoothed out over the employment cycle of an employee, rather than lump sum payments having to be determined at the end
  • Calculating an employee’s end-of-service gratuity based on their salary as and when they fall due, rather than at the final salary, making it more cost-effective to maintain
  • The ability to earn a return on their benefits and certainty of the payment thereof via a regulated and reputable administrator, allowing them to attract better talent.

Meanwhile, employees will benefit from:

  • Receiving their end-of-service gratuity, irrespective of an employer going out of business
  • Having their contributions professionally managed in a cost-effective and flexible manner
  • The chance to earn a return on their contributions, which is currently not the case
  • Visibility and a choice as to how their savings will be managed, catering to a range of risk appetites and including shari’a compliant options
  • Voluntary savings options on top of employers’ contributions, offering an incentive to save more towards their retirement.

It is considered likely that the change to the ESG regime within the DIFC will spread to other free zones and the mainland in order to modernise and standardise employee benefits and entitlements across the UAE.

As one of the largest independent trustees in the GCC, Sovereign can provide employees with tailored advice on suitable options for their existing end of service benefits arrangements. We can further assist you by creating a trust to hold the assets of the plan, providing your employees with the peace of mind that their benefits are safe and secure. The trust will be based in a regulated jurisdiction where Sovereign is fully licensed as a professional trust company. Our asset management team can further assist with low-cost investment options for your employees, depending on their individual risk appetites.

For further information contact Dubai office

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