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16 July 2024

Pension scheme on the anvil for UAE expats

By Shuchita Kapur

Expats living and working in the UAE may soon have access to a state pension scheme if the government’s plans for such a scheme are implemented.

While a number of private banks and financial entities currently offer pension schemes for UAE nationals as well as expatriates of various nationalities, the government is currently in discussion to launch a federal scheme for expats, according to various sources.

Experts in the UAE have long argued for pension reform, especially in lieu of the current gratuity scheme. They believe that a pension scheme to non-national employees will be more beneficial than what the employees otherwise receive under the end-of-service gratuity model.

As of now there is no law that binds the companies in the country to provide this benefit to foreign employees but there are strong recommendations for this and some companies are slowly moving towards to it in the form of contributory pension schemes.

Sara Khoja, Partner, Middle East Employment Group at Clyde and Co, sees the possibility of pension schemes for foreign workers materializing in the country. “Certainly, the UAE government has been looking into this issue,” she tells Emirates 24|7.

According to Jamie Liddington, Senior Associate at Hadef & Partners, “Pension plans are not uncommon in the UAE among international companies. We are seeing signs that contributory pension schemes are being implemented more widely but there remains a need to educate the local market.”

As per the findings by Towers Watson, a human resource consulting firm, an increasing number of companies in the country are offering a separate defined contribution (DC) pensions or savings plan to their employees. A defined contribution pension is a pension pot using the employee’s contributions and the employer’s contributions (if applicable).

Their survey suggests the proportion of companies offering a supplemental DC plan to all employees has increased from 34 to 48 per cent between 2010 and 2014.

Commenting on pensions, Michael Brough, Towers Watson’s Middle East benefits specialist, told this website that perhaps “at some point in time, pensions will have to happen. It’s on the government’s agenda and the UAE may have to do it if it wants to be a strong financial centre.”

Why are some UAE firms reluctant?

Even though there seems to be a push in that direction, majority of the companies are still reluctant to give this benefit to its foreign employees.

Employers in the UAE are generally reluctant to implement pension schemes due to the transitory expat culture. For a pension scheme to be effective there needs to be a long term strategy in order to maximise end gains, says Liddington.

“In some cases employers are reluctant to depart from the gratuity regime as pensions contributions are far more difficult to ‘claw back’ in the event that the employee’s employment is terminated for any of the reasons set out under Article 120 of the Labour Law,” he explains.

Another thing that hinders many companies from doing so is the added financial burden which comes with pension.

“For pensions to take off in the UAE, the employer’s contribution would need to be quite generous in order to persuade employees that the benefits of joining the scheme outweigh the disadvantages of giving up the right to a gratuity.

“The statutory gratuity regime works very well here in the UAE because of the transient nature of the workforce.  Employees come to the UAE and often work for a number of years (typically 5 to 10) and then receive a lump sum payment on departure.

“The truth is that for the typical expatriate worker in the UAE, a cash payment on termination is almost certainly preferred to having to wait for a further period of time before the pension benefit becomes payable, quite possibly in a country other than where they reside upon reaching the specified retirement age,” explains the expert at Hadef.