“The first company savings scheme that addresses both the UAE corporate environment and end of service benefits (ESBs).”
There is a need for a structured competent low cost Company Saving Scheme (CSS).
- A Tower Watson survey in 2010 showed the combined end of service gratuity liability in the GCC stood at $16-17 billion, and may increase to $70 billion by 2020 as salaries and years of service with company rise.
- In 2008, the average length of service was four years and seven months in the UAE, according to the Ministry of Labour, and that has risen to 6 years and 10 months today.
- Over the past five years the average gratuity payments have increased by 66%. This is primarily caused by the average length of service exceeding five years. At the five year point, the accrual rate for gratuity rate is enhanced.
- More than 80% of the employers don’t fund gratuity until it is due. Financially this is a big risk, even a bigger risk in terms of reputation.
- According to a recent survey conducted by Zurich of 1,000 UAE residents, just 22% will use the gratuity payment for their retirement. A majority of those surveyed by Zurich, 83 per cent, said they believe the end of service gratuity is an “inadequate” method of saving for their silver years. More importantly most of the residents in this survey believed that their existing company may not be able to pay their gratuity payment.
- The number of companies offering their employees retirement savings schemes in the UAE is likely to be around 3 to 5%.
These statistics along with the current economic climate lead to a concerning scenario for the UAE corporate pension environment. With more people trying to make the UAE their home it is essential that a structure is put in place that fosters retirement savings, incentives for residency in the UAE and corporate governance. Consequently, a CSS initiative will have a profound impact on the social and economic prosperity of the UAE.
Currently, the lack of a cost efficient and portable savings structure and opaque practices of the retail investor market has created an uneasy environment for investor confidence. Unfortunately, this scenario has led to a dismal picture for the business and employee whose best interest is no longer taken into consideration (Table 1). With visions of grand projects, such as Expo 2020, corporate governance is a necessity.
Grass roots finance is the key to maintaining a fully-funded company pension scheme. The concept of matching liabilities with asset durations overcomes the root problems and avoids severe downturns in the market. Currently, most companies are obligated to pay Employees an ‘End of Service Benefits (ESBs)’ which is equivalent to 21 calendar days’ salary for each year of service in the first five years of employment and 30 calendar days’ salary for each year of service worked beyond five years. The maximum payment is two years’ basic salary.
Table 1: Ideal Corporate Pension Parameters
|Gratuity/Pension||Mandatory (Very few companies provision for this liability)||ESBs is law. Any shortfalls must be compensated by the firm|
|Investment Criteria is based on ALM (asset/liability matching)|
|Savings Plan||Optional incentive scheme (matching Employee contributions)||Contributions are vested based on the rules in the CSS|
|QROPS||Not applicable||Offshore and portable|
|Set-up||Trust (option to unitize) – no other applicable fees||None|
|Ongoing||Unitized||Less than 2% of AUMs per annum|
|Liquidity||Under special circumstances the firm can have access to the gratuity assets. Some insurance policies cover shortfalls.||ESBs can be ported to any jurisdiction|
|Safety||Trust and CSS structure||Trust and CSS structure|
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