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Article | HR Perspectives

Saving for retirement in the evolving pensions landscape

By Ashika Tailor and Michael Brough | February 8, 2021

A look into the new reforms on the end of service benefits for the region's expatriated workforce
Retirement
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The UAE’s workforce relies largely on foreign workers who are increasingly staying in the region for longer periods of time, yet three in five people have concerns about their financial security after employment and expect their employer to provide a means for saving.

One of the most significant recent developments is the introduction in the UAE of the DIFC Employee Workplace Savings Plan (DEWS) which replaced the mandatory defined benefit end-of-service gratuity payable on leaving service, effective 1 February 2020. Under DEWS, employers based in the DIFC (and only the DIFC, so this excludes elsewhere in UAE) are now required to contribute 5.83% - 8.33% of salary to a defined contribution savings scheme. The need to improve long-term savings and retirement provision in the UAE is becoming a crucial issue for employers and employees alike.

Due to various uncertainties around the final regulations on opting out of DEWS prior to its launch, not least the very late delivery of these regulations leaving no time for DIFC employers to respond, it is unsurprising that 1,100 employers have enrolled into DEWS during its first year of operation.

In this regard DEWS is seen as a success by many. However, the opportunity to opt out and enrol in a qualifying alternative scheme (QAS) is still worth considering for many organisations. Those relatively few organisations that have opted out already have made use of an international pension or savings plan (IPPs and ISPs) as their QAS.

These schemes operate under a robust regulatory framework similar to DEWS, but also provide access to a much greater fund choice typically with institutional pricing, more flexibility and better overall value for members. A QAS can be used for multiple purposes and not solely as a DIFC compliance vehicle, and the design can be adapted as the sponsoring employer sees fit as changes are needed in future.

It is worth noting that a QAS could initially be more expensive for the employer considering the additional costs and resources required for the initial set up and ongoing investment advisory and local agent roles.

Employers have only a limited window of 60 days prior to 1 February every year to set up a QAS and to apply for the necessary approval to opt out of DEWS, by providing a suitable alternative.

Recent reforms in end-of-service benefits for the region’s expatriate workforce offer employers a number of options to attract and retain talent.

Recent reforms in end-of-service benefits for the region’s expatriate workforce offer employers a number of options to attract and retain talent

The shift to defined contribution

The DIFC’s transition from defined benefit (DB) to defined contribution (DC) is a common global trend with many other markets making or planning similar reforms in recent and forthcoming years. A recent study by Willis Towers Watson shows global DC assets growing annually by 8.4%, while DB assets have grown by only 4.8% per annum and we expect this trend will continue. In fact, this natural trend has been boosted by legislation requiring automatic enrolment of employees in DC arrangements in several countries — for example Turkey, Poland and the UK — with more in the pipeline.

In contrast to DEWS, both Poland and particularly Turkey’s introduction of auto-enrolment has proven less successful with an extremely low take up rate (about 25% for Turkey and 40% for Poland). For Turkey this can largely be explained by the fact that auto-enrolment plans are funded by employee contributions only, which has caused the majority to opt out. However, discussions are underway in Turkey to reform the end-of-service gratuity benefit potentially into an employer contribution to the DC arrangement.

Savings and pension plans as retention tool

Employers across the GCC are recognising the need to look beyond traditional compensation packages to attract and retain the best talent. Savings and pension plans can be an effective retention tool and are increasingly being considered as part of the total rewards package to help companies become the ‘employer of choice’ in their industry.

Savings and pension plans can be an effective retention tool and are increasingly being considered as part of the total rewards package.

Willis Towers Watson’s end-of-service benefits (EOSB) survey 2019 suggests that 42% of surveyed companies enhance the end-of-service gratuity with one of the most common reasons being to retain key talent. Out of the 123 companies that do enhance this, 54% responded that they offer employees a supplemental DC plan. We expect this trend to continue as the governments of Dubai, the UAE and other GCC countries have long considered similar measures to manage EOSB liabilities under their own labour laws.

The COVID-19 pandemic has emphasised the importance of employee well-being to business success. A key pillar of this is financial well-being. A recent article by Willis Towers Watson found that retirement benefits have a key role in an individual’s well-being — by providing both actual financial support and psychological confidence about a financially secure future.

60%
of UAE Employees worry about their future financial state and look to their employers to provide retirement benefits

Our research found that nearly three in five employees in the UAE worry about their future financial state and are looking to their employers to take the lead on provision of retirement benefits. According to our research, nearly 50% of companies in the UAE already provide or are planning to provide financial education seminars to employees, and a quarter of surveyed companies have or are considering providing employees with access to a savings scheme.

Longer stays require substantial savings

Saving for the future is becoming an increasingly important issue for employees in the UAE, particularly as foreign workers are increasingly staying longer periods. Our EOSB survey indicates that companies expect their employees to stay with them for five to 10 years, which is a shift compared to a decade ago, where typically expatriates only stayed between three and five years.

Additionally, the UAE is now issuing retirement visas to encourage people to stay in the country after employment, though this requires a substantial level of savings to be eligible. With longer service in the UAE comes a need for long-term and retirement savings to prepare workers financially for their time after work finishes.

The necessary measures to help prevent the spread of COVID-19 are coming at a significant economic cost as businesses adapt, reduce or completely suspend operations. As a result, employers and employees alike may be facing short-term financial stress.

For employers, retirement plans can be a significant drain on available cash. For employees, loss of retirement savings can be a source of financial stress but can also be a source of funds to help with short-term financial needs, as we have observed for several companies in the UAE who sponsor IPPs and ISPs. Both employees and employers have options to relieve this stress, but careful consideration should be taken with any action to avoid unintended consequences or harm to long-term financial stability.

Hardship withdrawals

Many IPPs and ISPs can include provisions for hardship withdrawals within their trust deed and rules or the contracts that established the IPP or ISP originally. In recent months we have witnessed unprecedented levels of withdrawals from IPPs and ISPs from members in the UAE and across the wider Middle East.

Those IPPs and ISPs that do not currently contain hardship provisions can reach out to the trustee and/or recordkeeper in the first instance to look to include them through rule changes, endorsements and so on. IPP and ISP regulators (based in the domiciles) have indicated a willingness to support this and to potentially ease up on the hardship verification requirements, allowing the withdrawal to be progressed more rapidly than usual.

Sponsors can also consider expanding eligibility criteria to allow new emergency-based distributions, subject to recognising administrative impacts on recordkeepers, as well as the possible need to get any trustee agreement or regulatory approvals.

There is a growing and encouraging number of options in the Middle East around pension planning, with further reform likely. Workers there, like everywhere, are concerned for their financial future, and the best employers will do all they can to help.

This article was written for the Middle East Insurance Review, and published in December 2020.

Authors

Director, Integrated & Global Solutions

Senior Director, Integrated & Global Solutions

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