Employer Action Code: Act
The government has issued a decree (Cabinet Decision no. 96/2023) to introduce a voluntary alternative system for end-of-service benefits (EOSB). The decree allows employers in the private sector and free zones to fund future EOSB accruals for employees via contributions to individual defined contribution (DC) accounts. Currently, employers — with the exception of those in the Dubai International Financial Centre (DIFC) free zone — are required to pay a defined benefit (DB) lump sum based on pay and service to employees at the end of employment (including upon retirement, resignation and death). In the DIFC, the mandatory EOSB accruals were shifted to a DC basis starting in February 2020 within the DIFC Employee Workplace Savings (DEWS) plan.
Following are the main parameters of the new system, effective October 10, 2023:
- Employers in the private sector and free zones (non-DIFC) have the option to sign up for the new system and to decide which employee categories will participate. Employers that opt to sign up must participate for a minimum of one year.
- Employers that join the new system must contribute to the individual DC accounts of participating employees at a rate of at least 5.83% of monthly base pay for those with fewer than five years of service or 8.33% for those with service of five years or more. Length of service is calculated from the start of employment, not the start of enrollment.
- Employers can join the new system by formally requesting enrollment with the Ministry of Human Resources and Emiratization. Individual DC employee accounts must be arranged with approved/licensed investment funds (i.e., the fund managers), which will be responsible for administering the accounts.
- Employees can make additional voluntary contributions based on a percentage of pay or a fixed amount, up to 25% of pay in either case. Employees can access all or part of their benefit entitlement based on voluntary contributions at any time during active employment, according to the investment fund’s rules.
- Account investment options should be risk-free; risk-based with low-, medium- and high-risk options; and Sharia-compliant funds.
- EOSB account balances are payable to the employee at the end of service. The right to voluntary participation ends at the same time, but the money associated with voluntary contributions can be left in the system at the employee’s discretion.
- Any accrued DB EOSB at the time of enrollment in the new system remains payable by employers at the end of employment according to the old system rules; however, it is calculated based on the employee’s base pay at the time of enrollment. The decree is silent on whether the value of the accrued DB EOSB may be transferred to the employee’s DC account.
The new system will give employers an option to avoid taking on new unfunded DB EOSB accruals by replacing them with DC contributions, though selecting the option may also accelerate cash requirements. Presumably, employers that meet the current EOSB mandate through a separate qualifying plan may continue to do so (as was the case in the DIFC). Employers should monitor further developments and consider whether they will choose to participate in the new system.
For further insights on this reform, please refer to U.A.E.'s bright future: Pioneering end-of-service benefits reforms.