Nobody likes to imagine life as a stereotypical pensioner, hobbling around and waiting anxiously for a monthly cheque to arrive. And not too long ago, many of us did not need to ponder long about pensions, because a combination of private and public funds was waiting in the wings to help out. In the developed world, so-called "defined benefit" pensions - in which recipients get a fixed amount of money a month based on years of service and salary - used to be the hallmark of a corporate culture where employees were seen more as family members than wage slaves.
How times have changed. As companies and governments come up against the hard reality that people are living a lot longer and drawing pensions for many more years than they had planned, the generosity of yesteryear is quickly changing into something completely different. While under the old system you were rewarded for service with regular, fixed payments, the new system generally requires you to make investment decisions about your money, while promising you less of it. This is, at its base, stinginess, but the new system is not necessarily a bad thing.
Left to your own devices, you could end up with more money in retirement if you make the right investments, which is a big "if". More importantly, though, such schemes give more flexibility to a workforce that is increasingly mobile by allowing workers to take their pension from company to company. The erosion of the pension system has played out most starkly in the UK and the US. In the UK, traditional pensions cover about 37 per cent of workers, down from 45 per cent a decade ago.
In the US, the story is grimmer: about 16.2 million workers now have traditional private pensions, down from 22.2 million in 1988. Those pensions are being replaced in the US by self-directed 401(k) savings plans, and in the UK by group savings plans, all of which come with tax advantages. In the UAE, however, where there are no income taxes, the dynamics of pension coverage are markedly different. Emiratis are 100 per cent covered by generous government schemes that require employers - both local and foreign - to contribute a percentage of their salaries to pension funds. They, therefore, have little to worry about when it comes to planning for income in retirement.
Expatriates, on the other hand, are typically less well covered. Workers from the UK and US, for example, are not forced to contribute to state-run pensions while they are away, which means the years they spend working in the UAE could put them at a disadvantage if they move back home and retire. Many companies in the UAE also do not offer any sort of private pension scheme akin to a 401(k) in the US or a group savings plan in the UK, which makes sense, given there are no income taxes and, therefore, no tax incentive to offer them.
It is not as though expatriates are completely pension-less in the UAE, however. Foreign workers in the UAE are entitled by law to a "gratuity" that companies must pay when an employee leaves. Workers who have served at least a year must be given 21 days' pay for each year worked. Those who have served five years or more get 30 days' pay per working year. Some companies pay it as a kind of bonus at the end of every year, but the legality of this method is in question, as the payout is supposed to be based on a worker's final salary when he leaves the company, not his end-of-year salary. Another problem with this system: companies are not required to save these payments in separate accounts, and typically pay them out of cash reserves. If the company simply does not have the money to pay you when you leave, you could be out of luck.
For many expatriates, the gratuity system falls far short of making up for benefits left behind in their home countries. So what is the best way to compensate? Experts recommend that, as a start, expatriates think about putting aside the money they would have paid as income tax in their home countries as a retirement savings nugget. Alternatively, you could run a simple calculation of the value of your private pension benefits back home - what you contributed to your company savings plan plus what part of your contribution your company matched - and your public ones - state-run pension and medical care programmes; in the US this amounts to about 15 per cent of your salary.
The more you can save, of course, the better. But these guidelines should give you a sense of where you stand and where you should be on the savings and investing continuum. If you discover you cannot afford to put aside what the numbers tell you to - or that tax-free living has pushed you a little too high on the luxury scale - do not fret. Instead, come up with a simple plan to gradually reduce spending, increase saving, or both.
You could, for example, decide to increase your monthly contribution to investment accounts by one per cent of your salary five times over a year, thus blunting the impact of a sudden decision to ramp up savings by five percentage points. Having a working budget is immensely helpful in making such plans. Thankfully, more pension benefits may also be on the way for expatriate workers. According to officials at Friends Provident International, an insurance and pensions company based in the UK with operations worldwide, companies in the UAE are using pension schemes to lure talent in an increasingly competitive global labour market.
It is part of a trend in which market forces are bringing all kinds of Western-style perks and benefits to the Middle East. "We have started to see comprehensive benefits packages being extended to more and more people down the ranks in more companies as a retention and recruitment tool," said Philip Story, the head of employee benefits at Friends Provident in the Middle East. Assuming the trend continues, the ranks of expatriates with pension coverage will increase rapidly. For now, though, many foreigners in the UAE will continue to go it alone, saving and investing without the help of a corporate pension plan or much government help.
The way pensions are evolving in the developed world, though, that might just be good practice for the return home. afitch@thenational.ae