Everything you need to know about the UAE’s new end-of-service savings scheme

Now that the UAE government’s new savings plan for employees in the private and free zone sectors to invest their gratuities has taken effect, more details have been revealed by the Ministry of Human Resources and Emiratisation.

The Voluntary Alternative End-of-Service Benefits Savings Scheme – unveiled by the UAE government in September – came into effect on Wednesday.

The initiative, which will be overseen by the ministry and the Securities and Commodities Authority, is not mandatory for employees or employers and does not have a minimum salary requirement to participate.

“We encourage companies to choose this plan. It is based on successful practices in the private sector in the UAE and elsewhere,” said Abdulrahman Al Awar, Minister of Human Resources and Emiratisation.

“The scheme will boost [the] competitiveness of the private sector and make employers more attractive to talent from around the world.”

Here is everything you need to know about the new savings scheme.

How can employees participate in the scheme?

Employees cannot participate in the scheme without their employer, which is required to submit a subscription application with the ministry.

Companies select licensed investment funds and decide which employee categories and levels should be included in the programme. The subscription then becomes mandatory for these workers.

Once employees are registered in the investment scheme, the fund administrator will open a savings account for the beneficiaries.

Employers must ensure that the employee's end-of-service entitlements from the previous period are preserved.

They must discontinue the use of the current gratuity system for employees who are selected to participate in the new scheme.

However, employers are required to calculate benefits due to employees before adopting the alternative system and must pay them upon termination of the employment, based on the worker’s basic salary.

The initiative is voluntary for employers but they are required to participate in the system for a minimum of one year once registered, the ministry said.

They must provide the ministry with a credit report to ensure beneficiaries receive their benefits at the end of their service.

How much do employers have to contribute to the scheme?

Contributions are based on a percentage of employees' basic salaries and how much time they have worked for a company.

For full-time employees who have worked for a company for less than five years, employers will contribute 5.83 per cent of their monthly basic salary to the investment fund and 8.33 per cent if the worker has served more than five years, the ministry said.

This is the basic monthly subscription for the savings scheme. This cannot be deducted from the employee’s salary and these amounts are not refundable to employers.

The basic subscription rate is determined by the chosen employee’s continuous service period, which begins with the date of employment, not the date of subscription.

It is prohibited to withdraw the basic subscription amount, as well as any profits or returns derived from the investment fund before an employee leaves the company, the ministry said.

However, the employer has the right to recover the basic subscription amount upon termination of the employee within one year of the start date.

The employer may change the fund manager and transfer all amounts and returns to an alternative investment fund, after obtaining the approval of the ministry and the SCA, based on factors such as the level of service performance.

Employers or participating employees are not required to pay for these transfers.

Can employees contribute to the plan?

Yes. Employees subscribed to the fund can voluntarily contribute a percentage of their salary or an additional amount, either monthly or a lump sum, in addition to the basic subscription payment made by employers.

This payment will be transferred directly to the investment scheme.

“The voluntary contribution will be deducted from his or her wage. In case of a monthly payment, the voluntary subscription percentage cannot exceed 25 per cent of the total salary while, in case of a lump sum, it cannot exceed the same percentage annually,” the ministry said.

Employees can withdraw part or all of the voluntary contributions or their investment returns at any time during their employment, in accordance with the terms set forth by the fund manager.

Participating employees can choose which investment fund they would like to use for their voluntary contributions. Unless specified, the investment will be incorporated into a capital guarantee fund, according to the ministry.

The employee is also entitled to all basic subscription amounts paid by the employer under the alternative system and any investment returns gained during the subscription period within 14 days after the termination of employment, the ministry said.

After termination of employment, the worker also has the choice to either receive financial benefits or continue investing in the scheme.

If the employee switches jobs, the new company can complete the basic subscription in lieu of the previous employer or they can withdraw their investment from the fund.

Top 10 global cities for retirement – in pictures

Who else can participate in the scheme?

Fund managers can accept voluntary subscriptions from self-employed people and independent business owners, expatriate employees working for government agencies and institutions, as well as Emiratis in the public and private sectors, the ministry said.

“[This] is provided their employers continue to pay contributions to the General Authority for Pensions and Social Security,” it added.

How does the scheme work for free zone employees?

Authorities responsible for the regulation of financial free zones are required to develop and approve end-of-service benefits that apply to companies within the scope of their authority and meet their requirements as an alternative to traditional end-of-service benefits.

However, they will require approval from both the ministry and the SCA to offer the service to companies outside their scope of authority.

Who will manage and invest the money?

The SCA will license investment funds for the scheme and approved service providers will offer services that include fund management, custodian services, insurance, auditing and legal advice.

Fund managers will be approved in partnership with the ministry to operate and manage the investment funds.

The fund manager must have a minimum of Dh1 billion worth of assets under management, and at least three years of experience managing funds, the ministry said.

They must provide employers and beneficiaries with semi-annual account statements and periodic reports of the balance of their basic and voluntary contributions and the returns achieved on them.

What are the investment options available?

Fund managers are required to provide a variety of investment options, including a capital guarantee option that offers a risk-free choice for capital preservation if the beneficiary is an unskilled worker.

Other investment portfolios are available that carry varying levels of financial risk based on expected returns, as well as Sharia-compliant funds for skilled workers with a monthly basic salary of at least Dh4,000.

A percentage of the basic and voluntary subscription amounts may be required by the SCA for investment in the country’s economy and markets as long as the investment does not harm the beneficiaries’ interests, the ministry said.

What happens if employers do not pay the basic contribution?

If an employer fails to make the basic subscription payment by the due date, the fund manager must notify the employer in writing within 30 days of the payment date that they are required to pay the basic subscription within five days after receiving the notification.

The fund manager is also required to notify the ministry of any non-payment of the basic subscription within 15 days of sending the payment notification.

If an employer fails to make a payment of the overdue subscription amount for two months, the ministry will cease issuing new work permits to the company and may take other administrative actions.

The ministry can also fine employers Dh1,000 for each beneficiary every month if the subscription amounts have not been paid after four months.

Can employers suspend subscription payments?

Yes, they can. Employers have the option of temporarily suspending the payment of the basic subscription in the following circumstances:

• Evidence of the company’s financial failure.
• If a beneficiary is absent from work without a valid reason.
• If the beneficiary is imprisoned or detained pursuant to a court order.
• If the worker fails to return from annual leave in a timely manner.
• After a restructuring, transfer of ownership, merger, acquisition or division of the company.

What if I have a complaint?

The ministry is responsible for receiving complaints regarding the alternative savings scheme and is also authorised to investigate breaches.

Financial free zone authorities must supervise, control and resolve complaints regarding the alternative gratuity system under their jurisdiction, the ministry said.

Meanwhile, complaints regarding the service of investment fund service providers will be addressed by the SCA.