Lunate first to launch UAE end-of-service fund in 'tectonic shift' for Middle East retirement savings

Lunate, a global investment manager based in Abu Dhabi, has launched a fund that will allow private companies nationwide to offer their employees investment returns on end-of-service benefits for the first time in the UAE.

The Ghaf Benefits scheme, launched on Tuesday will permit employers in companies across the UAE to transfer employees' end-of-service gratuity to the fund to receive potential investment returns. Named after the UAE's national tree known for stabilising sand in the desert, it is meant to give employees a chance to be grounded financially by introducing to the country, and region, its only nationwide plan for investing retirement savings.

Also read: Can employee saving schemes be a substitute for pensions in the UAE?

Currently, formal pension plans are only available to Emirati citizens and GCC nationals, in addition to some employees operating in free zones across the UAE.

This private scheme that applies to mainland UAE companies set up outside of free zones brings the Gulf country's 85 per cent expatriate population closer to the possibility of future pension plans. It also addresses a major issue for asset managers in the region, according to a managing partner at Lunate.

A "problem in the region is access to long-term capital", Seif Fikry told The National. "Long-term capital today in the region is mainly dedicated to sovereigns."

This scheme, Mr Fikry said, is the first time a large pool is available locally for asset management industries, allowing them to grow and flourish.

"This is tectonic. This is one of the most critical initiatives when it comes to Middle East, North African asset management," he added.

How it works

The Ghaf Benefits fund operates by offering six investment funds that allow private company employees in the UAE to invest their end-of-service benefits in conventional and Sharia-compliant options, and at varying levels of risk.

Sherif Salem, partner at Lunate and one of the architects of Ghaf Benefits fund, said his company's scheme will simplify benefits management by allowing employers to transfer their employees' traditional end-of-service benefits to be managed by Ghaf.

"What the employer will do, in this case, in the new alternative scheme, is that on a monthly basis, if the employee has worked for less than five years, they will transfer [a prorated] 5.83 per cent [21 days] of their basic [annual] salary. More than five years, 8.33 per cent [30 days] of their basic salary."

This is in line with the UAE's Ministry of Human Resources and Emiratisation (MoHRE), which allows an employee to add an additional 25 per cent of their salary. Those earning less than Dh4,000 ($1,100) a month are not eligible to invest in the medium or high risk schemes.

Then the employee has the option to invest in funds that range from low, medium or high risk, but are generally more conservative and balanced compared to similar global schemes.

Mr Salem said this was only possible due to federal government's establishment of clear regulations on its new alternative voluntary scheme in November 2023, in partnership with the Securities and Commodities Authority.

MoHRE authorised Lunate, along with Dubai-based private join stock company Daman Investments as the first funds to incorporate the new scheme earlier. First Abu Dhabi Bank and National Bonds gained approval in 2024.

With Lunate's Ghaf Benefits Fund launch on Tuesday, private companies have already expressed interest and sovereign wealth fund investor ADQ has signed a memorandum of understanding with Lunate to explore becoming one of the early adopters. ADQ has Etihad Airways and Aramex among more than 25 companies in its portfolio, with tens of thousands of employees.

Where's the risk?

Discussions about creating an alternative voluntary scheme have taken place as early as 2015, according to David Daly, partner at the Gulf Tax Accounting Group in the UAE.

"We've been talking about this a long time," Mr Daly said. He believes the UAE's readiness to move forward with the private sector scheme is due to its belief that there is enough appetite in the market.

"This is the government letting go and allowing the market to do its own thing," said Mr Daly. "It's a big change. They will want to see how it impacts the local economy in terms of investment.

"What you don't want is to bring a system that in five years' time, because of weaknesses, it all falls over, lots of different schemes collapse, people lose money, and confidence falls out of the market. And all of a sudden, nobody wants to be involved."

The private voluntary schemes face these risks, but also positive returns to build a stronger wealth economy, he told The National.

"It may force the government to begin to much more deeply regulate the wealth industry. And by that I mean the people who want to take your personal wealth and invest it for you for the future.

Mr Daly said that would quickly mature the wealth management industry in the UAE and attract more regional and global investment.

"The big advantage, I would say to the UAE as the first mover, if these UAE funds are able then to invest GCC-wide, so Saudi Arabia is OK with that money being invested in their country, then the UAE becomes the investment hub that also brings in jobs, helps develop the industry – everything matures."

First movers

Mr Fikry says Lunate is ready for the risks and complexities involved, which are expected when building a new industry and ecosystem. He said the company's three managing partners have repeated experience in being the first to execute projects, including special purpose acquisition companies and then exchange-traded funds to the UAE about five years ago.

He said their approach to overcoming obstacles is a combination of working with the right global partners and learning how to operate within UAE laws, regulation and market.

"You need to understand that our population is small compared globally," he said, and that it's also expensive to operate in the region.

"Asset management in our part of the world, trusted admin, transfer agents, lawyers – we don't have that ecosystem."

What is motivating, said Mr Fikry is the potential future offerings. Countries with more mature retirement asset sectors contribute substantially to global economies.

In the US, the amount of retirement assets reached $37.8 trillion by the end of 2022, according to the US Retirement Assets: Data in Brief by the Congressional Research Service. Employer-sponsored plans were valued at $26.3 trillion, while Individual Retirement Accounts were $11.5 trillion.

To achieve the UAE version of this economic contribution requires improving offerings that have already made the region "stickier" said Mr Fikry, including golden visas and more.

"Historically speaking, working in the Gulf was what, two, three, four, five years, and then, people would leave?" he said, adding there has been a growing shift.

"You have to start thinking a little bit more long-term towards the rights of employees", he said, when it comes to their end of service given the country's nascent industry. The Ghaf Benefits fund is the way to start, he said.