Workplace savings schemes less risky for employees than dependence on gratuities

Employee savings schemes are less risky for participants than end-of-service gratuities and could be used to attract and retain talent, insurance industry experts said at a webinar on Thursday.

A majority of employers both in the UAE and the wider Middle East currently pay for their end-of-service liabilities to outgoing employees from working capital, according to participants in The changing retirement and end-of-service gratuity landscape in the UAE online event organised by Axa Green Crescent Insurance Company.

“Companies have no separate assets to pay outgoing employees. They are instead using working capital to settle dues of outgoing employees,” Fareed Lutfi, secretary general of the Emirates Insurance Association and Gulf Insurance Federation, said.

“If the employer becomes insolvent, benefits are at risk, with no back-up funds to pay even partial benefits. Strict employer liability should be measured and disclosed in line with international accounting standards for employee benefits.”

The Dubai International Finance Centre was the first body in the UAE to overhaul the gratuity system – a defined, end-of-service benefit that all expatriate employees are entitled to after completing at least one year of service – when it introduced the DIFC Employee Workplace Savings (Dews) plan in February 2020.

Employers in the free zone are required to contribute an amount equal to 5.83 per cent or 8.33 per cent of an employee’s wage, depending on their length of service, on a monthly basis to a fund administered by a trust. Employees can also choose to make additional voluntary contributions to the Dews plan.

Seventy-eight per cent of companies in the Middle East do not fund end-of-service gratuity at all. Instead, they pay it out of company cash when the benefits fall due, according to the 2020 Middle East End-of-Service Benefit Willis Towers Watson Survey, which covers more than 300 organisations.

“The minority of companies that are funding it are just doing so by putting money aside into a cash account,” Ashika Tailor, director of global services solutions at Willis Towers Watson, said.

“Most companies have reported that their end-of-service liabilities are between $1 million and $5m. There are bigger employers with larger liabilities,” Ms Tailor said. “Moving to a defined contribution model will help reduce this liability on their balance sheets.”

Adopting a more structured payment plan means there is an opportunity for employers to benefit from higher investment growth.

“To retain the UAE’s appeal as an attractive destination for top talent, companies will need to step up and align with other developed economies. Employers who make that move first will be seen as employers of choice. Savings vehicles like this could be a powerful employee retention tool,” Ms Tailor added.

Employees in the Middle East are generally staying longer with their employers. The Willis Towers Watson survey found that 43 per cent of employers expect to retain staff for periods of between five and 10 years, while 13 per cent expect the average tenure to be even longer, ranging between 10 to 20 years.

There is a growing trend among multinational corporations [MNCs] in the Middle East to provide benefit enhancements that are over and above the mandatory requirements. About 39 per cent of companies offer this, the survey revealed.

“This could be a higher accrual rate or more generous pensionable salary definition,” Ms Tailor said. “Forward-thinking MNCs in the region have also introduced a global minimum standard of employee benefits, which includes retirement benefits.”

Although a lot more needs to be done, the DIFC’s Dews scheme has accelerated thoughts towards a more robust savings environment and greater awareness that the end-of-service gratuity is not sufficient to act as retirement income anymore, she added.