UAE APPROVES NEW END-OF-SERVICE BENEFITS SCHEME FOR PRIVATE SECTOR EMPLOYEES
25 September 2023
Mohamad Firas Badawi
The UAE cabinet has approved a new scheme for savings and investment funds for private sector employees. The scheme is optional for employers. Employees will be entitled to receive their savings and returns on investments at the end of employment, even if their employer is in financial difficulties. There is currently no similar scheme in the UAE except for the pension scheme that is applicable only to Gulf Cooperation Council national
Dubai: The UAE cabinet recently approved a plan to create savings and investment funds for employees in the private sector, including free zones, as an alternative to the current end-of-service benefits (gratuity) payment system.
Employers will have the choice to participate in the scheme. If they opt in, they will be obligated to contribute to the selected fund on a monthly basis.
The UAE Securities and Commodities Authority (ESCA), in conjunction with the Ministry of Human Resources and Emiratisation, will oversee the funds.
The scheme is expected to offer three investment options:
- Risk-free investment option to preserve the capital,
- Investment options with low, medium, or high risk, and
- Sharia-compliant investment option.
Upon termination of employment, workers will be entitled to receive their accumulated savings and investment returns based on the chosen investment option. They may choose to leave their savings and returns in the fund without additional contributions from the previous employer.
Participating employers will no longer be required to pay end-of-service gratuity to their employees. However, other benefits such as return tickets, payment for unused annual leave, and contractual benefits will still be mandated.
Presently, employers are not obliged to book provisions for end-of-service benefits in their accounting records. These benefits are only paid upon termination of employment. Consequently, financially struggling employers often find it challenging to fulfill their obligations. The new scheme seeks to address this by requiring monthly contributions from employers.
This way, even if an employer is facing financial difficulties, a portion of the employees' end-of-service benefits will be safeguarded if they have made regular contributions.
Apart from the pension scheme applicable only to Gulf Cooperation Council national employees and the Dubai International Financial Centre Employee Workplace Savings Scheme, there is currently no similar scheme in the UAE.
Further legislation detailing the scheme and its implementation is expected to be introduced in the future.
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