Dubai International Financial Centre (DIFC) – proposed new scheme to replace end of service gratuity



Background and drivers for change

The DIFC is in the process of considering a new scheme to replace end of service gratuity, which is a lump sum payment payable to employees upon termination of employment. The indicative timetable for the new workplace savings scheme (the Scheme) is for it to come into effect on 1 January 2020. These changes were initially intimated in March this year following a survey of DIFC employers upon the recommendation of a working group established by the DIFC Authority in order to consider the best scheme to deliver retirement savings for expatriate workers in the DIFC.

Providing a pension for an employer’s expatriate workforce is not a mandatory legal obligation in the UAE. Instead, UAE expatriate employees have only been entitled to a statutory payment based on final salary, which is linked to length of service (the Gratuity Payment). The Scheme is intended to change this for expatriate employees based in the DIFC.

The drivers for this change include: 

  • a trend among expatriate employees to remain in the UAE on a longer-term basis, which allows for longer-term planning;
  • removing employee exposure to a Gratuity Payment not being paid;
  • removing employer exposure from an open-ended liability that must be funded in a lump sum payment for each employee at end of service; and
  • global expectations from employees that they are provided with specific contribution-based retirement savings plans.

Proposed details in respect of the Scheme

While the exact details in respect of the Scheme are still in development, it is anticipated that the Scheme will not affect existing end of service gratuity entitlements. At the transition date, benefits earned under the existing formula are likely to be frozen but will be calculated and paid out at the end of service based on the employee’s final basic salary at that time – in line with existing practice. It is further anticipated that employers will continue to contribute to the Scheme at the same level as the existing end of service gratuity (i.e. annual equivalent to 21 days of basic salary for service below five years, which increases to 30 days of basic salary for service above five years), albeit employer contributions will be based on current salary rather than final salary.  As a result, it is expected that the Scheme will be a less expensive proposition overall for employers. 

The current recommendations suggest that the Scheme will also allow employees to voluntarily contribute funds on an ongoing basis for which they will be charged an annual management fee, expected to be around 1.25% to 1.5%.  Employees will most likely get to choose a risk profile (low, medium or high-risk options) for how contributions are invested. When employees leave their DIFC employment, it is expected that they may have the option to cash out the fund or, alternatively, they can choose to defer divesting the investment until a later date. 

When implemented, the Scheme will be regulated by the Dubai Financial Services Authority and will most likely be a master trust structure based in the DIFC. Reports suggest that key roles in respect of the trust, such as trustee and administrator, will be put out to tender.  It is anticipated that all DIFC employers and employees will be required to participate in the Scheme, unless an employer has opted out in accordance with specific criteria still to be determined.

Next steps, time frames and considerations for employers

The DIFC Authority is still in the process of considering the information collated from employers to date and how best to structure and implement the Scheme.  We anticipate that the next stage of the process will involve a consultation on a new DIFC law in respect of the Scheme and await this with interest.  In due course, employers will need to consider the implications for their business. In particular, this is likely to involve considering:

  • whether changes are needed to employment contracts and employee handbooks;
  • whether there is an option for them to opt out of the Scheme and whether they wish to do so;
  • the implications for payroll systems; and
  • preparing communications to employees in respect of the changes.

Although it is too early at this stage for employers to start considering the above points, it is important to keep abreast of the development stages of the Scheme in order to be aware of when it is likely to be implemented.  This will permit employers to be prepared in advance of any final implementation date.  While indicative timetables have suggested that this could be 1 January 2020, it is difficult to tell at this stage whether such a date is achievable without sight of a draft law and a consultation period in respect thereof.  We will keep abreast of developments and provide further updates once a draft law is issued for consultation.  

There is currently no announcement on whether the Scheme (or any similar arrangements) might be adopted by the onshore authorities to cover employees in the rest of the UAE.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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