Opportunity to develop local asset-management industry
The first attempts to introduce a pensions system for expatriates in UAE were revealed back in 2008, when the General Authority for Pensions and Social Insurance said that it was researching a proposed “pension savings” draft law. The promised legislation failed to materialize at the time, but now seems closer to realization.
According to various media reports from the last quarter of 2011, the expatriate community in the Emirates, which represents more than 80% of the population, soon may be required to contribute to a pensions system. A new scheme would replace the current structure, under which foreign workers, who have completed one or more years of service, are paid a sum-gratuity by their employer when they leave the company or retire.
The Dubai Department of Economic Development is leading the examination on building pensions structure for the expatriates, consulting with the World Bank on improving employment laws. According to comments of the DED’s officials, employers could be asked to contribute around 8% of an employee’s basic salary to a pensions system. Employees would also be required to add into the scheme, although no contribution level has yet been set. It is not yet clear whether the proposed scheme would be compulsory.
In such new scenario, the accumulated assets of a UAE pensions system would probably run into hundreds of billions of dollars providing a significant opportunity to develop a local asset-management industry. It would also strengthen UAE’s stock exchanges and debt markets, which have been hit hard in the wake of the global economic crisis and the real estate market downfall, in which prices in Dubai have slumped nearly 70% since their peak in 2008.
The new scheme’s primary goal would be to stimulate economic development. As long-term investors, pension funds play a major role globally in terms of developing capital markets. They promote the fund-management industry and foster development of new financial instruments.
The majority of the accumulated funds is likely to be invested outside the UAE, providing no portion of it will be diverted into government development projects as capitals that were invested within the country could be perceived as a tax by companies.
Currently, expatriates working in UAE receive an end-of-service benefit in the form of a gratuity paid by the employer. The calculation is based on the length of service and the basic salary – 21 days’ pay for every year completed for the first five years of work, and 30 days’ pay after that. The gratuity is capped at the equivalent of two years’ salary.
The current system has been criticized in the wake of the economic downturn, when some companies claimed to lack sufficient funds to honor the gratuities of departing employees. Although businesses are required by law to recognize gratuity payments as a liability on their balance sheets, they do not have to set aside funds to meet it.