By: HUB’s EB Global Benefits Team

The United Arab Emirates (UAE) has introduced a new, voluntary individual account-based system for employers to finance the statutory end-of-service gratuity (EOSG) under a defined contribution (DC) format. Introduced in October 2023, this system offers an alternative to the traditional defined benefit (DB) lump-sum gratuity required of employers to provide at the end of their employees’ employment.

The DC approach was heretofore only available in the DIFC free economic zone. All employers in the private sector can now choose to opt into the program. Participation requires a minimum commitment of one year.

Under the new law, the Securities and Commodities Authority, in coordination with the Ministry of Human Resources and Emiratization, supervises these funds. The minimum required employer contribution rate varies based on the employee's length of service:

  • 5.83% of the monthly base salary for employees with less than five years of service.
  • 8.33% of the monthly base salary for those with five years or more years of service.

Employees can voluntarily contribute up to 25% of their salary to their individual accounts. They can access these contributions during employment under specific guidelines set by the investment fund. Accounts offer a range of investment options, including risk-free funds, risk-based (low, medium, high) options, and Sharia-compliant choices, allowing for personalization based on individual employee risk tolerance and preferences.

At the end of service, employees receive the accumulated account balance alongside any accrued benefits for prior service under the previous system based on their enrollment salary. Employees can choose to leave their voluntary contributions invested even after their employment ends.

The law has provoked a lot of interest among employers and the investment sector as the new voluntary account based EOSG system introduces flexibility and aligns with practices observed in developed countries.

However, the implementation infrastructure and regulatory guidance is still in progress. Current regulations do not address several important aspects such as fiduciary responsibility of employers, protection against fund insolvency and employer switch between the DB and DC approaches. Furthermore, only two financial firms have applied for a license. Although in many instances, regulatory guidance has lagged emerging legislation by several years in the UAE, implementation of this new law is a high Government priority as Authorities are working hard to issue regulations and answering questions. This is an opportunity that employers need to actively track.

How this impacts you

  • Employers may soon have de-risking opportunities to move away from DB EOSG to DC financing, and to allow the employees to manage the investment of their own funds.
  • Through a switch to DC, employers would enhance the security of EOSG benefit accruals in case of employer insolvency. The downside for the employer is the accelerated cashflows from their on-going contributions.
  • Employers may now allow employees to save for retirement in a more efficient and convenient group framework relative to individual savings vehicles.

Next steps

  • There are still some uncertainties. Stay up to date on regulatory developments, or clarifications around the new EOSG DC funding option.
  • Carefully examine the details and implications of the new system before making a decision to ensure it aligns with the company’s larger financial strategies, and goals for attracting and retaining talent.
  • Evaluate the fiduciary responsibility aspects of the initial implementation of a DC plan approach, such as employee administration requirements and vendor and fund option range evaluation, to ongoing investment performance of asset managers.

If you have any questions, please contact your HUB Advisor. View more updates in our Global Benefits Directory.