The day before the 2012 ASHRM conference officially started last week, I was fortunate to be invited at the inaugural breakfast for the event. Besides the usual networking with a small group of select participants, we were given two presentations, one by Mercer (the results of a survey they specially performed for the conference), and one from an official from the Department of Economic Development in Dubai.
As you are surely aware, the DED has now been involved for some time with the World Bank and several other stakeholders including UAE business representatives to look into the implementation of a retirement scheme for expat workers in the UAE.
Framework for the establishment of a retirement scheme for expats in the UAE
The DED is looking for a win-win-win, with :
- Long-term stability for expats
- Employer and expat funds managed professionally, maintaining or reducing the employer’s cost of doing business
- A labour market that becomes more attractive and provides long-term funds in the financial sector.
The DED reckons that the current system leaves employees exposed because most employers don’t ring-fence the End of Service funds as liabilities, therefore the funds are used as “free cash” / working capital by the employer. The issue is, as was encountered when the global crisis hit the UAE a few years, when the companies get in financial trouble, given they have not really set the funds aside, then the EOS may not be paid to the employee and they have no way of ever getting access to the money.
So here are the guiding principles the DED has been considering :
- The scheme must maintain or lower the cost of doing business
- The scheme should sustain the UAE as a regional hub for talent
- It should take into account and build on the existing End of Service Benefits requirements
- It should incorporate the industry’s international best practices
- It should be flexible and scalable
- It should be universal (covering all workers in the UAE)
- There should be transparent stakeholders management.
The outcome so far – a glimpse of future expat retirement in the UAE ?
They have also taken into account a number of elements and success factors, such as : governance, having professional advisors, transparency, communication, proper management of the funds, financial returns and risks, and scheme administration.
And some of the constraints they have to look into include the cost impact on the organisation, contribution levels, portability of the scheme and visa-related issues.
The ideas cover a wide range of aspects regarding the development of the scheme :
- The individual accounts would be financed through mandatory and/or voluntary contributions
- The funds should be invested by a central pension fund, but with several portfolio managers
- The funds should be invested according to guidelines ensuring security, returns and liquidity
- The employer contributions should equal the existing EOS obligation
- Personal contributions from the expats may be added as well
- The eligible beneficiaries might have flexibiliy to be self-sponsored during transition periods in moving between jobs
- The government will not provide any form of guarantee on the funds accumulated and the financial returns.
Some comments and further thoughts on future retirement schemes in the UAE
It was the first time that I heard that the DED was working on pensions for the whole UAE. I had never read it clearly spelled out in the newspapers, and given that it is a Dubai entity not a federal one leading the thought process, I had always assumed this was a Dubai project. So that was my first (basic) learning.
Another interesting point was the focus on the centralised pension fund. The government is keen on making the scheme universal including covering the labourers and other lower-paid staff, who currently can’t access any type of long-term investment scheme in the UAE because their absolute individual contribution is too low for banks and insurance companies to create long-term savings products for them. Yet, as was explained, these labourers and other blue collars have a savings ratio of up to 50% which is transferred back to their home country, and a lot of them contribute to home pension schemes – so why not try to benefit from a part of that stream in the UAE ?
And I have to say I was surprised to hear about the possibility of portability of the scheme. Of course portability between employers is a very important factor, but hearing that if a person has been employed for a long time and has sufficient funds in their pension scheme, they might be able to be self-sponsored during their transition between jobs was a big surprise to me. I suppose it means they would use the amounts from the pension fund as a collateral guarantee against the self-sponsored visa.
If anything of the sort eventually gets implemented, this will be a massive positive factor for giving peace of thought to the expat community, ensuring liquidity in the job market and therefore reduced costs of hiring to employers as they would have access to a larger talent pool already based in the UAE : people in-between jobs would not have to leave the country 30 days after their visa is cancelled (if they meet the conditions to self-sponsor). I think it is a great concept that is definitely worth exploring in more detail to ensure its true feasibility.
Overall, I have to say that I was pleasantly surprised by the quality of the presentation. Clearly not only the speaker really knew his topic in and out, but also the DED has been conducting professional thinking about the concept. The speaker emphasized the interest of the DED to interact with all sorts of stakeholders including businesses, so if you want to share ideas, feedback or comments with them you should get in touch and get heard .
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