UAE – DIFC: End-of-service gratuity reform
Isabel Coles | 9 July 2019
Dubai International Financial Centre (DIFC) to replace the current mandatory end-of-service gratuity system with new DIFC Employee Workplace Savings plan from 1 January 2020.
With effect from 1 January 2020, DIFC employers would stop accruing end-of service gratuity benefits. Instead, employers will be required to pay monthly contributions to the new funded, defined contribution DIFC Employee Workplace Savings (DEWS) arrangement. DEWS will be set up as a master trust, governed by an independent trustee and administered by a third-party provider. The DFSA (Dubai Financial Services Authority) will regulate the trustee and the administrator. The DEWS trustee and administrator are due to be appointed by the end of July. They would start contacting employers in August about the process to transition to DEWS. The DIFC is targeting an implementation date of 1 January 2020 for the change to the new system and DEWS.
Employers will contribute to DEWS at a mandatory minimum rate, with the option of making additional contributions. While the mandatory minimum rate has not yet been finalised it is expected to be around 5.83% of basic salary for employees with less than 5 years’ service and 8.33% of basic salary for employees with more than 5 years’ service (that is, similar to the accrual rate under the current gratuity system). Employees will be able to make voluntary contributions to DEWS.
Employees will be able to choose how their contributions are invested from a pre-selected range of managed (likely passive, index-tracking) funds to reflect their risk appetite. A default investment option will apply for employees who do not make a selection. DEWS will apply an annual management charge to employees’ investment accounts to cover the DEWS operating costs.
When an employee leaves service, they can take their DEWS benefit immediately or they can choose to leave the funds invested with DEWS and take the benefit at a later date, for example at retirement. DEWS will pay the benefits direct to the employee.
DEWS will apply to all DIFC employers and employees. However, employers would be able to use their own end-of-service benefit plan instead, provided the contribution rates / benefits match or exceed what employees would receive with DEWS, and the plan is fully funded via a third party fiduciary arrangement.
The end-of-service gratuity benefits accrued up until 1 January 2020 will be frozen, based on service to that date. However, they will continue to be linked to future increases in the employee’s basic salary until the employee leaves service. Employers will still be required to pay out these benefits earned under the current end-of-service system when the employee leaves service, in addition to any benefits the employee receives from DEWS.
Companies’ end-of-service gratuity obligations are often unfunded or not fully funded, with a provision being disclosed in their accounts under International Accounting Standard 19 (IAS19). As companies approach their financial year-end reporting and planning for 2020, companies may wish to review the impact of this reform on their disclosure figures and a review of the future contribution cash flow requirements may be helpful. Other areas for companies to consider in the coming months include: whether to set up (or modify) your own scheme or participate in DEWS, payroll considerations for employer and any employee contributions, and communication with employees about the changes, which might extend to helping them understand their investment choices.
Whilst alternatives to the end-of-service gratuity have been a discussion topic for the UAE more widely, the reform applies to employers in the DIFC only at this time.