UAE government encouraged to replace end-of-service gratuity with savings fund

The UAE’s government has reportedly been presented with a study recommending the establishment of a savings fund at company’s rather than traditional end-of-service gratuity for expatriates.

Among the details of the plan are for a percentage of foreign employees’ salaries at government, semi-government and private sector firms to be deducted each month and deposited in the fund, according to Gulf News.

They would then be paid in a lump sum to the employee at the end of service or retirement, along with the expected return on their investment in the fund.

“The scheme would be a major strategic step and a new experiment of its type in the region,” one passage of the study reads, according to the publication.

Fund managing institutions would run these investment funds to ensure “good financial returns for the employees”.

The study’s author, who was not disclosed, suggested such funds could reduce the expenses of employers and stimulate the national economy.

However, it also stressed that employee participation should be voluntary, regardless of the sector, and the company would have the choice to participate or choose the regular end of service system.

Employees would have the option of additional monthly contributions to the plan if they wished and it could be offered to all or only certain levels of employee.

One key hurdle would be integration with the current end of service gratuity.

It was suggested in the report that end of service gratuity would be calculated on the date of implementing the new scheme. Current employees would then receive this payment and any additional contribution to the investment fund when they leave.

The lack of an equivalent to a pension seen in other countries had led to concerns that UAE residents are not saving enough for their desired retirement lifestyle.

Read: UAE residents not saving enough for desired retirement lifestyle

The current gratuity system pays 21 days of salary for each year of service, up to five years, when the employee leaves their job or retires.

After five years of service this payment increases to 30 days of salary for each year of service.