This was announced by Sheikh Mohammed bin Rashid on 4 September 2023 via his official X (formerly Twitter) account.

The system includes the establishment of savings and investment funds from the private sector that are supervised by the Securities and Commodities Authority in coordination with the Ministry of Human Resources. It will be optional for employers to join.

No timeline was publicly set out by the UAE government.

The scheme includes three main investment options: Risk-free investment that maintains capital; risk-based investment where the risk varies between low, medium and high; and the Sharia-compliant investment.

It sets mechanisms for each option to contribute to the achievement of the associated objectives and to enhance the competitiveness and stability of the UAE’S labour market. Employers participating in the scheme have the right to choose the employments’ categories to benefit from the system, and are asked to pay a monthly contribution. Upon termination of service, the employee receives their savings under the system.

Sheikh Mohammed bin Rashid said on X: “During today’s cabinet session, we adopted an alternative system for end-of-service rewards for workers in the private sector and free zones in the country.

“Emiratisation is through which the end-of-service reward for workers and employees is saved and invested according to various investment options. The aim is to preserve the workers’ savings, which represent the end of their services in the operating companies, and to ensure that they are invested in a safe way to guarantee their rights and achieve the stability of their families. The system also allows government sector employees to participate in it for the purposes of saving and investment.”

The operation will administrate employee money purchase schemes in the centre.

OIWSS has established a partnership with Intertrust Group, which will be the trustee and the operator of this scheme and Generali Global Pension, which will provide a capital guaranteed option for its clients.

The entity will operate from its office in DIFC and is a 100% owned subsidiary of Sukoon, which was previously Oman Insurance.

OIWSS has launched a scheme which will be branded as Go Saver and will be open for companies in DIFC, other freezones and other onshore jurisdictions.

Go Saver will be fully protected under a trust which will safeguard the interests of employees. Through a digital platform, OIWSS will provide investment solutions including a fully capital guaranteed option and investment portfolios including Sharia offer.

Emmanuel Deschamps, head of life and pensions and member of the executive committee at Sukoon, said: “The gratuity and employee savings landscape in the UAE provides an enormous opportunity, especially due to the regulatory changes which are expected in the country. We have seen the success within companies in DIFC and the public sector where gratuity provisions have been invested in a savings scheme.

“With limited players in the market, and the need for very high expertise in this business, OIWSS is well positioned to become the leader in this space and offer the most unique solutions to clients, working with HR and finance heads of companies to introduce a savings scheme for the gratuity liability of their employees along with an option to add voluntary contributions.”

The labour law contains a requirement for employers to pay expat employees a lump sum upon leaving employment. Yet, very few companies actually set aside specific funds against these liabilities, while expat employees themselves consider such benefit to be much far less than adequate as a pension income.

Therefore, reforms that prioritise the preservation of the expat labour rights have been proposed to change the End of Employment scheme, while avoiding cash deficiency employers might face anytime with respect to the current unfunded strategy.

Dubai’s DIFC has accumulated substantial financial assets through altering their approach to this expat benefit. The reforms will, therefore, build a new layer of pension infrastructure in Bahrain, funneling funds to local capital markets and expanding the country’s asset management industry.

There are several factors coming together substantiating the case for a new national workplace savings framework for Bahrain.

Modernisation of the ESB arrangements that are almost 50-years old by now is one of these. The pension reforms debate that has been ongoing the last few years in some GCC Countries is another factor. And the increased awareness about voluntary and supplementary savings to protect against contingencies or difficult times such as covid-19 is a third point.

Doing the maths

To avoid any confusion, we do not mean nor aim to reform the ESB by integrating expat workers into the national pension funds managed by governments for local citizens, because many of these funds are already struggling with actuarial deficits; but rather by restructuring these benefits with new notions in line with innovative pension thinking and the asset management industry.

The ESB – also referred to as leavers’ indemnity – is a benefit paid to expatriate workers when they leave the service; such scheme is also enforced in all GCC countries.

The payment amount is calculated based on the employees’ wages when they leave employment and the number of years the employee has worked. This means that substantial sums can become payable to staff.

Under Bahrain’s labour law, the employee is entitled to half a month’s wage for the first three years worked, and a full month wage for each subsequent year worked.

For example, an expat worker who has worked for five years with a salary of BHD 1,000 (£1,905, $2,637, €2,246) per month is due:

• BHD 500 for each of the first three years = BHD 1,500, plus
• BHD 1,000 for the fourth and fifth years = BHD 2,000
• Giving a final payment of BHD 3,500.

Managing liabilities

Therefore, it is crucial that such a sum is accounted in the firm’s balance sheet as it constitutes a liability.

For example, a company with 50 employees with a similar status to the example given above would owe BHD 175,000 in liability. Not only is the amount substantial, but the cost to the employer is always to some degree undefined due to the benefit being dependent on the employee’s monthly salary when they leave.

Although companies account for liabilities, very few set aside specific funds. Granted that the liability is present in the company’s balance sheet, yet it is calculated as part of the working capital.

Such an unfunded approach to the ESB puts both employees and firms at risk; if the company needed to reduce staff numbers, the firm will end up facing cash shortages. Even if the liability was accounted for correctly, there is no guarantee that the company would have sufficient funds to be able to make payment of ESB benefits.

In the case where the company’s performance has been poor, the likelihood of having little or no access to liquidity from the bank is increased.

Ring fenced

In an ideal world, this benefit will be fully funded and segregated from the employer’s balance sheet wherein each company would hold sufficient financial assets to cover their ESB liability; those assets would be segregated from the company’s balance sheet and not available to creditors.

However, the proposition of funding ESB liabilities often raises major public objection mainly from business firms, stemming from the belief that funding ESB will reduce their working capital and lead to business deterioration.

Realistic reformative measures that could be reinforced in Bahrain’s labour and pension sectors include more than one viable option.

The first is to retain the current ESB yet require employers to fund them. Although this option might appear unreasonable whereby employers cannot be expected to fully fund the whole amount to be paid for ESB liabilities immediately, various funding solutions could be considered. The first solution is to only require that a portion of ESB liability to be paid; this could be interpreted as 25% of the total liability, or the liability of 25% of employees with the largest accumulated benefits.

The second solution would be to ring-fence and restrict access to current accrued benefits and require that benefits that are accrued in the future must be funded; thus ensuring a gradual approach to the process.

In either proposal, a sufficient notice period is to be given to employers.

Taking a global view

The second and, in our view, better option of reforming the ESB is to replace the current structure with a defined contribution vehicle, in line with global pension thinking.

This involves replacing the current method of calculating benefits with a contribution, that is a percentage of the employee’s monthly salary, going to an Employee Saving Scheme.

This arrangement will ensure that benefits are fully funded on an ongoing basis, while employers will know the exact total cost to be paid and free their balance of such chronic liabilities. Many big businesses in Bahrain and across the region have been running employee savings schemes for decades and are familiar with its workings.

While achieving a win-win for employers and employees, this remedial approach also has the potential to create demand in local equity and funds, and channel a great domestic liquidity for infrastructure and growth projects.

Lobbying efforts were made with colleagues to put forward this concept and the law amendment it entails to some government agencies in Bahrain in the year 2015, but those authorities did not see the time was right then.

Learn from neighbours

Dubai’s DIFC is a striking example to the success of implementing a saving scheme for expats’ End-of Service benefits in the year 2020.

The DIFC asserted a pathway for modernising these benefits, through transitioning away from the traditional calculation of ESB into a new system of individual accounts of employee workplace savings, funded with contribution from the employer.

Employees too can choose to contribute to these accounts and choose how their funds are invested.

As a result, in just one year, the scheme accumulated a total of $127m in new investment assets. This was just the beginning, not the full roll-out at DIFC or the emirate of Dubai itself.

The success of implementing a new expats’ saving scheme was previously predicted and discussed in a study conducted by Fintech Robos under “With $170bn, the GCC can Triple the Size of Asset Management and Establish GCC Infrastructure Bank -The Power of Thinking Big for Pension Funds”.

Executing such a plan will promise the creation and development of a new and thriving pension industry that will exponentially grow the financial and investment assets of Bahrain’s economy in the next 10 years.

This article was written for International Adviser by Ebrahim K Ebrahim, founder of Fintech Robos.

They will introduce a fintech-based product for calculating and managing end-of-service benefit (ESB) for expat workers in Gulf Cooperation Council (GCC) countries.

The ESB calculations can be built on investments, universal life or unit linked structures.

Ebrahim Ebrahim, chief executive of Fintech Robos, said: “Whilst companies do account for the liability, very few companies set specific funds aside. The liability is present on the company’s balance sheet; however, it’s almost entirely used as part of working capital.

“Even if the liability has been accounted for correctly, there is no guarantee that the company will have sufficient cash to be able to make payments. In the case where company performance has been poor, the likelihood of having little cash or access to liquidity from the banks is increased.

“We want to build a trusted, purpose-driven regional house of fintech solutions for long-term savings and pensions.”

From 1 February 2020, the regime for expat workers was replaced in the Dubai International Finance Centre (DIFC) with the DIFC Employee Workplace Savings Plan (Dews) or an alternative qualifying scheme (AQS).

There were a number of issues with the previous system that sometimes meant expats received no EoSG at all; or their former employer took a substantial financial hit as the money to be paid had not been put aside over the employment contract and it was, instead, taken out of cash flow.

Dews was set up to:

• Ensure employers pay the ongoing liability on a monthly basis;
• Allow employees to make voluntary contributions from salary deductions;
• Incorporate a trust arrangement to protect employees accrued values; and
• Allow employers to fund prior end of service (EoS) liabilities for each employee.

Zurich was chosen as the administrator of the scheme, while Equiom is the trustee partner and Mercer the investment manager.

Success?

International Adviser spoke to Walter Jopp, Zurich Middle East chief executive, to discuss how successful the Dews scheme has been.

“The DIFC wanted to put global standards in place and in February last year, they essentially put some legislation in place to say that if you are a company that is registered in the DIFC, you have to fully fund for the end of service gratuity, and the way you do that is through Dews,” Jopp said.

“The feedback from the 18,000 employees and 1,200 companies that are members of the scheme has been incredibly positive. In the first 12 months, the scheme has attracted $127m (£91.6m, €105.1m) of assets. The vast majority of the companies in the DIFC have opted to be in the scheme.

“There are exceptions for those companies that have joined another scheme. From our perspective, it’s gone very well in the past 12 months, obviously that will continue to grow.”

But some feel that it is too soon to get a true sense of its long-term success.

Ross Crick, manager of employee incentives at VG, said to IA: “Whilst the Dews scheme was relatively inflexible and compulsory, it has been deemed a success by the DIFC.

“The funds available to select within Dews have performed relatively well so employees should be pleased with the returns. But as we build a better picture of long-term retention, will we truly see if the scheme has been a success or if employers will be looking to other providers and jurisdictions to implement an AQS for added flexibility.”

Lack of options

The Dews scheme has been very good for the UAE, as funds have stayed in the country rather than head to various international financial centres, as was initially predicted.

So, why have jurisdictions like Jersey not also benefitted?

Chris Cain, client services director for Middle East at Equiom Group, said to IA: “Only a limited number of employers choose to fund their end of service liability off balance sheet, this drives the low asset numbers.

“It would take a change in employment law to force employers to set aside their liability to change this position – as we have seen in the case for the Dews plan in the DIFC.

“The opportunity for growth across the Middle East could be significant, but potential providers need to bear in mind the low margin, high administrative nature of workplace savings plans before deciding whether to enter the market.”

Crick added: “A suitable investment manager, trustee and platform provider partnership would be required to deliver a compelling AQS to Dews and information in the run up to the launch of the Dews scheme was scarce.

“Most employers did not have sufficient time to look into an AQS and so they went into the default Dews scheme. It was also difficult for jurisdictions to obtain a ‘certificate of compliance’ signed off by the DIFC, but further to recent lobbying by jurisdictions such as Jersey, this is now an easier process.

“We would therefore expect more AQS’ to be established by DIFC employers who are looking for more flexible and bespoke savings plans for their senior executives.”

Regulation

But Zurich’s Jopp stated that the legislation mandates that companies have a base in the UAE if they want to offer AQS’.

“What the regulator is saying if you want to offer a solution for UAE-based residents, you have to be regulated in the UAE, you have to capitalise the company, so it’s a locally based company, and be properly regulated by the Dubai Financial Services Authority (DFSA).”

He continued: “If you’re a Jersey company, and you want to put in the capital that’s required, and establish yourself a business in the UAE, as Equiom have done, then you are allowed to play.

“What they’re saying you can’t do is be based somewhere else, come over here and then be able to access that market without the regulation.

“That would be exactly the same thing as me trying to sell our Middle East policies into the UK market, I can’t just go off and sell them without the UK regulator’s approval, and Zurich UK does that.

“I think the initial idea was we will just do it on an offshore basis, and I think that the regulator has put some controls in place, and I think rightfully to make sure that the assets for those residents that are based here locally are also regulated here locally by the DFSA.”

Opportunities elsewhere

Dews was only launched a year ago, so it is still a relatively new concept.

But, given its apparent success, more jurisdictions in the Middle East may look to the scheme to open up the market.

VG’s Crick said: “As Dews and AQS are novel to the DIFC, we do expect that other jurisdictions such as the UAE, Saudi Arabia, Qatar and maybe further afield might adopt something similar in order to replace current EoSG style benefits.

“As a stable and robust jurisdiction, which has a wealth of experience and expertise administering employee benefit structures Jersey, and VG, would be well placed to service and administer AQS.”