Dubai: Pension investment schemes are starting to gain momentum in the UAE, with more and more employers realizing they need to make their retirement funds work better than in the past.
At the same time, workers are also taking a more hands-on approach to deciding how much their pension contributions should be.
But on the part of employers, it is still not easy to get them to sign up and free up the gratuity funds at their disposal. “Most of these (remuneration-linked) funds, especially in the SME space, are just ideas on paper,” said Mohammed Qasim Al Ali, chief executive of National Bonds.
“I’ve talked to a couple of big companies that are on the right track and they’re putting money in the bank so they can generate something.
“The most important thing is to convince employers that it’s time to start – even if they can’t finance the funds they have accumulated before, which could be Dh1 million, Dh2 million or whatever.
“Start over – because eventually the government may decide to force the private sector to fund service terminations (spending). Better get ahead of the game and take care of your staff.”
UAE authorities are streamlining what will eventually become the country’s full-fledged pension framework, for both citizens and resident expatriates. In this regard, Dubai has since last year passed a scheme whereby all employees of government entities can make monthly contributions towards their end-of-service benefits. These funds are managed by third-party entities to provide the best returns. (The pension scheme known as “DEWS” was originally for DIFC licensed entities.)
When it comes to employer contributions to end-of-service funding, National Bond’s chief executive said employers, especially SMEs, need to start with smaller contributions and work their way up. “The message is getting to the big companies, but the smaller companies are still struggling with liquidity and cash flow,” Ali said. “They’ll take longer – but they have to start now.”
“It is well known that most end-of-service benefits exist only on the books of many companies. Most of the time, they are not invested on behalf of employees and do not generate any revenue or growth.
“We believe there is a niche market for simple pension schemes for employers and employees.”
With pension schemes, you are changing the culture and mindset of UAE employers
– Mohammed Qasim Al Ali of National Bonds
There have been rumors for some time that the authorities are about to introduce a major overhaul of the decades-old end-of-service benefit scheme. Pensions are seen as a natural progression in this regard and, recently, an improved pension was introduced for UAE nationals.
Businesses, especially SMEs, often make irregular contributions to their honorarium plans. More importantly, in a tougher economic environment, the cost of debt has risen sharply after successive rate hikes since March 2022. Therefore, where possible, businesses have drawn upon their own funds rather than set aside honorariums.
Industry sources said it will take some transition time for companies to control such plans internally.
That’s where schemes like the state bond “golden pension” scheme launched last October will help. Companies, large or small, can deposit their fees into the company, which then distributes them for varying returns. Companies such as Dubai Taxi, which employs 9,000 people, have signed up so far.
“When we talk to businesses, we talk on different levels,” Ali said. “It starts with the end-of-service benefit fund that they deposit with us, which they can choose to register as an account with the company. Then they distribute rewards and awards to their employees.
“Or they require us to open an individual account for each employee so employees can see their service terminated.
“When you look at employees, there are people who are not financially aware, and then there are more experienced, higher-level employees who can decide what investments they want to put their money in, what risk profile they should adopt, and what assets to get into. category.
“When it comes to the former, he just wants to see his end-of-service benefit in a safe place that grows at least at a rate that offsets inflation. That’s our approach, and we got a buzz from the market as soon as we announced it.”
How the National Bond ‘Golden Pension’ Works
- Employers will begin to deduct monthly amounts equivalent to the employee’s termination of service. They can add funds to accounts in state bonds.
- They can, at their discretion, keep it under the employer’s name or under the individual employee’s name.
- An employee may also contribute additionally to savings through the company or directly through National Bonds, which provides him/her with an account number for direct contributions.
- Deductions made by the employer for termination of service cannot be redeemed or refunded. Anything beyond that is employee voluntary.