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Monday, March 4, 2024
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All You Need to Know About the UAE’s End-of-Service Benefits Scheme

The UAE’s Ministry of Human Resources and Emiratisation (MoHRE) and the Securities and Commodities Authority (SCA) recently introduced a new alternative scheme for end-of-service benefits. Here’s a detailed guide to help you understand this new saving scheme designed to attract the best talent.

Voluntary Investment Scheme for End-of-Service Benefits

This voluntary scheme allows employees to invest their end-of-service benefits in well-established investment funds with a proven track record. The primary objective is to provide employees with investment returns on their end-of-service benefits.

The scheme is available to employees in public, private, and free zone companies, offering an alternative to the traditional gratuity payment practice. Employers have the flexibility to choose whether to adopt this scheme. Both expatriates and UAE citizens are eligible to participate in this new scheme.

Key Benefits for Employers and Employees

  1. Enhanced Job Loyalty and Productivity: The scheme aims to boost employees’ job loyalty and productivity.
  2. Operational Efficiency: Employers can focus on their core commercial activities and capital gain rather than the operational aspects of managing and disbursing end-of-service benefits.
  3. Cost-Effective: Enrolling in the savings scheme is cost-effective over the medium term compared to the current end-of-service scheme.
  4. Diverse Investment Options: Employees have various options to generate returns on their savings, aiding in precise financial planning and contributing to a more stable labor market.

Employer Responsibilities in the New Scheme

Employers looking to participate in the new scheme need to adhere to several key requirements:

  1. Select an Approved Investment Fund: Employers must contract with one of the licensed investment funds to implement the alternative system.
  2. Choose Eligible Employees: Employers decide which categories and levels of employees should be included in the alternative system.
  3. Discontinue Traditional System: Employers must cease using the existing end-of-service benefits system for employees chosen to participate in the alternative system. However, employers need to calculate benefits for these beneficiaries based on the Decree Law before implementing the new scheme and must pay these benefits upon the termination of the employment relationship.
  4. Payment of Subscription Amount: Employers are responsible for calculating and paying the basic subscription amount, which should not be deducted from the beneficiary’s salary. These amounts are non-refundable to employers.
  5. Providing Documentation: Employers should provide all necessary documentation and information related to beneficiaries when requested by investment fund service providers.

Subscription Process

Subscriptions are transferred into the investment fund account within 15 days from the start of the calendar month. Employers must submit a request to the MoHRE and select an approved investment fund. Employers are also responsible for choosing which employees should register in the scheme while preserving their entitlements from the previous period.

Subscription Types

There are two types of subscriptions:

  1. Basic Subscription: This subscription is reserved for non-skilled workers.
  2. Voluntary Subscription: Skilled workers, with a monthly salary of at least Dh4,000 or equivalent as per the approved labor classification system, qualify for voluntary subscriptions. Skilled workers can allocate their funds to low, medium, and high-risk assets.

Employee Flexibility

Skilled workers who qualify for voluntary subscriptions have the option to increase their end-of-service benefits by choosing high-return investment portfolios or making additional contributions. If skilled workers opt for high-risk investments, they assume responsibility for potential losses and cannot hold employers accountable for these decisions.

Subscription Percentages

The percentage of the monthly basic salary deducted for end-of-service benefits depends on the employee’s years of service:

  • Employees with less than 5 years of service: Up to 5.83% of their monthly basic salary
  • Employees with 5 or more years of service: 8.33% of their monthly salary
  • The voluntary subscription percentage cannot exceed 25% of the total salary, and it cannot exceed this percentage annually in the case of a lump sum payment.

Mandatory or Optional Participation

Participation in the scheme is optional for both employers and employees. However, employers can mandate participation for selected workers. Workers not chosen by employers to register in the scheme cannot apply for participation.

Withdrawal and Continuation Options

Employees can request the withdrawal of part or all of the voluntary contributions and investment returns to the fund administrator. While withdrawal of the basic subscription amount is prohibited, it can be withdrawn only by the employer upon termination of the employment relationship within one year.

If an employee opts to continue investing in the scheme after termination, a new employer takes over from the previous one, maintaining the subscription with the same fund or selecting another fund manager for future contributions.

Investment Options

Fund managers are required to offer a range of investment options for beneficiaries. These options include:

  1. Capital Guaranteed Portfolio: This low-risk option guarantees capital preservation and is mandatory for unskilled workers.
  2. Risk-Based Investment Options: These options vary in terms of risk, including low, medium, and high-risk assets. Skilled workers can choose their preferred risk level.
  3. Shariah-Compliant Investment Funds: This option adheres to Islamic finance principles.

Flexibility for Employers

Employers can withdraw from the scheme with the MoHRE’s approval, provided they meet specific criteria. This includes a minimum subscription period of one year and meeting certain financial and administrative conditions. Employers can also temporarily suspend basic subscriptions under the alternative scheme for various reasons, subject to the Ministry’s approval.

Responsibilities of Fund Managers

Fund managers play a crucial role in the scheme and are responsible for:

  1. Providing investors with basic investment options with capital guarantees.
  2. Offering various risk-based investment options.
  3. Ensuring the availability of Shariah-compliant investment funds.
  4. Managing a minimum of Dh1 billion in funds and assets.
  5. Having at least three years of experience in managing investment funds.
  6. Providing employers and beneficiaries with semi-annual account statements.

Penalties and Enforcement

In cases where employers fail to make payments for two months, the MoHRE may cease issuing new work permits and impose penalties. A penalty of Dh1,000 per beneficiary per month is imposed if subscription amounts remain unpaid for more than four months. End-of-service benefits for employees in the new scheme are calculated based on their years of service up to the date they join the scheme.

Regulation and Oversight

The SCA grants licenses to investment service providers or fund managers. Financial free zones in the UAE will oversee the development of legislation, regulations, and rules related to the scheme for employees working in these zones.

Conclusion

The UAE’s new end-of-service benefits scheme provides a flexible and investment-oriented approach to employee benefits. Both employers and employees have the option to choose this alternative system, aiming to offer more attractive benefits and financial stability. Skilled workers can tailor their investments based on their risk preferences, while unskilled workers benefit from capital guarantees. Fund managers play a pivotal role in offering diverse investment options. Employers have the opportunity to withdraw or suspend their participation, subject to specific conditions. This scheme adds a new layer of flexibility and choice to the UAE’s labor market.

The UAE’s commitment to improving its labor market and providing attractive benefits is evident in this innovative approach to end-of-service benefits. By offering employees the opportunity to invest their benefits, this scheme aligns with the UAE’s vision for a prosperous and stable labor market.

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