DIFC has recently rolled out a set of regulations which effectively change the end of service gratuity system in this zone. This article has all the details that you should be aware of about these new regulations, the problems these regulations solve and underlying challenges.
How did the Dubai International Financial Center (DIFC) Reform the end of service gratuity for expats?
The Dubai International Financial Center (DIFC) is a special economic “free zone” in Dubai.
In 2016 the DIFC began to examine how to overhaul the gratuity scheme for expats and, in line with the global best practice, replace it with a new, “employer-funded” defined-contribution savings scheme. February 2020 onwards, all employers in the DIFC are now required to register for the new scheme or join a qualifying alternative scheme. The new savings scheme, which the DIFC launched in January 2020, will be funded by monthly employer contributions that would be invested on behalf of expats. At retirement, expats would have the option to receive their savings in monthly payments, rather than as a lump-sum.
DIFC is the first free zone in the UAE to embrace a defined-contribution gratuity plan, and this reform could be a catalyst for pension reform in the UAE’s other free zones and the broader mainland.
What are the advantages of the new DIFC savings scheme over the old end of service gratuity scheme?
For employers the key benefits include:
- A stronger incentive for attracting talent to and retaining talent in the DIFC
- Little or no end of service gratuity funding liability when an employee leaves the organization as employer contributions are not deferred
- Safety of retirement savings as contributions are managed not by an employer but by an independent third-party administrator
- Employee contributions are voluntary
- Optional rollover of existing end of service gratuity benefit (The amount that an employee has already accumulated before beginning of the new scheme) into the new scheme
What are the possible challenges for the new scheme?
The new scheme is a step in the right direction as it protects the interest of the employees. However, it comes with its own set of challenges:
- It has a somewhat of a complex governance and oversight structure with several parties involved in its management. While this tiered management structure can ensure transparency in the running of the scheme, it can also create conflicts of interest amongst the various parties. For example, a complex management structure can create additional unforeseen costs that lower the total returns for employees
- The scheme intends to charge employee members an annual management fee of approximately 1.25%-1.5% of invested funds with no hidden fees. While this fee seems low, some of the scheme’s fixed-income investments may not even make this much in annual returns. On top of that, the underlying funds the scheme invests in may not have a clear structure, and this complexity may increase management fees
FinFlx has its own end of service gratuity maintenance system that it runs with the companies. FinFlx has a dedicated team of fund advisors working towards improving the returns on the amount invested with them and there are no hidden fees. Additionally, you know where your gratuity money is invested (Whether you decide that for yourself or let FinFlx’s advisors make that call) thereby eliminating any additional process overhead, otherwise seen in traditional fund management programs.