Weighing up Dubai’s proposed pension plan for expats

Weighing up Dubai’s proposed pension plan for expats
25 May 2012

FOR the very first time in the Gulf, the state is considering stepping in to create a universal pension scheme for workers in Dubai.

The Department of Economic Development (DED) is working alongside the World Bank to establish the viability of such a scheme.

Instead of pension contributions, for the last 40 years foreign workers have benefited from an end-of-service scheme known as gratuity. Upon termination of employment, employees receive a lump sum calculated on the length of their salary and contract.

This is the practice throughout the Middle East, although it does differ slightly from state to state. For example, Saudi Arabia has no limit on the amount that can be received while the UAE limits payouts to the equivalent of two years’ salary.

Question marks

It is not clear whether the UAE’s proposed pension plan would be compulsory, or the amount foreign workers would be expected to contribute, although a figure currently being bandied about is employers paying in 8% of an employee’s salary.

Crucially, what is not clear is whether this would be taken from the employee’s salary or whether it would be in addition to it. Or would employees be required to match contributions in order to qualify? These are details, but they are important ones.

Another question that need answering before we can really assess the quality of the proposed scheme involve charges, access, investment options and whether the scheme would be voluntary or mandatory.

Potential benefits

Such a scheme could have a number of potential benefits. First and foremost it would protect employees if their company becomes insolvent. During the recent crisis, it became apparent that many, if not the majority, of firms in the UAE had failed to plan for the huge cost of gratuity in the event of mass redundancies.

Furthermore, if a firm becomes insolvent, employee gratuity isn’t protected – it is lost. By ring-fencing employee pension benefits on an ongoing basis, employee benefits should be protected.

If invested wisely, there is also the potential of receiving a much higher lump sum on return than the sum total of contributions alone, especially over the long-term thanks to the wonder of compounding. The flip side to this is obviously that if invested poorly, the member could get back less than total contributions.

Then there is the obvious benefit of expats being forced (or at the very least actively encouraged) to save some of their tax-free earnings. Currently, far too many people come to Dubai with such good intentions, but they soon succumb to other temptations.

Possible drawbacks

That doesn’t mean that there aren’t possible pitfalls. Probably the biggest concern for many is, at its heart, is this proposal for the benefit of expat workers or the local fledging stock markets?

More cynical observers have commented that the scheme could have the potential of raising hundreds of billions of dollars in capital which could be used to help grow the UAE’s fledgling asset management sector and boost local bourses. This would suggest that the scheme is more for their benefit than yours.

However, Harun Kapetanovic, the head of the DED, has said that the money raised would only be used to enhance the welfare of expats and not on funding existing development projects.

In addition, does the concept of a retirement plan really work in such a notoriously transient environment? It does if it is as portable and accessible as other offshore savings plans, but failing that the answer is probably not.

Expats! What do you think of the proposed scheme? Share your views with cashy...

Pic credit: freedigitalphotos.net

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