Pensions in demand as expats stay longer in the Gulf

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• UAE catalyst was DIFC Employee Workplace Savings Plan
• Survey shows over half of residents have not planned for retirement

Expats are staying in the Gulf longer than the global average, leading to greater demand for pension services in the UAE and Saudi Arabia.

“We have observed an increase in interest and discussion in the Middle East around offering pension type savings for expatriate employees,” said Robert Ansari, head of investment and retirement for India, the Middle East, Turkey and Africa at Mercer, a professional services firm in New York.

Ansari said the catalyst for the increased demand was the introduction of the DIFC Employee Workplace Savings (DEWS) Plan, which was launched in February 2020 for workers based in the Dubai International Financial Centre (DIFC), the emirate’s main financial hub.

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The plan was designed to replace the end-of-service gratuity scheme, where expat employees receive a certain amount of money at the end of their employment, with the percentage applied rising after one, three or five years.

DEWS was made mandatory for employees of all Dubai government departments and since July this year 65 such entities have enrolled, with their expatriate employees set to be added to the plan before December 2023. 

“Free zone authorities will also enroll into DEWS on a mandatory basis from January 2023 – with mandatory employer contributions being paid into DEWS on behalf of expatriate employees,” Ansari said.

“Emirati employees will have the option to make voluntary contributions into DEWS.

“While there is no formal communication and no timelines provided as yet, it is expected that DEWS could become available to private sector employers to participate on a voluntary basis.

“Indications are that private sector companies will have the choice to participate in a qualified scheme.”

The majority of private sector employers do not offer pension savings type plans, preferring to depend on the end-of-service gratuity scheme, as mandated by the UAE Federal Labour Law.

As a result of the expansion of the DEWS plan, Ansari said he has observed that many private sector employers in the UAE, whether in free zones or onshore, want to learn more about introducing pension savings for their employees. This trend has also been evident in other Arab countries.

“We have also noted increased interest for information on pension savings from employers in the Kingdom of Saudi Arabia and other countries in the Middle East,” he said.

The increased demand comes as the UAE’s retirement income system placed 25th in the rankings of the 14th annual Mercer CFA Institute Global Pension Index.

Iceland and the Netherlands topped the list of 44 jurisdictions surveyed, representing 65 percent of the world’s population. 

The UAE’s overall index score improved from 59.6 in 2021 to 61.8 in 2022.

The report said the improved score was due to the UAE’s generous retirement benefits, and their high labour force participation rate for those aged over 55.

Pension schemes for Emirati employees, who contribute five percent of their salary with their employers adding between 12.5 and 15 percent, are administered by the Abu Dhabi Pension fund (ADPF), the Sharjah Social Security Fund (SSSF), and the General Pensions and Social Security Authority (GPSSA).

“A number of local and international firms with UAE operations recognise the benefits of private pensions and employee workplace saving schemes as a means to attract and retain talent,” Ansari said.

“The recent launch of the unemployment pension scheme — the so-called ‘Golden’ pension scheme — is aimed at enabling locals and expats to invest in their future while supporting the private sector with employee retention, ultimately furthering the government’s ambition to be a magnet for top talent.”

Planning for longer

The rise in pension schemes comes on the back of two reports: the first shows that over half of UAE residents have not planned for their retirement; while the second finds expats are opting to live longer in the UAE than the global average.

A survey by insurance company Friends Provident International found that 45 percent of UAE residents have no plan in place for their older years, with 44 percent hoping to retire at 55 and 63 percent hoping to have stopped work by the time they turn 60.

At the same time, the 2022 edition of the 360° Global Wellbeing Survey, compiled by health services firm Cigna, found that the average length expats stay in the UAE is about four years and five months, compared to a global average of three years and three months.

The company attributed that figure to a “better quality of life, finances and a more stable job market” in the UAE.

“Expats here [in the UAE] typically would have more disposable income [than in] their home country, but it’s what they do with it that will make the difference in the long term,” said Joshua Nash, associate partner and expat financial planner at GSB Capital in Dubai.

“Nearly all UK and European expats will be giving up employee and government pensions outside of manually making contributions, and [they will also be forgoing] free or subsidised education.

“You need to close this gap somehow, and it’s near impossible to do that with just cash surplus or gratuity payments.”

Keren Bobker, an independent financial advisor and senior partner at Holborn Assets based in Dubai, pointed out that most expats cannot contribute to actual pension arrangements in their home countries, but she believed that the alternative investment options available are better than they were in the past. 

“There is no need to contribute to a 20 to 25-year plan with high charges where you are effectively locked-in and hugely penalised if you want to encash,” Bobker said.

“We have investment options with low charges, total flexibility in terms of contributions, no exit penalties, and thousands of fund options.

“The reality is that the majority of people I speak to are underfunded in terms of their retirement planning, and that is taking into account pensions, other investments, and property.”

Dubai-based Rupert J Connor, partner at Abacus Financial Consultants, said the increased interest in pensions was a step in the right direction and will hopefully lead to more expats starting to adequately plan for the future.

“I feel that individuals would be well advised to also make their own provisions whilst living in the UAE. I would say that anyone over 30 should be making additional personal contributions towards a pension (and ultimately their retirement) or even better if they start earlier, due to the cost of delay.

“Companies in the UK are legally required to provide a pension scheme for their employees – usually the individual will contribute an amount and the company will match this. We have seen this rolled out in the DIFC and hopefully this is the beginning of it being a staple across the rest of the UAE in the years to come.”