Announcement of Two End of Service Benefit Alternative Schemes

On 4 July 2024, the United Arab Emirates’ (UAE) Labour Ministry and Financial Regulatory Agency announced two alternative End of Service Benefit (EOSB) schemes.

In a joint statement, the Ministry of Human Resources and Emiratisation (MoHRE) and the Securities and Commodities Authority (SCA) announced that they had authorized Lunate and Daman Investments as the first investment funds to operate under the Voluntary Alternative EOSB (Savings Scheme).  

Currently, expatriate employees working in the UAE’s private sector (except for those employed in the Dubai International Financial Centre (DIFC) freezone) are entitled to an EOSB payment in accordance with the UAE labour law. The new schemes allow employers to register with either of these approved investment firms and make monthly contributions to an investment fund instead of paying an EOSB cash lump sum to employees.

Key highlights 

• This announcement means that employers can now opt for an alternative to the EOSB scheme and make monthly contributions to an investment scheme for their registered employees.
• The two Abu Dhabi-headquartered investment firms, Lunate and Daman Investments, offer a variety of investment options, including Sharia-compliant funds.

How does the savings scheme work? 

To enroll their workforce, employers need to submit a request to MoHRE, specifying which of the two investment funds they choose. Once enrolled, participation in the voluntary scheme becomes mandatory, and employers must discontinue the current EOSB system.

Any existing EOSB accruals will still need to be accounted and paid out in accordance with existing regulations.

Enrollment of Gulf Cooperation Council (GCC) nationals is voluntary at this stage.

Employers contribute to the chosen savings scheme as follows:

• 5.83% of their employees’ monthly basic salary if the employee has not completed five years of service
• 8.33% if the employee has served more than five years

Employees can also make additional voluntary top-ups of up to 25% of their total annual salary.

What is the impact of this scheme? 

The introduction of the alternative scheme provides greater benefits to both employers and employees. Employers now have the option to provide an alternative to the cash lump sum that would typically be paid at the end of employment, and instead make contributions on an ongoing basis into an investment scheme. This potentially significantly reduces an employer’s EOSB liability which is always calculated based on the final basic salary, whereas the alternative scheme – although paid into the savings scheme on an ongoing basis – sets each month’s contribution at the employee’s basic salary for that month. 

From an employee’s perspective, this provides security for their end of service entitlements and the opportunity to control their investments. Furthermore, the introduction of the new schemes can be seen as more consistent with international pension schemes where both employees and employers contribute to a trust, which provides an investment return over a longer period.

Deloitte’s view

This represents a significant development in the EOSB regime across the UAE, providing employers with the opportunity to offer an alternative arrangement to the existing practice. It also builds on earlier developments in 2020 in the DIFC when the DIFC Employee Workplace Savings (DEWS) plan was introduced as an alternative to EOSB.  

The approach taken by the federal government has been somewhat different from the DIFC (noting that the DIFC has its own labour law and so is not subject to federal labour law). Notably, the federal government is introducing alternatives to EOSB as optional (whereas the DIFC mandated the move away from EOSB). While DIFC authorities permitted the use of employer-proposed alternative schemes (subject to a qualification process), the federal approach has been to provide employers with investment funds that are approved.

Across the market, the expectation is that employers will take the approach that aligns with their needs. Some employers are expected to move quickly to enroll in either of these funds, driven by employee sentiment and/or potential cost savings versus the existing EOSB entitlements. Others may choose to wait to observe future developments (e.g., whether the use of existing international savings/pensions plans may be possible). In all instances, it is expected that the landscape will continue to evolve towards increased regulations and increased options around EOSB.