Workers across the Middle East are potentially sleepwalking into poverty in their retirement because they are too reliant on the lump sum payment they will receive when they leave their employer.
The end of service gratuity (EoSG) for non-UAE nationals applies to those who have one year or more in continuous employment.
If the role lasts for less than one year, the person is entitled to nothing. Those with one to five years of employment will receive a full gratuity worth 21 days’ salary for each year of work.
Anyone who has worked continuously for a company for more than five years is entitled to a full gratuity of 30 days’ salary for each year of work following the first five years.
Smaller payments than expected
But research from Old Mutual International and Quilter Cheviot has found that around 59% of respondents are either fully or partly relying on their payment for retirement.
Of the 130 people living in the UAE who were surveyed, 84% said they will receive an EoSG when they leave their company.
The respondents included expats, non-resident Indians and GCC nationals and they needed to have a minimum of $50,000 (£38,400, €44,000) invested to be included in the survey.
Most (62%) expect an EoSG in excess of AED20,000 (£4,223, $5,445, €4,789) from their current employer.
However, there are some instances when the gratuity could be withheld, with the most common reason being some form of breach of contract. Additionally, if the employee is sacked the payment is nullified.
OMI and Quilter Cheviot said this reliance on EoSG, “could be cause for concern, as the research shows that on average, they are relatively small payments”.
Lack of knowledge
Chris Hall, director at Vantage Pension Trustees, spoke to International Adviser about the survey: “From our work in the GCC, we continue to be surprised by the widespread lack of knowledge on the level of a person’s EoSG entitlement, with an oft-held view that it will see them through their golden years.
“Coupled with general inaction surrounding people’s retirement planning, many GCC workers are facing a ticking time bomb.
“With non-national employees generally staying longer in the region, we are, however, starting to see more forward-looking employers recognising this potential deficit, and firms looking to provide a more western-style scope of employee benefits – including company pensions schemes and/or employee savings plans.
“This can only bode well for the region’s employers and employees as the take-up increases.”
The end-of-service gratuity offering in the Middle East has become an important aspect to the financial advisory market – and some jurisdictions have introduced international savings plans (ISP) to help combat the issues surrounding the scheme.
Introduced on 1 January 2019, Jersey’s ISP scheme enables multinational and international companies to set up savings plans in Jersey for non-resident employees in a bid to appeal to the Gulf region.
Geoff Cook, chief executive at Jersey Finance, told IA: “It’s clear that there is both a real need and a real demand amongst multinational firms in the UAE for appropriate plans that can support their internationally-mobile employees in the long-run, to enable them to save for their retirement and plan for their future flexibly and through robust structures.”
Also, Guernsey unveiled a tax exemption for ISPs, where the beneficiaries are non-resident on the island and none of the income is sourced from Guernsey.
Stephen Ainsworth, president of the Guernsey Association of Pension Providers, told IA: “The role of end-of-service gratuity benefit schemes for today’s international workers is increasing in importance, as this UAE survey indicates.
“The increasing dependence upon end-of-service gratuity benefits for employees retiring in the UAE is focusing new attention on the funding of such benefit promises.”
The UAE’s Federal Authority of Human Resources (FAHR) is even running a conference in February on this topic, as the country looks to improve communication surrounding the scheme.
Correction: This story initially cited the EoSG calculation for UAE nationals instead of expats. The UAE gratuity is more generous and calculated as one and a half month’s salary for every year for the first five years of employment. It rises to two months’ salary for the next five years and then to three months for every year after that.