Abu Dhabi, UAEThursday 27 June 2019

Almost half of UAE residents spend their gratuity on debt, bills or luxury items

Study by Swiss insurer Zurich finds majority want their employer to provide a savings plan to fund retirement

While the employer believes the payment should be made after the visa is cancelled, the employee says it should be paid before. So who is right? Getty Images
While the employer believes the payment should be made after the visa is cancelled, the employee says it should be paid before. So who is right? Getty Images

Almost half of UAE residents will use their gratuity payment to clear outstanding debt, pay a bill or buy a luxury item, a new survey from Swiss insurer Zurich found.

Of the 47 per cent of respondents who do not plan to direct their end-of-service benefit towards retirement savings, 22 per cent will use it to pay off debt, 15 per cent will spend it on a holiday or luxury item, and 10 per cent will use the money to pay school fees or rent, the poll by Zurich and YouGov of about 750 UAE residents found. Respondents could chose more than one answer on how they would allocate the gratuity payment.

They create a very cost-effective way for people to save. We accept that when we engage with big employers that employees come and go so it’s not a term-related saving arrangement – it’s clean.

Peter Cox, Zurich

“Paying off debt and using the benefit to pay off a large bill seems to be more prevalent for those that are older but they also have concerns about saving for their financial future,” Peter Cox, head of international pension plans sales at Zurich, told The National. “The majority are aware their end-of-service benefit is not enough to cover their intended retirement expenses and they feel employers should be doing more to facilitate the opportunity to save through the workplace."

Employees are entitled to a gratuity - an end of service payment - after completing one year of employment, with those that have worked between one and five years paid 21 days of basic pay. After five years, they are entitled to 30 days of basic pay for each year served after that. The defined benefit is decided by an employee’s length of service and final basic salary at the time of leaving.

The UAE plans to “enhance and improve” the end-of-service gratuity awarded to employees to help companies attract and retain talent, and ensure they can adequately fund the liability. Abdulrahman Al Awar, director general of the Federal Authority for Government Human Resources, said studies are being carried out to improve the system.

Zurich supplies employer-sponsored workplace savings schemes to about 70 companies across the GCC, with $1 billion in assets under management.

According to the Zurich study, 83 per cent of those polled said their employer should do more to help them provide financially for their retirement. And while some residents are saving their gratuity payment – 39 per cent save, 35 per cent put down a deposit to buy a property and 20 per cent direct it towards a retirement fund – the majority 64 per cent do not feel it is adequate to cover their retirement expenses.

Peter Cox of Zurich says 'saving at source' via a workplace scheme is a far better way to prepare for the future than spending your salary and then saving. Leslie Pableo for The National  
Peter Cox of Zurich says 'saving at source' via a workplace scheme is a far better way to prepare for the future than spending your salary and then saving. Leslie Pableo for The National  

Experts say the gratuity was never designed to cover retirement expenses and with many residents failing to save adequately on their own or treating the benefit like a mid-career benefit, they can be left with a big hole in their savings.

“Seventy-five per cent of western expats feel the end-of-service benefit is not enough – the highest compared to other nationalities – and that’s probably because they have higher expectations of a company pension plan," said Mr Cox. "If you were in any other developed economy, savings in the workplace would be an accepted part of an employment package. Here it’s not, and people are on their own. It’s save yourself and that has to change.”

Dubai International Financial Centre is looking to replace gratuity with a funded workplace savings plan for its expatriate workforce by January 1, 2020. The free zone has proposed a trust-based savings vehicle that will handle contributions, invest the money and pay the benefits.

Martin McGuigan, a partner at Aon Retirement Solutions and McLagan in Dubai, told The National earlier this month that the DIFC proposal “is a significant move towards off balance sheet funding of end-of-service liabilities".

The Zurich study found that 70 per cent of respondents were concerned about employers that did not separate the end-of- service benefits from the balance sheet. According to a Willis Towers Watson study, a fifth of the country’s companies face end-of-service liabilities of $15 million (Dh55.1m) or more, and nearly nine in 10 entities in the UAE have no plan in place to fund gratuities.

Mr Cox, who is part of the DIFC Working Group examining the various options available, said the free zone's proposed reforms could be a catalyst for change across the country.

“The very fact that companies [in DIFC] will be setting assets aside in relation to the statutory benefit is a plus. The fact they are making it available to save in the workplace through salary reduction in a very cost-effective way – that’s also a big tick,” he said. “If what the DIFC proposes is successful, then it’s a template that can be used in other free zones and at a federal level.”

With much criticism in the UAE in recent years around expensive fixed-term savings products, Mr Cox said workplace schemes come with lower charges and better rates because “employers are buying services in bulk”.

“They create a very cost-effective way for people to save. We accept that when we engage with big employers that employees come and go so it’s not a term-related saving arrangement – it’s clean," he said. "No cost of entry and no cost of leaving. All of these advantages can be brought through the workplace.”

Updated: March 27, 2019 09:13 PM

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