Does Dubai end of service gratuity scheme lack competition?

‘Employers did not have sufficient time’ to look at alternatives and ‘so they went into the default’ plan

The end of service gratuity (EOSG) is a payment linked to how long an employee has worked for a company, which translates into a lump sum when they leave that employer.

From 1 February 2020, the regime for expat workers was replaced in the Dubai International Finance Centre (DIFC) with the DIFC Employee Workplace Savings Plan (Dews) or an alternative qualifying scheme (AQS).

There were a number of issues with the previous system that sometimes meant expats received no EoSG at all; or their former employer took a substantial financial hit as the money to be paid had not been put aside over the employment contract and it was, instead, taken out of cash flow.

Dews was set up to:

  • Ensure employers pay the ongoing liability on a monthly basis;
  • Allow employees to make voluntary contributions from salary deductions;
  • Incorporate a trust arrangement to protect employees accrued values; and
  • Allow employers to fund prior end of service (EoS) liabilities for each employee.

Zurich was chosen as the administrator of the scheme, while Equiom is the trustee partner and Mercer the investment manager.

Success?

International Adviser spoke to Walter Jopp, Zurich Middle East chief executive, to discuss how successful the Dews scheme has been.

“The DIFC wanted to put global standards in place and in February last year, they essentially put some legislation in place to say that if you are a company that is registered in the DIFC, you have to fully fund for the end of service gratuity, and the way you do that is through Dews,” Jopp said.

“The feedback from the 18,000 employees and 1,200 companies that are members of the scheme has been incredibly positive. In the first 12 months, the scheme has attracted $127m (£91.6m, €105.1m) of assets. The vast majority of the companies in the DIFC have opted to be in the scheme.

“There are exceptions for those companies that have joined another scheme. From our perspective, it’s gone very well in the past 12 months, obviously that will continue to grow.”

But some feel that it is too soon to get a true sense of its long-term success.

Ross Crick, manager of employee incentives at VG, said to IA: “Whilst the Dews scheme was relatively inflexible and compulsory, it has been deemed a success by the DIFC.

“The funds available to select within Dews have performed relatively well so employees should be pleased with the returns. But as we build a better picture of long-term retention, will we truly see if the scheme has been a success or if employers will be looking to other providers and jurisdictions to implement an AQS for added flexibility.”

Lack of options

The Dews scheme has been very good for the UAE, as funds have stayed in the country rather than head to various international financial centres, as was initially predicted.

So, why have jurisdictions like Jersey not also benefitted?

Chris Cain, client services director for Middle East at Equiom Group, said to IA: “Only a limited number of employers choose to fund their end of service liability off balance sheet, this drives the low asset numbers.

“It would take a change in employment law to force employers to set aside their liability to change this position – as we have seen in the case for the Dews plan in the DIFC.

“The opportunity for growth across the Middle East could be significant, but potential providers need to bear in mind the low margin, high administrative nature of workplace savings plans before deciding whether to enter the market.”

Crick added: “A suitable investment manager, trustee and platform provider partnership would be required to deliver a compelling AQS to Dews and information in the run up to the launch of the Dews scheme was scarce.

“Most employers did not have sufficient time to look into an AQS and so they went into the default Dews scheme. It was also difficult for jurisdictions to obtain a ‘certificate of compliance’ signed off by the DIFC, but further to recent lobbying by jurisdictions such as Jersey, this is now an easier process.

“We would therefore expect more AQS’ to be established by DIFC employers who are looking for more flexible and bespoke savings plans for their senior executives.”

Regulation

But Zurich’s Jopp stated that the legislation mandates that companies have a base in the UAE if they want to offer AQS’.

“What the regulator is saying if you want to offer a solution for UAE-based residents, you have to be regulated in the UAE, you have to capitalise the company, so it’s a locally based company, and be properly regulated by the Dubai Financial Services Authority (DFSA).”

He continued: “If you’re a Jersey company, and you want to put in the capital that’s required, and establish yourself a business in the UAE, as Equiom have done, then you are allowed to play.

“What they’re saying you can’t do is be based somewhere else, come over here and then be able to access that market without the regulation.

“That would be exactly the same thing as me trying to sell our Middle East policies into the UK market, I can’t just go off and sell them without the UK regulator’s approval, and Zurich UK does that.

“I think the initial idea was we will just do it on an offshore basis, and I think that the regulator has put some controls in place, and I think rightfully to make sure that the assets for those residents that are based here locally are also regulated here locally by the DFSA.”

Opportunities elsewhere

Dews was only launched a year ago, so it is still a relatively new concept.

But, given its apparent success, more jurisdictions in the Middle East may look to the scheme to open up the market.

VG’s Crick said: “As Dews and AQS are novel to the DIFC, we do expect that other jurisdictions such as the UAE, Saudi Arabia, Qatar and maybe further afield might adopt something similar in order to replace current EoSG style benefits.

“As a stable and robust jurisdiction, which has a wealth of experience and expertise administering employee benefit structures Jersey, and VG, would be well placed to service and administer AQS.”

Source: IA