The UAE is mulling a pension scheme for expatriate workers and may use some of the capital to build a local asset management industry and boost financial markets, it was reported on Sunday.
The Gulf state’s more than seven million foreign workers may be asked to contribute to a pensions system if plans progress, newspaper the Financial Times reported.
“We do have a starting point of about eight percent contribution of basic salary from the employer,” the Dubai Department of Economic Development’s Harun Kapetanovic, who is heading up a team looking at the option for establishing a pensions scheme, told the paper.
It is not clear whether the plan would be compulsory, or the amount expatriate workers would be expected to contribute.
A pensions plan could raise hundreds of billions of dollars in capital, which could be used to help grow the UAE’s fledgling asset management and boost local bourses, Nigel Sillitoe, chief executive of research firm Insight Discovery, told the paper.
Kapetanovic said the capital would not be used to fund government development projects, but would aim to “enhance the welfare of expatriates”.
In the absence of a mandatory pension schemes in the Gulf, firms are required to provide an end-of-service payout to employees, calculated on the length of the employment and basic salary.
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In recent years, Gulf firms have increasingly set aside capital to fund end-of-service employee payoffs following a rise in the number of disputes with staff, a report from consultancy firm Towers Watson said in June.
“The proven practice has been for end-of-service benefits to be simply accrued, accounted for on the books but the actual cash for that remaining within working capital,” said senior consultant Iain Collins. “[Companies] are beginning to separate funds out…either in whole or in part.”
Saudi Arabia has no cap on the total amount employees can receive while the UAE and Kuwait cap payouts at equivalent to two years’ pay.
A number of companies are already farming out the management of end-of-service funds to external firms, creating a lucrative niche for investment firms and the same system could be adopted if a pension scheme were to be introduced.
“Most multinational employers in the UAE will make funded provisions for their gratuity obligations under the law, and increasingly these are managed externally,” said Samir Kantaria, partner and head of employment at Al Tamimi & Company.
“In certain instances, depending on the size of the organisation and the level of the funding, the fund becomes self-funding through the interest the fund amount accrues.”