Retirement Planning: Benefits for Gulf-based Expatriates

Overseas postings are becoming increasingly long-term as expats embrace new surroundings and set down roots, such as property ownership. Where previously a stint abroad may have involved a secondment from a home country and a single employer, it is now often a lifestyle choice. One of the dangers for these long stayers is a neglect of their retirement provision. This is especially relevant where they reside in a country without a compulsory pension framework.

In the Gulf, employees are typically paid a lump sum on departing employment – known as an ‘End of Service Benefit’ (EOSB). The sum payable is based on salary scale and length of service. EOSBs are often funded from the business’s working capital when an employee departs, and relatively few employers make off-balance sheet provision. The risk is that, in challenging times, a company may have little, if anything, to fund its EOSB liabilities to departing staff.

This position is simple to address. If an employer establishes a trust to hold the EOSB funds, it can pay into this trust periodically to keep pace with its EOSB liabilities. The funds within the trust are legally separate from the business’s assets.  This offers greater peace of mind for employees, knowing that the funds are effectively ‘ringfenced’ and may only be called upon for EOSB purposes.

Subject to anticipated staff turnover, the funds within the trust can be suitably invested to meet short-term and longer-term liabilities. The returns generated and accumulated should then mitigate the size of any future payments into trust and at least cover the modest cost of maintaining the trust.

An EOSB pay-out, even a generous one, is unlikely to be sufficient to cover an employee’s retirement needs fully, so employers that want to attract and retain the best staff can go further by creating a ‘top up’ scheme to reward key individuals. The UAE labour law offers some flexibility in respect of potential structures, as Article 141 states that:

In any establishment where a pension or security schemes or similar schemes are maintained, the employee who is entitled to retirement pension may select either this latter or the prescribed gratuity or whichever from both thus is more favourable to him.

This flexibility allows for creating more conventional, defined contribution-style arrangements, provided that they offer benefits that are at least as generous as the EOSB. The Dubai International Financial Centre (DIFC) is leading the way in the Middle East region, having amended its own laws to introduce the DIFC Employee Workplace Savings (DEWS) Plan in February 2020.

The DEWS Plan introduced a progressive end-of-service benefits plan to restructure the previously defined benefit employee plan into a funded and professionally managed defined contribution plan. DEWS also offers a voluntary savings plan, allowing employees working in DIFC to help boost their savings.

One year after its launch, the DEWS Plan had enrolled 19,182 members from 1,187 DIFC firms and had attracted over USD127 million in assets under management. This scheme will likely be extended to companies in some of Dubai’s other free trade zones.

International businesses with multiple sites overseas may also consider a similar international pension plan (IPP) or international savings plan (ISP). These plans are especially relevant in cases where there is no local pension system or pension tax relief or where the administrative burden of setting up a local arrangement makes it impractical.

Typically, an IPP or ISP (the latter is differentiated by not having a minimum retirement age) would be based in a tax-neutral jurisdiction such as Guernsey. This means there is no withholding tax on pension benefits or scheme assets, so members only need to consider their local tax liabilities. Guernsey also has a well-established legal and regulatory framework for such arrangements.

An IPP or ISP should ideally be designed to enable employers to add new sites/companies to the existing master trust arrangement with minimal fuss and expense. There should also be scope to tailor scheme rules to meet any specific requirements, either from a commercial perspective or to accommodate local labour laws.

Vesting periods, whereby benefits are enhanced upon achieving specified service milestones, are a highly effective way of encouraging loyalty and incentivising longer-term staff. Any arrangement should also come with an appropriate choice of investment options, from default funds based on risk appetite and time horizon to passive funds that mirror an index to those that adhere to environmental and social criteria.

Arguably the biggest cost for employers is inertia. A good employee benefit structure differentiates your business from competitors, assists cash flow and budgeting, and encourages staff loyalty. Employee turnover carries a high cost. Smart companies work hard to measure employee satisfaction and act to minimise turnover. The bottom line is that it’s much cheaper to keep your current employees motivated and productive than it is to find, hire and train new ones.

Our global office network, our independence, our reputation for excellence in scheme administration and our record of innovation and technical expertise has propelled the Sovereign Group to become a market leader in providing employee benefits solutions. We would be delighted to assist your business in designing and implementing the best solution alongside GSB Capital.

Matt Tailford

Matt is a director of Sovereign Corporate Services in Dubai and Sovereign Wealth in Gibraltar.

Since moving to the UAE in 2009, Matt has worked extensively with individuals, businesses and financial advisers in the area of employee benefits and pension planning. Before leaving the UK, Matt worked as a pension specialist for a leading UK financial advisory business.

He is a Chartered Financial Planner and a Fellow of the UK’s Personal Finance Society.

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