End of service benefits in the UAE

Ever since I started working with clients in the Middle East, and in particular in the UAE back in 2016, it’s often been said that imminent change is afoot in the End of Service Benefit (EOSB) space. The Emirati structure in the UAE (coupled with the Free Zone concept) has resulted in rumour and speculation as to which region or zone might adopt which solution to the conundrum of improving the unfunded defined benefit-style EOSB obligations - and all the headaches this brings for employers.

The first major shift was seen in 2020 when the Dubai International Financial Centre (DIFC) introduced its mandatory funded workplace savings regime. As much as that was a significant change to the existing EOSB regime, it was limited in its application to those expatriate employees in the DIFC, which currently stands at around 30,000 individuals. Since then we have seen limited extensions of this concept but nothing that could be said to significantly alter the broader landscape.

All that might be about to change. In early September 2023, it was announced that employers across the entire UAE would have the opportunity to voluntarily fund future EOSB obligations. Whilst on first glance many might react by saying “it’s only voluntary” (and so it is not a replication of the DIFC regime), to do so risks missing the value of the opportunity from an employer and employee perspective. Taking advantage of the voluntary regime will remove the future defined benefit-style EOSB obligations. More importantly, it will do so in a manner that reduces the EOSB costs for the vast majority of employers.

Take Aisha, a non-Gulf Cooperation Council national employee who has worked in the UAE (but not in the DIFC) for 15 years when she leaves employment. At that time her annual base salary is AED 250,000. Under the current regime, her EOSB payment will equate to AED 277,397 (representing 21 days annual salary for each of her first five years of employment and 30 days annual salary for each of her next 10 years of employment). Let’s assume wage inflation has been at a rate of 3% per annum during her employment, meaning 15 years ago she was earning an annual base salary of AED 165,250 - and that rose at 3% each year to AED 250,000 today. Let’s also assume that any funded workplace saving EOSB scheme also grew at the same rate as wage inflation (here, 3%). In that scenario, had Aisha’s employer funded her EOSB on a monthly basis, her EOSB pot on termination would have been worth AED 281,977, at a cost of AED 231,022 to her employer. 

Details of when and how each Emirate and Free Zone will introduce the voluntary funded scheme is yet to be clarified. Much work is doubtless being undertaken to bring this to life in each of those regions, but what we do know is that a private sector investments and savings fund will be set up. At this stage, employers should understand their options and model the cost implications. Moving to a funded regime brings different challenges, as first-hand experiences from the DIFC changes showed us back in 2020. Communications with employees is at the heart of a smooth and successful change. Those challenges are surmountable and offer the prospect of significant cost savings whilst providing the not insignificant benefit of comfort and certainty for employees. It could be said to be the proverbial “win-win” scenario. 

Many suggest the new voluntary funding opportunity is a precursor to a mandatory funded regime (replicating more closely the DIFC regime), which only strengthens the benefit for employers of getting on the front foot now. For this author, it feels like the biggest change in the EOSB regime since he has been working with clients in the region. It represents a huge shift away from unfunded defined benefit-style liabilities and imitates the international best practice funded defined contribution world, as we have seen in so many economies around the world in the past 20-30 years. If that imitation continues, it's likely that mandatory funding is coming down the line.