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Sat, Dec 21, 2024 | Jumada al-Aakhirah 20, 1446 | DXB
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New savings scheme for UAE private sector – should your employer subscribe?
The scheme provides three main investment options
- By
- Ben Brown and Katie Cleworth
Savings accounts and fixed deposits are proving to be more popular amongst residents.
The snappily-titled Voluntary Alternative End of Service Benefits Savings Scheme (VAS) is now in effect and offers eligible UAE employers – and their employees – a voluntary alternative to the existing cash end-of-service gratuity scheme (ESG). The VAS is essentially a defined contribution pension scheme, which also offers a voluntary savings plan for employees.
Instead of paying out a lump sum cash gratuity when an employee is terminated, eligible employers may instead make a monthly contribution into a fund supervised by the UAE Securities and Commodities Authority. During the first five years of employment in the UAE, 5.85% of an employee’s monthly basic salary is to be contributed, and 8.33% is to be contributed during each additional year of employment in the UAE.
The monthly contributions cannot be deducted from an employee’s monthly basic salary and employees may also voluntarily contribute a percentage of their monthly basic salary, or a lump sum.
Employees will be entitled to withdraw the benefits they have accrued in the VAS upon termination of employment, or they can choose to leave their funds in the scheme. They will be entitled to withdraw all or part of any voluntary contributions they made during their employment.
The scheme provides three main investment options: risk-free investment that maintains the capital amount; risk-based investment where the risk varies between low, medium and high; and a Sharia-compliant investment option. If their employer subscribes, skilled employees will have the option of choosing their fund. Unskilled employees must participate in the investment fund that offers a risk-free option for capital preservation.
Which companies can subscribe to the VAS?
All private sector companies in the UAE, including semi-government entities, which are located outside the Dubai International Financial Centre and the Abu Dhabi Global Market are eligible to subscribe to the VAS. At this stage, employees cannot participate in the VAS independently of their employer. In other words, if an employer does not subscribe to the VAS, its employees cannot do so.
While subscription to the VAS is currently optional for eligible employers, we consider it very likely for it to become mandatory in the not-too-distant future.
What happens to my accrued end of service gratuity?
An employee’s end of service gratuity (ESG) will stop accruing at the date their employer subscribes to the VAS. An employee will be entitled to be paid their accrued ESG on the termination of their employment, which will be calculated according to their basic salary at the time their employer subscribed to the VAS. Although employees may contribute a lump sum of no more than 25% of their gross basic salary, it is currently unclear whether an employee (or their employer) will be able to pay their accrued ESG into the VAS.
Ben Brown is Partner – Employment, Addleshaw Goddard and Katie Cleworth is Managing Associate – Employment, Addleshaw Goddard
Should your employer subscribe to the VAS?
Employers and employees should keep in mind the following factors when considering the merits of subscribing to the VAS.
The VAS removes the risk of employees not receiving their ESG, whether non-payment is due to unscrupulous employers or because of the insolvency of their employer. This is an obvious positive. That said, many employees will not have any material concerns about the non-payment of their ESG by their employer.
Moreover, the VAS undoubtedly allows employers to better manage their financial obligations to their employees.
This is the first national savings scheme of its kind for the private sector in the region. There is likely to be a bedding-in period in terms of its administration and operational functionality and for any associated issues to be ironed-out.
It should be noted that an employer’s contributions into the VAS will likely be less beneficial for an employee than under the current ESG system. This is because the contributions made by the employer will be calculated as a percentage of their salary at the time each contribution is made. With the ESG, the final payout will, in most cases, be higher, as it’s calculated according to the employee’s basic salary at the time they leave the company.
The opportunity for an employee to realise a capital increase on their savings in the VAS is dependent on the performance of the relevant fund and the associated costs of that fund. In other words, there is no guarantee that the value of an employee’s investment in the VAS will increase. As a point of reference, employers can assess the performance of the various funds available in the DIFC Employee Workplace Savings Scheme which, in performance terms, we anticipate will be comparable to the funds available in the VAS.
Given that subscription to the VAS is currently optional, we anticipate that many employers will, for the time being, adopt a wait-and-see approach. Employers will be able to make a more informed decision about whether the VAS is suitable for their employees once a proper assessment can be made of its overall performance.
Ben Brown is Partner – Employment, Addleshaw Goddard and Katie Cleworth is Managing Associate – Employment, Addleshaw Goddard
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