The snappily-titled Voluntary Alternative End of Service Benefits Savings Scheme (the "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"). This article considers what the VAS is, how it interacts with accrued ESG and the merits of an employer subscribing to the VAS.
Alternative to End of Service Gratuity - Should my employer subscribe to the new scheme?
What is the alternative scheme?
The VAS is effectively a defined contribution pension scheme, which also offers a voluntary savings plan for employees.
Instead of paying out a lump sum cash end of service gratuity on termination of employment, eligible employers may instead make a monthly contribution into a fund supervised by the UAE Securities and Commodities Authority, as follows:
- 5.85% of an employee's monthly basic salary during the first five years of an employee's employment in the UAE; and
- 8.33% of an employee's monthly basic salary during each additional year of an employee's 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 VAS on the termination of their employment, or they can leave their funds in VAS. They will be entitled to withdraw all or part of any voluntary contributions they make during their employment.
VAS 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.
All private sector companies in the UAE (which we understand includes semi-government entities) which are located outside the Dubai International Financial Centre and the Abu Dhabi Global Market are eligible to subscribe to VAS. At this stage, employees cannot participate in the VAS independently of their employer. In other words, if an employee's employer does not subscribe to the VAS, its employees cannot do so.
Whilst subscription to the VAS is currently optional for eligible employers, we consider it very likely that it become mandatory in the not-too-distant future.
An employee's ESG will stop accruing at the date their employer subscribes to 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.
It is worth employers (and employees) bearing 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.
- The VAS undoubtedly allows employers to better manage their financial liabilities to their employees.
- The VAS 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.
- 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 percentage contributions made by the employer will be calculated at the time the contributions are made, whereas ESG is calculated according to the employee's final basic salary which, in most cases, will be higher.
- 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, it is worth employers assessing 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.