The UAE introduces voluntary pensions to replace end-of-service indemnities, joining an increasing trend of reforms across the GCC countries

© ILO/Muscat, March 2024

Beirut (ILO NEWS)- The UAE Cabinet in Abu Dhabi announced in October 2023 an optional pension scheme to replace the end-of-service indemnities (EOSI) system for employees in the private sector and free zones.

Under the existing EOSI scheme, private sector employees, including migrant workers, receive directly from the employer a multiple of their final wage as lump sum at the end of their service. As of November 2023, employers who opted for the new system are instead required to pay an equivalent monthly contribution into the new savings scheme. At the end of service, employees receive the accrued savings and investment returns from their participation in the investment fund. 

The new system is optional for employers to join and is managed by private savings and investment funds overseen by the Securities and Commodities Authority in coordination with the Ministry of Human Resources and Emiratisation (MOHRE).

His Excellency Dr. Abdulrahman Al Awar, Minister of Human Resources and Emiratisation announced that “the new Voluntary Alternative End-of-Service Benefits Scheme forms part of the ongoing efforts to develop the legislative infrastructure for the UAE labour market, in line with the government’s strategy to support ease of doing business and provide the highest standards of living, ensure the wellbeing of all workers in the country, and advance the UAE’s position as a leading global destination for attracting national and international talent.”

“The UAE joins other GCC countries in taking important steps to reform end-of-service benefits for migrant workers,” said ILO Regional Director for Arab States Ruba Jaradat. “Shifting from benefits financed by individual employers to national social protection systems will significantly benefit workers and businesses alike. Ongoing efforts to ensure adequate benefits, collective risk management, and effective access to social security benefits should continue to be guided by international social security standards. We hope stakeholders in the UAE will take further steps through the adoption of a mandatory system to cover all workers on the basis of social insurance principles.I congratulate the Ministry of Human Resources and Emiratization on this important achievement.””

The recent developments were discussed at the regional workshop on EOSI reforms taking place in the Gulf region, which took place in Muscat on 6 and 7 March 2024, organized by the Executive Bureau of the Council of Ministers of Labor and Ministers of Social Affairs in the GCC States and the ILO Regional Office of the Arab States, and hosted by the Ministry of Labour and the Social Protection Fund of Oman.


The new voluntary system has come into effective implementation on 1 November 2023. Monthly contribution rates by employers have been set at 5.83 per cent of the monthly basic salary of employees who serve less than five years, and 8.3 per cent of the basic salary of those who serve more than five years. Migrant workers registered by their employers in the system will also have the option to make voluntary contribution, whether in monthly or lumpsum payments which shall not exceed 25 per cent of the total their total annual salary. The scheme also allows voluntary participation for self-employed individuals, those with freelance work permits, non-nationals working in the public sector, as well as UAE nationals working in the government and private sectors, however with only additional voluntary contributions.

Employees will be able to withdraw the benefit accumulated in the system upon moving from their current employer to a new one. Alternatively, they could opt to keep benefits in the fund until the investment matures, with the possibility of collecting it at any time.
 

Reforming end-of-Service indemnity system in the GCC: at a crossroads

The EOSI system has been criticized for providing insufficient and unreliable protection to workers, for placing the financial burden on employers and for lacking solidarity in financing, falling short of all key requirements of international social security standards, as a recent ILO report explains. Rather than pooling risks, individual employers are financially responsible, hence employers that do not set aside sufficient resources for EOSI benefits face liquidity risks at payout and, in cases of bankruptcy, workers are left unprotected. Effective access to EOSI is also hindered by a lack of effective grievance mechanisms, and access to justice is limited for the most vulnerable workers. 


The mass layoffs during the COVID-19 pandemic coincided with an economic contraction, leading to liquidity issues for companies, and jeopardizing EOSI payments to migrant workers who lost their jobs.

“Several GCC countries have accelerated reforms of the EOSI system and are now at a crossroads.” said Luca Pellerano, Senior Social Protection Specialist in the ILO Regional Office for the Arab States. “On the high road, reforms options aiming to progressively extend social protection provisions to migrant workers in line in international social security standards will unlock potential for social and economic transformation in GCC countries and countries of origin. On the low road, further segmentation of social protection entitlements between migrant and national workers - as well as amongst migrant workers - will deepen structural challenges that hamper GCC development model and continue to shift the burden of protection onto migrant workers, their families and their countries of origin.”

International social security standards provide a compass for orienting further discussion of EOSI reforms options in the UAE and in the region. They call for adequate, predictable, and collectively financed benefits, and for the inclusion of all migrant workers based on the principle of equality of treatment. They also require the state to act as a guarantor of the social security system, as it is the case for pension systems for GCC nationals.

This is particularly important for migrant workers in the GCC countries, who are not eligible to participate in national pensions systems, and for whom the EOSI system represent the only source of income protection in case of disability, death, and eventually old age.

The experience of countries that have adopted privately managed schemes as the main pension pillar point to a number of challenges that stakeholders in the UAE should consider, as the newly announced reforms are implemented. Coverage rates have in some cases stagnated or decreased, and pension benefits deteriorated. Administrative costs have typically increased, reducing pension benefits, while the participation in management has been very limited.

In line with international labour standards, the state should set the legal and administrative architecture for social security to be able to exist and operate. Even when it opts to delegate this task to other operators, such as private schemes, the state remains responsible for ensuring – through proper regulation and enforcement – that the pension system delivers on its objectives, in line with international social security standards.

“It will be important to ensure that benefits offered under the new system do not fall below existing Labour Law entitlements by adequately protecting insured workers from investment returns risks. Over time options to allow portability of benefits along migration corridors inside and outside the GCC countries should also be considered”, concluded Lea Bou Khater, ILO Social Protection Technical Officer.
 

A new regional momentum for social protection reforms in the Gulf region

Recent reforms in the UAE come in the context of a new regional momentum with social protection reforms that have the potential to extend rights of migrant workers. A 2023 ILO policy paper analyzed EOSI schemes in the GCC countries and proposes policy reform solutions in line with core principles enshrined in international social security standards. The ILO participated in a series of regional workshops on reforming EOSI for migrant workers organized by the Executive Bureau of the Council of Ministers of Labour and Ministers of Social Affairs in GCC States. As a result of these regional exchanges, reforms agenda have accelerated in several countries across the region.

In Oman, newly approved legislation radically reshapes the social protection system in the Sultanate and provides for the gradual inclusion of migrant workers in national social insurance cash benefits for maternity and paternity, sickness and employment injury insurance on same terms as Omani national workers. It also establishes a national provident fund to replace the current End-of-Service Indemnities system. A new provident fund, which will be managed by the unified national social protection agency, will collect employers’ contributions and administer benefits to non-Omani workers in case of retirement, death and disability and upon return to countries of origin.

A similar approach for the establishment of a national provident fund was legislated in Bahrain in 2022 and operationalized in 2023, whereby the government of Bahrain promulgated a new EOSI fund for non-Bahraini workers in the private sector. While EOSI entitlements will continue to be in line with the set provisions of the Labour Code, the reform introduces a new financing mechanism through monthly contribution to the Social Insurance Organization. In Kuwait, the ILO is assisting the Public Authority of Manpower to inform dialogue around the limitations of current EOSI schemes, and involved workers, employers and relevant government entities in Kuwait in the identification of appropriate policy solutions in line with international standards and best practices.

The new developments in UAE come after a series of previous related reforms. In 2018, a group of national private insurance companies administered by Dubai Insurance launched the Establishment Workers Scheme as an alternative to the Banking Guarantee System to protect the rights and financial dues, including EOSI of all private-sector and domestic employees registered with the Ministry. The UAE also introduced individual pension savings schemes to replace the EOSI system for certain categories of employees. The Dubai International Financial Centre (DIFC) Employee Workplace Savings (DEWS) plan for non-national workers became effective in February 2020 as a defined contribution pension plan for non-national employees that replaces EOSI. In July 2022, the Government of Dubai launched a scheme targeting migrant worker employed in the government sector called the Savings Scheme for Employees in Government of Dubai. In October 2022, the UAE National Bonds had launched a separate initiative called the Golden Pension Plan. The optional pension plan caters for large enterprises that contribute a lump-sum amount or monthly deposits from or on behalf of their employees, in lieu of EOSI. 

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For more information, please contact: 
Luca Pellerano, Senior Social Protection Specialist: pellerano@ilo.org 
Lea Bou Khater, Social Protection Technical Officer: boukhater@ilo.org 

The ILO has renewed efforts to advance the agenda of extension of social protection to migrant works in the GCC, in the context of the project Extending Social Protection to Migrant Workers: Exploratory Research and Policy Dialogue in the Gulf Cooperation Council (GCC) Countries. The project is funded by the Swiss Agency for Development and Cooperation.