DIFC Employee Workplace Saving Plans – Further Developments

The Dubai International Financial Centre (“DIFC") has published its proposed amendments to the recently issued DIFC Employment Law (DIFC Law No. 2 of 2019) (the “Employment Law”) and an introduction of regulations in connection with the replacement of the existing end-of-service gratuity payment regime with the DIFC’s proposed DIFC Employee Workplace Savings (“DEWS”) (the “Proposed Amendments”).

Earlier this year, the DIFC announced its intention to move from the defined benefit structure of end of service gratuities to a funded and professionally managed defined contribution system with the introduction of DEWS for all DIFC entities from 1 January 2020. The Proposed Amendments now published for consultation provides some clarification on the introduction of DEWS and sets out the proposed amendments to the Employment Law to account for the requirements in respect of DEWS and acceptable alternatives. An information session on DEWS held by the DIFC on 29 October 2019 (the “Information Session”) also provided some additional guidance on how the new scheme will work.

Proposed amendments to the Existing Law

Under the Proposed Amendments, it will be mandatory for all DIFC employers to pay contributions into the DEWS or into an alternative qualifying scheme ("Qualifying Scheme”) in respect of their non-GCC national employees (UAE and other GCC national employees will continue to be provided for separately under the General Pensions and Social Security Agency requirements). Such DIFC employees will also be able to add their own savings as voluntary contributions.

The “Core Benefits” to be contributed by employers to the DEWS or a Qualifying Scheme are to be calculated in line with existing end of service gratuity calculations, i.e.:

• an amount equal to 5.83% of the employee’s monthly basic wage for the first 5 years of service (including any period of employment or secondment served before the DEWS scheme came into force); and
• an amount equal to 8.3% of the employee’s monthly basic wage for each additional year of service,

(in each case pro-rated for part of a year) with the main differences from the old arrangements being that contributions are due from the start of employment without any qualifying period of service and the calculation is based on the employee’s basic wage at the time of contribution not the final basic wage at time of termination of employment. As with the calculations of end of service gratuity, the basic wage element must be at least 50% of the monthly salary received by the employee and employers are not permitted to manipulate the amount of the employee’s basic wage to reduce their liability to make contributions below what has been deemed reasonable in this regard.

An important clarification under the Proposed Amendments is the confirmation that existing DIFC employees will continue to be entitled to any gratuity payments accrued by them prior to the new regime coming into effect, those accrued entitlements will crystallise at 31 December 2019. Employers would have the option to transfer any accrued gratuity payment into the DEWS or another Qualifying Scheme without the consent of employees.

However, the Proposed Amendments do not adequately deal with employees with a start date in 2019 who have less than one year’s service as at 31 December 2019. Under the Employment Law, end of service gratuity benefits only accrue after one year’s service has been completed but, once completed, the amount accrued is in respect of the entire period since the start of employment. As currently drafted, the Proposed Amendments do not make any provision for recognising any period of service less than one year as at 31 December 2019, since at that point there is no accrued entitlement to end of service benefit under the Employment Law. As such, whilst those employees would be entitled to start receiving contributions to DEWS from 1st January 2020 (prior to completion of one year’s service), they would lose the benefit of any period of service completed prior to that. This issue was recognised by the DIFC at the Information Session and will be considered as part of the consultation process.

Also not currently distinguished in the Proposed Amendments are employees who are shareholders and partners and do not draw a basic wage but instead receive dividends or drawings. This is another grey area that may be further considered as part of the consultation and refinement process.

DEWS vs Qualifying Schemes

In August 2019, the key service providers for the DEWS were announced with Equiom (a global trust services provider) selected as master trustee and Zurich Middle East selected as scheme administrator, assisted by Mercer as investment advisor. We understand the DEWS will offer funds with varying degrees of risk profile to enable employee members to select how their funds are invested according to their risk appetite, the default selection will be low to moderate risk but alternative selections ranging from low to high risk can be selected through the member portal that will be launched. We understand Sharia compliant options will also be available and more information in this regard will be published later in the year.

The DEWS will be run in line with global best practice and be under the supervision of a Supervisory Board which will have non-fiduciary oversight of DEWS.

DIFC employers who choose not to participate in the DEWS will need to ensure they select, and make their monthly contributions to, an alternative Qualifying Scheme which meets the criteria set out in the Employment Regulations (Qualifying Scheme requirements under Article 66 of the Law) (the “Regulations”) to be issued as part of the Proposed Amendments to the Employment Law. Qualifying Schemes must have a Certificate of Compliance and the Regulations set out further details on the requirements which must be fulfilled for a scheme to qualify.

In general, under the Proposed Amendments, a Qualifying Scheme must:

• be an “Employee Money Purchase Scheme”;
• provide for contributions of no less than the Core Benefits prescribed for the DEWS;
• require the operator, administrator, investment manager or fund manager to be regulated by a recognised regulator (if this is not the Dubai Financial Services Authority (the “DFSA”), the Certificate of Compliance will only be issued after consultation with the DFSA); and
• if the scheme is established in the DIFC, it must be a DIFC Trust.

The Regulations also set out specific requirements in respect of the operator, administrator and investment advisor as well as in respect of membership, contributions, payment of benefits, investment requirements and scheme fees and charges.

Under the Proposed Amendments, Certificates of Compliance will need to be applied for prior to 1 January 2020 and at least 30 days prior to 1 January for each subsequent year, unless the relevant Qualifying Scheme no longer meets the qualifying criteria, in which case the relevant employer will be required to inform the DIFC of the same as soon as reasonably practicable and apply for a Certificate of Compliance for a replacement Qualifying Scheme. At the Information Session it was indicated that all the requirements for a Qualifying Scheme will be available by or around 18th November 2019 and the process for obtaining Certificates for Compliance for a Qualifying Scheme will be available.

No Waiver of Rights

Under the Proposed Amendments, it will not be possible for employees to waive their rights to payment of Core Benefits into the DEWS or another Qualifying Scheme or accept contributions less than the specified amount of Core Benefits, and any agreement to the contrary will be null and void and unenforceable.

DIFC Employers who fail to comply with the requirements of the new regime once introduced will be subject to fines proposed to be USD2,000, as well as open to claims from employees to enforce their rights.

Proposed Introduction Date – 1st January 2020

There is a lot that needs to happen between now and 1st January, including the enactment of the legislative amendments, the establishment of the DEWS Supervisory Board and the various entities involved in DEWS, finalisation and communication of the details of DEWS and all the processes for onboarding employers and issuing Compliance Certificates for Qualifying Schemes. Nevertheless, the DIFC remains confident that the proposed 1st January implementation date can be met. At the Information Session, the DIFC indicated that over the next month they will be sharing a great deal more information through town hall meetings, the DEWS website and other communications and will detail and open up the process for obtaining Qualifying Scheme Compliance Certificates. In around a month’s time the DIFC intends to take stock on progress and take a decision on whether there will be any extension. The DIFC noted that 1st January is a self-imposed deadline and there is no reason why it cannot be extended, however, they also indicated that any extension is most likely to take the form of a grace period for compliance but requiring retrospective effect from 1st January.

Action Points for Employers

While the Proposed Amendments are still in draft form and not yet final, on the assumption that the main aspects of DEWS are likely to remain the same, there are steps that employers should start taking now to ensure they are prepared come the proposed 1 January implementation date.

Employers should consider what current accrued liabilities for end of service benefits they have, whether these liabilities are funded and whether the employer will transfer such liabilities into the DEWS (or other Qualifying Scheme) or keep them on the employer’s balance sheet. Where the accrued liabilities are not fully funded (as is very often the case), transferring them into DEWS/ a Qualifying Scheme could have a significant impact on cash flow.

Professional advice may need to be sought to inform the decision as to whether to select the DEWS scheme for employees or another scheme that meets the Qualifying Scheme criteria, particularly where other schemes are already used by other group companies. Employers will also need to consider their existing employment terms, policies and handbooks and take professional legal advice on updating these and perhaps creating new guidelines in relation to the selected scheme.

Internal HR, Finance, payroll and legal teams will all need to be fully informed on the incoming changes and their roles in implementing them and managing them going forward. An employee consultation process is also recommended to ensure employees fully understand the changes to be brought in, explain the scheme selection decision and the impact this will have on them. In particular, if the decision is made to transfer existing accrued liabilities to the DEWS/Qualifying Scheme, having employees’ consent will absolve the employer from further liability to make up any shortfall.

Overall the move to a defined contribution model is positive for both employers and employees and in line with the direction pensions and workplace savings systems globally have been moving for many years. DEWS and the Proposed Amendments will allow employers to clearly identify their liabilities to employees and discharge them through the selected scheme, as well as allowing those payments to be made across the year rather than a lump sum on employment termination which will, in turn, have cash flow benefits. It will also be cheaper for employers to make contributions since they are calculated on employees’ current salaries not on final salaries. Employees will benefit from having greater visibility on their entitlements as well as the security of knowing that these are funded and held independently with a third-party trustee. However, as with any investment, there are risks involved for employees and, unlike end of service benefits which employees currently have an absolute right to receive subject to the Employment Law, pay outs from an investment scheme are not guaranteed. Employees will no doubt have many questions on the impact on them and their savings which employers may need to guide them through.

Opportunity for public comment

A consultation paper has been published detailing the Proposed Amendments and the Regulations, seeking public comments on them ahead of their formal issuance. The deadline for providing comment on the consultation paper is 18 November 2019.

We will continue to follow developments in this area and provide further updates as more details become available. If you have any questions or concerns on how the introduction of the DEWS and the Proposed Amendments to the Employment Law may affect your business, or you would like assistance in updating your employment terms and policies for DEWS, please do get in touch with us.