end of service gratuities in the difc · 2020-05-11 · (“esg”) in the dubai international...
TRANSCRIPT
End of Service Gratuities in the DIFCAre you change ready?
Introduction
Mandatory funding for End of Service Gratuities (“ESG”) in the Dubai International Financial Centre (“DIFC”) begins from 1 January 2020. The appointment of a master trustee and trust administrator in August 2019 has reaffirmed the DIFC’s intention to overhaul the existing system of gratuities in favour of fully funded workplace savings provision for employees.
We consider these changes and the impact for employers in brief below.
Background The DIFC have laid out proposals to introduce a DIFC Employee Workplace Savings (“DEWS”) plan, which will become mandatory for all employers operating in the DIFC zone.
DEWS will replace the existing system of paying ESG to employees on ceasing service and will apply from 1 January 2020. The biggest change being introduced through the new regime is the obligation to fund future liabilities, whereas currently there is no requirement.
Employers operating in the DIFC will have the ability to opt out of DEWS in certain circumstances. Specifically, they will have the opportunity to offer a Qualifying Alternative Plan (“QAP”), which must be approved by the relevant supervisory board.
What is the objective of the proposed changes?The introduction of these changes to ESG, underpinned by a clear legal framework, is demonstrative of the DIFC’s continued commitment to maintain international standards and facilitate a simpler and business friendly environment for employers and employees. It also shows their ongoing commitment to transparency and efficiency.
Funding future ESG liabilities also recognises the limitations of the current approach, under which employers are exposed to an open-ended liability and employees have little or no certainty that sufficient assets have been set aside by employers to meet their obligations.
Introducing a clear legal and regulatory framework for savings with effect from 1 January 2020 brings the DIFC into line with many other jurisdictions around the world by encouraging and promoting the importance of longer term funded employee savings.
Who will these changes affect and how?In short, all DIFC employers and their employees.
Some of the other key changes being introduced from January 2020 will mean that employees no longer need to work for a minimum period of one year before accruing an entitlement under DEWS (or a QAP). This is in contrast to the current ESG system, whereby no entitlement accrues in the first year of employment. In addition, the current (and somewhat subjective) exceptions to paying ESG will no longer apply. Therefore, an employee will be entitled to their DEWS (or QAP equivalent) benefits regardless of when they leave and their reasons for leaving employment.
First and foremost, employers need to understand their obligations under the new system. Moving to a funded regime will present challenges ranging from systems readiness, through to cash-flow modelling and employee communications.
Employers will also need to take some important decisions about their approach to the new regime. For example, will they want to participate in the DEWS or prefer to implement a QAP? In determining their approach, employers may well consider their wider global philosophy on workplace savings, and whether a QAP is a more efficient vehicle to deliver these benefits.
There may also be an opportunity (subject to confirmation) to crystallise historic ESG liabilities at the 1 January 2020 value if employers are prepared to fund those liabilities at that point in time (and employees agree to this). If this option will exist, it will be vital that employers know what to pay and when.
What are the key considerations and actions for employers?
• Early-mid 2019—The legal framework for DEWS was established.
• August 2019—details of the DEWS master trustee and administrator were announced. Engagement with employers to support transition to the new regime commenced.
• From 15 September 2019—guidance on the criteria to be met for a scheme to qualify as an alternative scheme to the DEWS plan will be issued by the DIFC.
• 31 December 2019—all employers wishing to opt out of DEWS must have applied for a “certificate of compliance” from the relevant supervisory board.
• 1 January 2020—the new regime applies. Existing ESG accruals cease and mandatory funding begins for all employers operating in the DIFC zone.
Wha
t are
the
key
date
s?
Contribution levels
Plan structuring, location and fiduciary
selection process
Impact on employment
contracts
Investment fund options and investment manager selection
Distribution process
Employee communication programme
Once the framework of a new plan has been determined, employers can ensure their approach is compliant with the requirements that will be released by the DIFC on or after after mid-September. This will ensure employers will be ready to submit their plan to the relevant supervisory board and receive approval prior to 31 December 2019.
Next stepsEmployers must be ready for change. Whether they opt to participate in DEWS, or to implement a QAP, employers have to understand how the employment law and funded savings regime changes will affect their workforce.
Some employers are already expressing their desire to implement an alternative plan to DEWS. Given that further guidance on what will constitute a QAP is not expected until after mid-September 2019, employers may wish to use the interim period to consider and gain consensus internally on the key characteristics of a new plan, including:
Coupled with a changing employment law regime, mandatory funded savings may well be one of the biggest changes seen by employees working in the DIFC. As such, the need for a clear and consistent communication exercise is self-evident.
There is a limited timeframe for employers to act on the above. In particular, deciding on whether they intend to participate in DEWS or to introduce a bespoke arrangement for their employees in advance of the 1 January 2020 go live date will be high on the agenda for employers at this time.
If you would like to discuss the impact of these proposed changes for your organisation, please speak to your usual Deloitte contact, or one of the following specialists:
UKChris BulleymentPartner+44 20 7007 2610
Varinder AllenAssociate Director+44 20 7007 0408
Arun KundiConsultant+44 20 3741 2820
DubaiAlex LawPartner+97 145 064 891
Hadi AllawiDirector+97 145 064 901
Aliabbas ViraniSenior Manager +97 145 064 903
This publication has been written in general terms and we recommend that you obtain professional advice before acting or refraining from action on any of the contents of this publication. Deloitte LLP accepts no liability for any loss occasioned to any person acting or refraining from action as a result of any material in this publication.
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