Pension considerations across the UAE
Financial Services Focus
Sabrina Saxena Senior Counsel,Employment & Incentives
The United Arab Emirates (“UAE”) has recently undergone a comprehensive reform of its legislative framework, aiming to address shifts in the work environment and align UAE relations with international best practices. The most recent and radical change to the pensions landscape is the implementation of a new pensions law, UAE Federal Decree Law No. 57 of 2023 (the “2023 Law”).
In addition to the changes to the Federal position, in September 2023, the DIFC Authority released a consultation paper proposing various amendments to DIFC legislation, and in particular in respect of pension obligations to UAE and GCC national employees (the “Consultation Paper”).
On 2 October 2023 (the “Effective Date”), the 2023 Law was officially published. This legislation represents the most substantial change to pension regulations since the introduction of UAE Federal Law No. 7 of 1999, as amended (the "1999 Law"). Notwithstanding this, it is important to be aware that the 1999 Law will remain in force and will be applicable to Emiratis hired and/or registered with the General Pensions and Social Security Authority ("GPSSA") before the Effective Date. Despite this, the GPSSA has confirmed that 31 October 2023 should be considered the effective date. This is a clear discrepancy of the provisions of the 2023 Law, and it remains to be seen as to whether the GPSSA will change its position and align with Effective Date set out in the 2023 Law in this regard.
By way of background, the GPSSA is the responsible authority for registering Emiratis and GCC nationals employed in the UAE across all of the Emirates (with the exception of those companies incorporated in Abu Dhabi and Sharjah that are subject to a separate authority). This being said, the 2023 Law applies solely to Emiratis, and GCC nationals are not impacted.
Under the 2023 Law, both employers and employees must pay mandatory monthly contributions to the GPSSA, calculated with respect to an employee’s total fixed monthly salary, as follows:
The employer’s contribution is 15% (albeit where an employee earns below AED 20,000 per month, 2.5% of the employer’s contribution will be paid by the government); and
The employee’s monthly contribution is 11%.
The employee’s contributions are usually deducted by the employer at source and paid directly to the GPSSA.
The monthly pensionable cap under the 2023 Law has increased to AED 70,000, compared to AED 50,000 under the 1999 Law. Notably, the 1999 Law obliges an employer to make good any difference in respect of the payments made under the 1999 Law and a potential end of service gratuity entitlement where salary exceeds AED 50,000 so that an employee who earns more than AED 50,000 per month is not disadvantaged by way of the cap. The 2023 Law does not provide for a similar benefit.
According the 2023 Law, contributions (employer, employee, and government) should continue during leave, even if unpaid, and during periods of secondment and study leave. Exceptions apply to individuals suspended without pay, those on agreed periods of unpaid leave, or not entitled to a salary. For individuals under the 2023 Law, unpaid leave for study or childcare allows the continuation of contributions if the employee pays all requisite contributions.
Upon retirement, pension for employees falling under the remit of the 2023 Law, will be calculated at a rate of 2.67% of the pension account salary for each year of the contribution period. Upon reaching 30 years, this rate is increased by 4% annually up to a maximum of 100% of salary. If the total subscription period exceeds 35 years, the individual shall be paid at a rate of three months for each year above the 35-year period calculated on the basis of the pension account salary.
The UAE has recently undergone a comprehensive reform of its legislative framework, aiming to address shifts in the work environment and align UAE relations with international best practices.
In February 2020, the DIFC implemented its own defined contribution scheme (being, DEWS) pursuant to which, contributions must be made by an employer on a monthly basis calculated with regard to an employee’s basic salary. There is no cap on the level of contributions that can be made. Additionally, employees are permitted to voluntarily contribute to DEWS, and any such voluntary contribution must be deducted by the employer at source and paid by the employer directly into DEWS.
The DIFC Law No. 2 of 2019 as amended (the “DIFC Employment Law”) provides that UAE and GCC nationals are exempt from DEWS, and instead should be registered for pension in accordance with the applicable Federal pension laws – being the 1999 Law and the 2023 Law.
Interestingly, the Consultation Paper (which was released prior to the 2023 Law) addresses the pensionable cap set out in the 1999 Law and provides that the imposition of a pensionable cap for UAE and GCC nationals can give rise to a financial discrepancy compared to those employees who are eligible to be enrolled in DEWS and are not subject to any similar cap. The Consultation Paper proposes amendments to the DIFC Employment Law such that an employer would be required to make DEWS contributions on behalf of UAE and GCC nationals where an employee’s basic salary exceeds AED 50,000 per month. As of the date of this article, the Consultation Paper remains in draft form.
It is clear that these legislative milestones represent a significant reform, demonstrating the UAE's commitment to adaptability and alignment with global best practices. As the legal landscape undergoes this transformation, the focus is particularly keen on pension regulations, where substantial modifications are set to redefine the benefits and structures for new Emirati as well as GCC hires.
It is important for employers in the UAE to familiarise themselves with the 2023 Law to ensure compliance. Although an employer’s general obligations have not been radically changed from the 1999 Law, employers should be aware of their obligations and the potential penalties and sanctions for non-compliance.
For further information,please contact Sabrina Saxena.
Published in February 2024
