UAE expat pension scheme only workable as a federal institution

The UAE is understood to be in early talks with the World Bank to introduce a pension scheme for its seven million expatriate workers in lieu of the current end-of-service payment scheme. But with work visas of only two years it is not clear if such a scheme is practical.

At present when workers’ contracts come to an end they are entitled to a final sum dependent on the number of years worked. It sounds a simple idea to pay this money into a pension fund that would invest and hopefully deliver a bonus to this pension pot when it was finally paid out.

Practical issues

But when would it be paid out? At 60 or 65 years old? Or could that be raised later? Who would make the investment decisions? Would the state guarantee the principle invested or leave it to market forces? What fees would the pension fund managers be able to pay themselves?

The devil is in the detail. Many pensioners in the so-called advanced economies of the world are currently being bitterly disappointed with their pension payouts. Low interest rates on government bonds are depressing annuity payments to pensioners worldwide.

There is also something always to be said for having money in your hand rather than stuck in the hands of somebody else, especially if that is in a far away land where you have no rights of citizenship.

This is a non-starter, except from the point of view of the UAE. Such a fund could be invested in grandiose projects and the local stock markets. It would benefit the nation rather than remain in the capital of companies as working capital as it does today. Then again the companies would lose out.

Of course, the local financial industry would benefit most of all with the lucrative management fees and brokerage commissions. Even in the West the pensions industry is under scrutiny as yet another legalized scam for the financial sector.

Benefit protection

On the other hand, removing the end-of-service payment would protect employees against the loss of this benefit if their employer goes bust. Perhaps the answer is to make it compulsory for these contributions to be paid into an escrow account under federal government supervision.

Or better still for employers to be given some incentive to set-up a voluntary scheme based on these annual payments with a reputable fund management company, although again you then face the problem of deciding who is reputable and what happens if they go bust.

Perhaps then only a federal expatriate pension scheme would work because of the need to guarantee the security of the payments. Actually the current scheme is not so bad and simple to administer and enforce. Maybe there should just also be an opt-in federal scheme for those who think it beneficial to them.