Your EOSB transition journey
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Introduction to the new EOSB Savings scheme
This short video will give you a good overview of the new End-of-Service Benefits Savings scheme.
Everyone in the UAE is familiar with the current End-of-Service Benefits (EOSB) Gratuity system which works like this:
This system, which is currently in force, has several problems.
Most importantly, this gratuity is not invested, and the money doesn’t earn any profit or interest. Another important disadvantage is that these payments are not guaranteed – if the company becomes insolvent, employees risk getting nothing.
For these reasons, many countries in the world have adopted a different system, also called the “defined contribution” system where defined amounts are regularly paid by employers into certain funds that generate a return for employees, while also eliminating the risk of employer default.
The new EOSB Savings scheme is essentially a defined contribution scheme.
The new system introduced by way of Cabinet Resolution 96/2023 and Ministerial Resolution 668/2023 works like this:
Main financial differences
Under the new EOSB Savings scheme, the EOSB Contribution is 5.83% and 8.33% of basic salary each month for employees with less than and more than five years of service, respectively.
While this roughly equates to 15 and 21 days of basic salary per year, respectively, similar to the current EOSB Gratuity System, there are some important financial differences between the two schemes that impact employers and employees differently.
| Party | Current EOSB Gratuity System | New EOSB Savings Schemeble Header |
|---|---|---|
|
Employer |
Pros Funds are not blocked and can be used as working capital or invested to earn a return. Cons Results in overall higher spend, as final payout is based on the current basic salary x accumulated days. Results in a large cash outflow on employee separation. EOSB charge to the income statement is not a tax deductible expense unless the amount is paid to an EOSB fund. |
Pros Results in overall lower spend as past periods are not indexed to salary increments. Accumulated EOSB as at the date of transition to the new scheme remains frozen and may be retained as an unfunded liability or transferred in full to an EOSB fund. Monthly payments of EOSB Contributions to EOSB funds fulfils employer liability for the relevant period. Paid EOSB Contributions is a tax deductible expense for the relevant period. Cons Lower working capital or investment returns. |
|
Employee |
Pros Known take-home amount (defined benefit) based on current basic salary. Cons No upside potential from investment returns. Fully unfunded EOSB is exposed to high credit risk in case of employer default. |
Pros Results in lower EOSB Contributions. However, this is offset by the compounding effect of gains from investment in EOSB funds. No exposure to credit risk, provided that the accumulated EOSB is also transferred to EOSB funds. Cons Employees are solely responsible to manage their savings in EOSB funds which are always subject to market risks. |
When is the new scheme effective?
It is important to note that this new EOSB Savings scheme is voluntary as of now and employers can choose which employees to enroll in the new scheme. However, it is expected that the new scheme will eventually become compulsory, fully replacing the current EOSB Gratuity mechanism.
At present, there is no official information on timelines. However, Pensions Monitor anticipates an announcement to this effect in early 2026 with a further 12 months window for employers to align themselves, taking us to early 2027 by when the scheme will likely become compulsory.
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Should HRs prepare for the transition now?
Although the new EOSB Savings Scheme is not currently voluntary, the transition is a significant nation-wide change, that will impact about 800,000 companies and 6.5 million employees.
For majority of companies, this change presents a new challenge and a massive responsibility for HRs to prepare their organizations in terms of resources and infrastructure, educating employees about the new scheme, sufficiently involving them in the decision-making process and also providing them with ongoing guidance. Additionally, there are some companies that are already enrolled into voluntary workplace savings schemes. In these cases, HRs are tasked with transitioning to the official mainland scheme in the near future.
HR professionals are the drivers of this change and must therefore take proactive steps to facilitate the process well in advance. A good starting point is to document a plan. While the new scheme’s broad parameters are already defined by regulation, there are several important considerations specific to each organization that should be taken into account.
Budget integration: Should your budget plan for 2026 or 2027? How does this align with your company’s overall financial health?
Transition approach: Should you transition in a phased manner by enrolling employees in batches during the voluntary phase to test the waters? Or should you wait until the scheme becomes compulsory to enroll all employees at once? What teething problems might arise during this transition?
Contribution levels: Should your company transfer the accumulated EOSB? What tax benefits will apply?
Administration expenses: Will additional HR staff be needed to manage the new scheme? Consider tasks such as communication with providers, payroll uploads, exception handling, internal staff communication, training, etc.
System capabilities: Are your current systems equipped to manage records of enrollment, contributions and claims? Will upgrades be required? What integrations will be required with fund managers? (Tip: Incorporating EOSB contributions on pay slips could be beneficial).
External vs. Internal Systems: Or should you rely on the fund manager’s system and if so, how will you manage historical records if you switch fund managers in the future?
Decision-making: While the Board of Directors will make high-level decisions, these must reflect employee needs, preferences, and feedback, as these decisions directly affect employee finances. How will you incorporate employee preferences?
Communication: When and how should you start communicating with employees to secure their buy-in? How will you educate employees about the scheme’s benefits and operation? What feedback channels will be established?
Choosing fund managers: What criteria will you use to objectively evaluate and monitor fund managers?
Service agreements: Who will review agreements with fund managers to ensure that terms and expectations are clearly understood?
Risk management: What strategies will you deploy to mitigate associated risks, including investment diversification, compliance checks, and financial contingency planning?
Legal guidance: What legal counsel will you need regarding compliance with regulations, and addressing legal disputes?
Governance structure: What will the internal governance structure for overseeing the scheme look like? Have the roles and responsibilities for HR,Finance, Compliance and management teams been defined? What mechanisms for oversight, including audits, performance reviews, and compliance checks need to be put in place?
External support: Will you need assistance from external consultants? If so, what form will this support take, who are the potential providers, and what will be the costs?
As you see, there are many aspects for HR’s prior to transition involving decisions, of which the selection of a Fund Manager is likely to be the most critical decision for any company.
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