07 Sep 2020

Regulation of state and supplementary pension schemes in UAE

Authored by: Rachel Hill and Taher Abdeen Ibrahim

A Q&A guide to pensions law in the United Arab Emirates.

The Q&A written by Thomson Reuters gives a high level overview of the key practical issues including: state pensions; supplementary pensions; funding and solvency requirements; tax on pensions; business transfers; participation in pension schemes; and employer insolvency and overall scheme solvency.

To compare answers across multiple jurisdictions, visit the pensions Country Q&A Tool.

The Q&A is part of the global guide to pensions law. For a full list of jurisdictional Q&As visit global.practicallaw.com/pensions-guide.

National government pensions

1. Do employers and/or employees make pension contributions to the government in your jurisdiction?

Contributions paid to the government

Under UAE law, it is mandatory for both public and private sector employers in the UAE to register their UAE national employees with, and contribute to, the national government pension programme. It is unlawful for either employers or employees to opt out of the scheme.

The UAE Federal Pensions and Social Security Law No.7 of 1999 (as amended) (Pensions Law) governs pension provisions for eligible UAE nationals. Expatriate employees do not have access to a national government pension and instead benefit from a statutory "end of service" gratuity payment for services rendered during their employment, which is governed by Federal Law No. 8 of 1980 (as amended).

The General Pension and Social Security Authority (GPSSA) is the federal body responsible for administering pensions for UAE nationals working in the UAE (excluding those in Abu Dhabi) and for Gulf Cooperation Council (GCC) nationals working in the UAE (including Abu Dhabi). Emirati nationals working in Abu Dhabi must be enrolled with the Abu Dhabi Retirement and Pension Fund (ADRPF).

The total mandatory pension contribution is 20% of the employee's salary. For those employees employed in the public sector, the employee pays 5% of the contribution with the government paying the remaining 15%. For those employees employed in the private sector, the employer pays 12.5% and the government pays 2.5% of the contribution, with the employee providing the remaining 5% contribution. The government makes this pensions contribution for private sector employees to encourage private sector employers to hire UAE nationals.

Pension contributions made on behalf of UAE national employees are subject to a statutory minimum and maximum salary amount (which is AED1,000 and AED50,000 respectively), against which the amount of the pension contributions is calculated). Practically, this means that if an individual is earning more than AED50,000, pension contributions will only be calculated against the maximum salary cap of AED50,000 and any additional earnings will not be considered for the purposes of the pension contributions.

Only UAE national employees who hold a "family book" (that is, those who have been UAE nationals for some time and have not recently been naturalised) are entitled to participate in the national government pension scheme. UAE nationals who do not qualify to participate in the national government pension scheme should instead receive an "end of service" gratuity payment on termination of employment.

The pensions portal (the General Pension and Social Security Authority (GPSSA): http://gpssa.gov.ae) is open for all employees to inspect. Each employee is provided with log in details and a password to access the portal. The employer pays contributions into the portal and thereafter has no control of the pension fund. The fund is controlled entirely by the GPSSA. Any draw down of a pension is subject to the consent of the GPSSA and the employer has no further involvement beyond making the necessary contributions. When an employee changes employer, their personal details on their own pension fund is updated and the new employer assumes responsibility for ongoing pension contributions.

The timeframe for registrations is tight, and an employee must be registered with the GPSSA by the employer within one month from the date that they commence work with that employer. Where an employer fails to register employees, or completes late registrations for employees, the employer can be fined up to AED5,000 for each employee that it has failed to register or registered late. In addition, where pension contributions are paid late, fines can be imposed against the employer. Fines are calculated at a daily rate of 0.1% of the contributions payable, and are charged for each day that the contributions are overdue.

Taxation of contributions

Any pensions contributions paid towards the national government pension, and all compensations/benefits paid by the national government pension, that are made in accordance with the laws that regulate pensions are exempt from all taxes and fees.

National government pension age

2. Where a national government pension is provided, at what age can pension payments be collected by an employee? Are there any provisions allowing for the early payment of this type of pension to an employee?

The national government pension is payable in all of the following cases:

  • Where an employee's employment terminates as a result of the employee's death or severe disability (such disability must be recorded and approved by the medical committee).
  • Where an employee's employment terminates as a result of the winding-up, bankruptcy or liquidation of the employing entity (there is no requirement for the employee to have a minimum period of service for the pension payment to become due).
  • Where an employer terminates employment (but not for summary dismissal), and the employee has either:
    • attained an employment period of at least 15 years; or
    • reached the age of retirement (50 years of age).
  • Where an employee's employment terminates by reason of dismissal, or by virtue of a disciplinary decision or judicial ruling, provided that the employee has a period of service of at least 15 years.
  • Where an employee resigns, provided that:
    • pension contributions have been made by the employee for a minimum of 20 years; and
    • the employee is aged 55 years old or more.
  • Where a female employee (who is married, divorced or widowed) resigns, provided that she both:
    • has a child (or children) under the age of 18; and
    • has made pension contributions for a minimum of 20 years.
  • Where an employee's employment terminates as a result of a federal or local decree, provided that the treasury of the relevant Emirate bears the actual expenses incurred from that termination of employment. The President will issue a decision concerning the method for calculating such expenses in these circumstances.

The calculation of the period of pension contributions will include the periods of service that are defined under Federal Pensions Law, and will not include any periods of employment where the employee was on unpaid leave.

Monthly amount of the national government pension

3. What is the monthly amount of the national government pension?

For details on the pension contributions paid by employers, employees and the government, see Question 1, Contributions paid to the government.

The payouts very much depend on various factors, including an individual's salary and years of service in employment. For public sector employees, the monthly payout is the average of the last salary received by the employee over their last three years in employment, or for the entire period should the employment be less than three years before retirement. For private sector employees, the monthly payout is the average of the last salary received by the employee over their last five years in employment, or average for the entire period should the employment be less than five years.

Public pensions body

4. Is there a public body or agency that oversees the operation and policy of national government pension schemes? Do any other governance regimes apply to national government pension schemes?

Public pensions body

The Council of Ministers is the government body that regulates the General Pension and Social Security Authority (GPSSA), which oversees the operation and policy of national government pension schemes. The board of the GPSSA drafts the internal regulations that govern the operation of the pensions system in the UAE. The GPSSA's main office location is in Abu Dhabi, although it has customer care centres all around the UAE.

Name. General Pension and Social Security Authority (GPSSA).

T 80010(Call Centre).

E ccsupervision@gpssa.gov.ae

W http://gpssa.gov.ae/ar/Pages/default.aspx#/

Other governance regimes

There are no other governance regimes that apply to national government pensions in the UAE.

Supplementary pensions

5. Is it common (or compulsory) for employers to provide access, or contribute, to supplementary pension schemes for their employees? If they do, are they:

  • Occupational (that is, linked to an employment or professional relationship between the plan member and the entity that establishes the plan)?
  • Personal (that is, not linked to an employment relationship, established and administered directly by a pension fund or a financial institution acting as pension provider, where individuals independently purchase and select material aspects of the arrangements, though the employer may make contributions)?

Supplementary pension schemes do not currently operate within the UAE.

6. Where supplementary pension schemes are provided, do these schemes provide pensions, the value of which:

  • Is linked to the employee's salary (defined benefit)?
  • Is linked to employer and/or employee contributions and investment return on those contributions (defined contribution)?

Linked to the employee's salary

Supplementary pension schemes do not currently operate within the UAE.

Linked to employer and/or employee contributions

See above, Linked to the employee's salary.

7. For supplementary pensions:

  • Is there a minimum period of service before workers are entitled to receive vested rights?
  • Are there any requirements to disclose pension benefits to participants or beneficiaries?
  • Are there any legal requirements for schemes or providers to index pensions in payment and/or revalue pension rights in deferment?

Minimum period of service

Supplementary pension schemes do not currently operate within the UAE.

Disclosure requirements

See above, Minimum period of service.

Legal requirement to index

See above, Minimum period of service.

Funding and solvency requirements

8. In relation to supplementary schemes, are these generally funded or unfunded? If funded, are there any solvency requirements? Are there any legal requirements relating to how the scheme employer, trustee or provider must invest the assets of the scheme?

Funded or unfunded?

Supplementary pension schemes do not currently operate within the UAE.

Solvency requirements for funded schemes

See above, Funded or unfunded?.

Accounts and disclosure

See above, Funded or unfunded?.

9. Can supplementary pension schemes hold sponsoring employer stock as a plan investment? If so, are there any limitations that apply?

Supplementary pension schemes do not currently operate within the UAE.

10. Are there any fiduciary requirements that apply to the sponsoring employer, trustee, provider or administrator of supplementary pension schemes?

Fiduciary requirements

Supplementary pension schemes do not currently operate within the UAE.

Prohibited activities

See above, Fiduciary requirements.

11. In relation to access for members to the funds in their supplementary pension scheme:

  • To what extent can members transfer their funds to another pension scheme?
  • How do members normally take the benefit of their funds (for example, lump sums, income withdrawals (drawdown), life annuity arrangements)?
  • What are the legal restrictions upon access to the funds (for example, age)?
  • What are the common arrangements for early retirement and ill-health retirement?
  • Are dependants of deceased members entitled to receive benefits payable on the member's death? What form do these commonly take?

Member's transfer of funds

Supplementary pension schemes do not currently operate within the UAE.

Taking pension benefits

See above, Member's transfer of funds.

Legal restrictions

See above, Member's transfer of funds.

Early and ill-health retirement

See above, Member's transfer of funds.

Dependants' benefits

See above, Member's transfer of funds.

Regulatory body

12. Is there a regulatory body that oversees the operation of supplementary pension schemes? Do any other governance regimes apply to supplementary pension schemes?

Regulatory body

Supplementary pension schemes do not currently operate within the UAE.

Regulatory framework

See above, Regulatory body.

Other key governance requirements

See above, Regulatory body.

Penalties for non-compliance

See above, Regulatory body.

Tax on pensions

13. Are any tax reliefs available on contributions to supplementary pension schemes (by the employer and employees)?

Tax relief on employer contributions

Supplementary pension schemes do not currently operate within the UAE.

Tax relief on employee contributions

See above, Tax relief on employer contributions.

14. Are there any approval or registration requirements with the local tax authority where a supplementary scheme is established?

Supplementary pension schemes do not currently operate within the UAE.

15. What is the tax treatment of investments made by the scheme?

Supplementary pension schemes do not currently operate within the UAE.

16. What is the tax treatment of pension and lump sum payments made to members?

Supplementary pension schemes do not currently operate within the UAE.

17. Are there any other applicable tax charges on schemes?

Supplementary pension schemes do not currently operate within the UAE.

Business transfers

18. Is there any legal protection of employees' pension rights on a business transfer?

Transfer of accrued pension rights

Pension contributions made by employers and employees are mandatory, and the employer must ensure that all requisite pension payments are made to avoid hefty financial sanctions. Therefore, on a business transfer, the obligation to make pension contributions will automatically transfer to the new employer, who will be responsible for making all the necessary pension contributions following the business transfer.

Other protection for pension rights

No other protection for pension rights exist other than those outlined above (see above, Transfer of accrued pension rights).

Participation in pension schemes

19. Can the following participate in a pension scheme established by a parent company in your jurisdiction:

  • Employees who are working abroad?
  • Employees of a foreign subsidiary company?

Employees working abroad

National government pensions are only available to UAE nationals and Gulf Cooperation Council (GCC) employees employed within the GCC region. Any UAE national working outside of the UAE or the GCC is not entitled to participate in the UAE national government pension system, and their accrual will freeze until such time as they return to employment in the region.

Employees of a foreign subsidiary company

See above, Employees working abroad.

Employer insolvency and overall scheme solvency

20. Is there any protection provided for pension scheme benefits where the sponsoring employer becomes insolvent? If so, who provides the protection, and how does this operate? If the scheme itself is underfunded, are there any funding obligations on connected or associated legal entities?

The law is silent on this point. There is no funding entity or foundation to assist if the sponsoring employer becomes insolvent.

 

Credit: Find the original article by Thomson Reuters dated 1st Septmber 2020 here