The reform of the end-of-service gratuity system in the UAE has become a turning point in the approach to pension payments. The traditional lump-sum payoff model has been accepted as the standard for decades. However, its weaknesses became obvious: the lack of investment options, dependence on the sustainability of the company, the inability to make voluntary contributions, and the complete predictability of the result, which did not grow over time.
Now everything is different. Since November 2023, the defined contribution scheme has been introduced, which changes the very logic of pension savings formation. Employers list regular contributions: 5.83% of the base salary for employees with up to five years of experience and 8.3% for those who work longer. For citizens, there is an even more developed system 26% of the pension base, where 11% is paid by an employee, 15% by the employer, and the state adds 2.5% for salaries below 20 000 AED.
Impact On Employers And CFOs
These numbers change everything. Previously, the company was faced with balloon payment at the time of dismissal, but now the costs are evenly distributed and turn into a manageable operating cost. CFOs gain predictability and a balance between cash flow and liabilities, which improves financial stability indicators and makes the company more attractive to investors. Under the 9% corporate tax introduced in 2023, each transfer to a pension fund reduces taxable profits. A simple example: with an income of 10 million AED and a contribution of 1 million, the tax base is reduced to 9 million, which allows you to save significant amounts.
The new system has also become a challenge for HR departments. Pension contributions are now part of the total rewards strategy and become a visible part of the compensation package. An employer can retain employees by offering contributions above the minimum or match voluntary contributions, which increases competitiveness in the labor market. In an environment where 92% of the country’s workforce are expats and 89% of the population are foreigners, it is precisely such measures that enhance talent retention and reduce turnover.
Employee Perspective And Social Protection
For employees, the changes are even more noticeable. The formula of the old gratuity (salary × years of service) / 3 is already a thing of the past. Now the money accumulates in the fund, generates investment income, is available for voluntary contributions, and can be transferred to another fund when you change jobs. The right to receive accumulated funds and income is fixed by law: within 14 days after dismissal, the employee receives everything that was transferred.
An important addition is investment tools: Sharia compliant funds, capital guaranteed options for unskilled workers, and diversified portfolios for those who are willing to take risks. This flexibility gives employees the opportunity to shape retirement planning based on age, income, and goals. Workers also gain peace of mind knowing that they can complement their pension savings with additional protections such as insurance in Dubai, which often plays a role in securing long-term stability.
The reform fits into a broader regional context. In Saudi Arabia, the retirement age is 58, one of the lowest in the world. Provident funds are already operating in Oman and Bahrain, which have replaced end-of-service allowances and are accumulating employer contributions. International social security standards require collective financing, savings portability, and inflation protection, and the new system in the UAE is moving in this direction.
Today, end-of-service gratuity is no longer an unpredictable lump-sum payment. It becomes part of investment-based alternatives, where each contribution becomes an element of long-term capital. Employees gain financial security, companies manage liabilities, and the economy gets a sustainable savings model.
This is not just a pension reform. This is a step towards a system where defined contribution, regular contributions, portability and long-term savings growth become the basis of a social contract between employees, employers and the state.
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