From Lump-Sum Uncertainty to Planned Contributions: Traditionally, UAE companies only faced a large end-of-service gratuity payout when an employee left, which was an uncertain future liability. The new pension scheme changes this dynamic to a steady funding model, requiring monthly contributions to an investment fund
For CFOs, this means moving an expense that was once back-loaded (and sometimes under-provisioned) into a regular operating cost. On one hand, this can tighten monthly cash flow since the business is setting aside 5.83%–8.33% of basic payroll in real time. On the other hand, it eliminates the risk of a balloon payment due at an employee’s departure, which can be especially challenging if multiple long-tenured staff exit around the same time. Businesses can budget more accurately for these expenses now, smoothing out what used to be a volatile obligation.
Balance Sheet and Funding Considerations: Adopting the funded scheme can also improve a company’s balance sheet health. Under the old gratuity system, companies carried an accumulating liability (often disclosed in financial statements). By participating in the new scheme and contributing monthly, the liability is essentially offloaded to a funded plan, potentially removing it from the employer’s books as an unfunded debt. This can enhance key financial ratios and make the company more attractive to investors or lenders, who often prefer to see well-managed employee benefit obligations. However, a transition challenge is handling the accrued gratuity up to the point of switching – employers must ensure past service benefits are preserved
Some firms might inject a one-time contribution to the fund to cover past accruals (if they choose to fully fund past service), which could impact short-term cash or reserves. Others may keep the past liability separate and only fund on a going-forward basis. Either way, clear planning is needed to avoid double counting or gaps.
Corporate Tax Advantages: A noteworthy development is the introduction of corporate tax in the UAE (9% on business profits from 2023). Under the pension scheme, employer contributions are likely tax-deductible, similar to salary expenses. In fact, participants in the new scheme are explicitly said to gain corporate tax benefits
Practically, this means every dirham a company contributes to employees’ pension funds could reduce its taxable income. Under the old system, gratuity costs weren’t realized until payment (at which point they’d be deductible, but many years later). Now, there’s an incentive to fund sooner: the business not only invests in its employees’ futures but also saves on taxes today. For example, if a company has AED 10 million of profit and contributes AED 1 million to the pension scheme, that might lower its taxable profit to AED 9 million, yielding a significant tax saving. This dual benefit of tax relief and improved employee benefits makes a compelling business case for the new system. CFOs should work with their tax advisors to maximize this advantage, ensuring contributions are structured and documented properly to meet deductibility criteria.
Impact on HR Budgets and Total Rewards: For HR departments, the pension reform requires rethinking total compensation strategy. The end-of-service gratuity was often viewed as a back-end cost, somewhat “out of sight, out of mind” in day-to-day reward discussions. Now, with ongoing contributions, the pension becomes a visible part of employee cost. Companies might decide to reallocate compensation – for instance, offering slightly lower annual bonuses but a higher long-term benefit via the pension contribution, emphasizing the future value to employees. In competitive industries, some employers could choose to contribute above the legal minimum or match a portion of voluntary employee contributions to attract talent (similar to employer matching in 401(k) plans globally). Each dirham invested in the pension fund is money that could have been salary or bonus, so HR must strike the right balance to keep overall remuneration attractive while managing budgets.
Talent Retention and Productivity: There’s also a less tangible but powerful financial impact: improved talent attraction and retention. Companies offering a robust pension (especially if backed by a reputable provider like HAYAH) will likely stand out in the job market. This can reduce recruitment costs and turnover-related expenses. Employees who feel secure about their long-term savings tend to be more engaged and loyal, which boosts productivity. Moreover, the ability to withdraw voluntary savings during employment (for emergencies, as allowed by the scheme)
means employees have a safety net. This could reduce stress and thereby healthcare or absenteeism costs for the employer – a healthier, wealthier workforce is often a happier one.
HAYAH’s Life & Disability Solutions – Smoothing the Transition: One immediate concern for businesses is: What happens in cases of an employee’s death or disability under the new system? Under the gratuity system, if an employee passed away or was permanently disabled, the company was obliged to pay out the accrued benefit immediately. With a funded pension, the accumulated amount is in the fund and would be claimable by the employee or their beneficiaries, but it might not equal the traditional formula if the event occurs early in service (depending on contributions made and investment performance). This is where HAYAH’s life and disability insurance offerings provide a safety net for both employer and employee. By arranging group life and disability cover with HAYAH, a company can ensure that, say, 2-3 years of salary is insured for each employee. In the unfortunate event of death or disability, the insurance pays out a lump sum to the employee’s family (or to the employee, in case of disability), complementing whatever is in the pension fund. This means the family receives sufficient financial support, and the employer is not scrambling to find additional ex-gratia payments beyond the funded amount. Essentially, HAYAH’s insurance products shield the business from unexpected payout shocks, allowing a smooth financial transition to the new system. They turn unpredictable, catastrophic events into planned, insured events.
Supporting Businesses Through Change: Implementing the new pension scheme requires setup of new processes – payroll deductions, fund transfers, record-keeping, employee education (addressed in Article 10). HAYAH’s digital ecosystem significantly eases this burden. Through HAYAH’s platform, employer contributions and employee voluntary contributions can be automated and tracked in real time, reducing administrative workload. HR and finance teams get access to dashboards and reports that show contribution totals, participation rates, etc., making reconciliation with accounting much simpler. This streamlining saves staff time (which is money) and reduces the risk of errors or late contributions (avoiding potential fines or penalties). As an example, HAYAH’s partnership with cutting-edge fintech additiv allows a fully digital end-to-end process – from onboarding employees into the scheme to handling their exit payouts
Fewer manual interventions translate to lower administrative costs.
Additionally, companies gain access to HAYAH’s financial planning tools that can help model the impact of the pension scheme. A CFO could, for instance, use these tools (or consult HAYAH’s experts) to project the next 5-10 years of pension expenses under various growth and turnover scenarios. This kind of foresight was harder with the old gratuity system due to its unpredictability. Now, with HAYAH’s domain expertise – serving over 350 companies and 300,000 employees in the region
– businesses can tap into best practices and benchmarking. How much are competitors contributing? What insurance multiple are others offering for life cover? HAYAH can advise on these questions, drawing from its broad client base, so that each company can calibrate its benefits to be both competitive and cost-effective.
Incentives for a Smooth Transition: It’s worth noting that the government is encouraging this shift not to burden companies, but to modernize benefits. The long-term expectation is that well-managed pension funds will yield returns that ultimately reduce the real cost of end-of-service benefits for employers (since investment gains will shoulder part of the payout). By partnering with HAYAH, which offers personalized investment strategies and professional asset management, employers increase the likelihood that fund returns will be healthy. Over years, a well-performing fund could mean the contributions made end up growing, potentially easing the pressure on the employer to constantly increase benefit budgets for inflation – the investments help do that. This “investment dividend” is something CFOs will appreciate when looking at the total cost over decades.
In summary, while the pension reform requires businesses to adjust their cash flow and accounting practices, it brings greater predictability and potential financial benefits (tax savings, lower turnover costs, improved balance sheet position). With HAYAH’s comprehensive support – from life/disability insurance that caps the downside risk, to digital administration that lowers overhead – businesses can navigate this transition smoothly and even leverage it as a value-add. The focus shifts from seeing end-of-service payments as a cost and risk, to viewing a pension plan as an investment in workforce stability and company reputation.
Sources:
UAE Government Portal – Employers contribute 5.83%/8.33% of basic salary monthly under new Savings Scheme
UAE Cabinet Resolution No.96/2023 – Participants must cease accruing under old gratuity system once new scheme is adopted, ensuring no overlap
UAE Government Portal – Employee is entitled to all contributions and returns within 14 days of termination; can continue investing in the scheme afterward
Additiv Press Release – Employers gain corporate tax benefits by opting into the voluntary scheme
HAYAH-additiv Partnership – HAYAH’s platform provides fully digital employer & employee experience for End-of-Service Benefits, from onboarding to termination
HAYAH Insurance Profile – HAYAH serves 350+ companies and 300k employees with life, medical, and savings solutions, indicating strong domain expertise
International Adviser – HAYAH’s digital administration ensures businesses manage pension obligations with ease and efficiency
International Adviser – CEO Mohamed Seghir highlights HAYAH’s ability to deliver top-tier pension solutions, supporting government’s aim and positioning HAYAH as a foremost provider