Planning for the Future: Introducing the EOSB Savings Calculator

GratuityAdviser is pleased to unveil a brand-new tool: The EOSB Savings Calculator. Under the traditional End of Service Benefit (EOSB) system, calculating the EOSB gratuity is straight-forward as it follows a clear formula which is stipulated in the UAE Labour Law.

However, under the new alternative EOSB saving scheme, calculating the gratuity is more complicated as the new system is investment-based. The gratuity cannot be calculated according to a simple formula any longer – instead we need to simulate the outcome of different investment scenarios. Let’s dive in!

How the New Scheme Works

First, let’s remind ourselves about the key features of the new scheme.

• Employers pay a monthly contribution to the appointed Fund Manager. The contribution rates are:  5.83% of monthly basic salary for employees with less than 5 years of service; and 8.33% of monthly basic salary for employees with 5 or more years of service

• Employees can choose the investment fund into which the contributions will be paid (as long as they are “skilled” workers earning more than 4,000 AED/month).

• Once they enter the new scheme, the accumulated EOSB gratuity up and until the time of switch-over is calculated and frozen. This is called the "Legacy Gratuity".

• In addition, employees can make Additional Voluntary Contributions (AVC’s) which are deducted from their salary, and invested into the investment fund of their choice.

That is, in a nutshell, the new system. There are of course additional points and clauses- if you are interested to read more then we suggest the following article or other resources on the GrauityAdviser site.

The Three Components of the New EOSB Payout

As per the short summary above, the EOSB payouts of the new system consist of three elements:

• The first is the Employer Contributions that are being invested;

• The second is the “Legacy Gratuity, ie the gratuity that has been accumulated up & until the time of switch-over

• The third is the voluntary savings that the employee makes on his own, by way of salary sacrifice

  
  

The first two “pots” are available only once an employee retires or leaves his employer. (Or passes away, in which case his beneficiaries will receive the savings). The third “pot” – as it is entirely voluntary – can be cashed out at any point in time.

So, if we are going to estimate the future EOSB gratuity payout, we need to calculate & simulate all three savings pots. This is where the investment funds come in – remember, the employer contributions as well as the additional voluntary contributions are invested, and they generate an investment returns. But how much?

Investment  Fund Types — Why the Choice Matters

Each approved Fund Manager offers a range of investment funds (please see here for a comprehensive overview). These funds come in different types. For instance:

• Capital-Guarantee Funds: These are funds where the Principal is protected. This means you will never lose out, and at the minimum you will get back what you put in. Sounds great, right? Well…. Perhaps not. Remember inflation? If you put in 100 AED today, and get back 100 AED in twenty years time, you’ll notice that the 100 AED in future will buy you much less than today, as prices will have increased.

• Conservative: These funds typically invest in highly rated bonds (ie, debt issued by governments or companies). They are quite secure, and generate a modest return of perhaps 3-5%

• Balanced: These funds invest not only in bonds, but also in equity. This means they are more volatile, more risky, but offer a higher potential return, perhaps in the 5.5 – 8.5% ballpark.

  
  

You’ll notice that we have carefully given some indicative ranges of what investment return investors can expect from these funds. However- please remember these are historic averages and are not guaranteed going forward. And they represent long-term averages; in any given year they could be higher or lower, and in some instances the return may be even negative.

Using the EOSB Savings Simulator

So let’s now turn our attention to the GratuityAdviser EOSB Savings Simulator. The inputs are straight forward: Employees can entere their basic salaray,  start date, date of switching to the new system. Furthermore employees can indicate if they wish to make additional voluntary contributions, their expected salary increase per year, and their fund preference — and hey presto, the calculator works out the EOSB gratuity broken down by all three components: The Employer Contributions (and investment gain); Voluntary Contributions (and investment gain); Legacy EOSB.

Furthermore the calculator helps users to understand what the future gratuity is worth in today’s money; and finally, the calculator estimates what this lump sum would translate into if one was to invest the lump sum into an annuity, generating a regular monthly income.

What does that mean for HR?

As awareness of the new system is increasing, more and more employees and managers have practical questions – first and foremost: "What does the new system mean for me? Should I make additional voluntary contributions? What fund should I invest into?" And so on.

The GratuityAdviser EOSB Calculator helps HR teams and employees to understand the impact of their fund selection, the impact of AVC’s, and to work out scenarios how much their EOSB gratuity may amount to in future.

We believe it is an essential tool that helps HR to communicate what the new system is all about, and what it means for each employee. Please give it a try!