Protecting Worker Retirement In The Post-Covid ERA

As we emerge from a world struggling with the social and economic effects of a two-year global pandemic, it has become clear the risks that employees face when an employer suffers financially. Bahrain, an early mover on balancing its pandemic response and economic necessity, has introduced provisions as early as 2012 in its Labour Law to account for the possibility of workplace closures and operating restrictions. The legal certainty benefitted employers and employees alike.  Once the COVID pandemic began, health and safety became the priority, including PPE distancing and limitations on non-essential businesses. With the economic strain mounting from reduced travel and a global economic slowdown, Bahrain turned to subsidies and policies to enable local and foreign workers to remain employed and to avoid an exodus of skilled employees. Finally, by facilitating free access to the COVID vaccine to all residents, Bahrain evidenced its compassion for all people who call Bahrain their home.

Having learned the toll which a pandemic can take on employees, businesses and a whole country, the Bahraini parliament and ministers have turned their attention to ensuring employees protection of their future.  This article details the major changes in Bahrain’s social insurance and end of service indemnity regime, as well as other protections designed for worker confidence.

Social Insurance

In April 2022, His Highness King Hamad Bin Isa Al Khalifa signed into law an amendment to the Social Insurance Law (the SIO Law) after it had been approved by parliament following substantial deliberations, focused primarily on the social and economic effects of the changes on employers and employees.. 

The SIO Law amendments are likely to have a profound effect on employers and employees alike. Increased funding for pensions and postponement of entitlement to balance funding with an employee’s continued contribution to the Bahrain economy is a major step towards economic certainty for pensioners. Allocation of expatriate’s end of service indemnity administration to the SIO fund places non-Bahraini employees on an even footing in the confidence that money will be available when they change jobs or leave Bahrain. For Bahrain, the long term goals of these amendments are sustainability of the SIO fund and a larger base of contribution for investment. 

The most significant changes brought on by the SIO Law are as follows:

Increasing the monthly contribution amounts paid by employers and Bahraini employees: 

An Employer’s contributions toward social insurance for old age, general disability and death were increased from 9% to 11% of the employee’s monthly qualifying salary (in addition to contributions towards workplace injuries and unemployment insurance). Beginning in 2023, employee contributions would be increased from 6% to 7% of their qualifying salary.

From 2023 until 2028, the employer contribution will increase by 1% each year until reaching 17% of each Bahraini employee’s wages in addition to the employee’s portion of 7% mentioned above.

While this increase in contributions represents an additional cost on employers, assurance that the Social Insurance Organization (SIO) will continue to receive adequate funding to cover Bahraini pensioners is key to Bahrain’s longevity and growth.

Changing the retirement age and employment term for women

In a move toward equality, the retirement age for women has now been aligned with that for men at sixty years (up from fifty-five). Similarly, the number of contributing months for timely retirement and pension has been increased to 180. Those women eligible for retirement under the age fifty-five criteria may exercise the right until April 2023.

This change reflects the recognition of women’s economic contribution to Bahrain and the importance of a diverse workforce for productivity and success.  Significantly, Bahrain also removed restrictions under the Labour Law of 2012 which prohibited from women undertaking certain jobs.

Increasing the pension amount for retirees

With Bahrain’s recognition that inflation in the post-COVID era has a particularly heavy impact on pensioners on fixed income, the recent amendments have introduced a retroactive increase in pensions by 3% for 2021 and 3% for 2022.  

Inclusion of the “End of Service Indemnity” for expat employees into the SIO fund

The final major amendment involves allocating expatriate end of service entitlements to the Social insurance organization’s general fund. This consolidates funds and facilitates utilizing such funds toward higher yield investment returns available to the SIO to fund end of service entitlements rather than an employer being required to hold the indemnity amount on their books.

The amendment authorizes the Prime Minister to determine the rates of contributions and the conditions and terms for calculating end of service indemnity, taking into account the provisions of the Labor Law.

The decision to assign contributions relating to end of service indemnity out of the hands of employers and into the hands of a governmental body is a contentious one. On one hand, the situation of employees who are at risk of an employer refusing or being unable to pay this necessary pension-like benefit are meaningfully improved.  On the other hand, for employers who may seek to cooperate with employees (such as permitting withdrawal of end of service entitlements) or who have a strong track record of proper funding, this change introduces additional administrative hurdles and a theoretical risk of SIO underfunding.

Wage Protection Scheme Update

Bahrain’s Wage Protection Scheme was initiated by a Ministerial Order by the Minister of Labour and Social Development in 2019. The wage protection scheme is a system that aims to provide additional guarantees to employees (Bahrainis and expats alike) of receiving their salaries and wages fairly and in accordance with the requirements under the Labour Law.

The “Wages Protection System” does not impose a funding requirement, but instead an information delivery requirement to the Labor Market Regulatory Authority (“LMRA”) reflecting accurate and timely payment of wages. In order to comply with the Wages Protection System, employers must maintain a bank account in Bahrain and ensure that their employees open a bank account for transferring their wages through banks and financial institutions. Salary transfer is monitored and disclosed by the relevant bank to the LMRA evidencing that wages are being paid.

The Wages Protection System was meant to be enforced in three stages with the first stage applicable only to employers having 500 or more employees, the second stage for employers having 50 to 499 employees and the last stage for employers having 49 or less employees. By and large, most employers in Bahrain fall within the last category of SMEs.

This third and last application stage of the Wage Protection Scheme entered into force on 1 January 2022 based on a ministerial order in 2021. The Order also grants a “grace” period of six months to allow employers to take the necessary steps to be inducted into the Wages Protection System. During such period, no sanctions will be imposed on non-compliant employers.

Unlike wage protection schemes in other jurisdictions, Bahrain does not require a certain format of wage payment; any payment method afforded by a local bank and compliant with CBB regulations is acceptable.