In recent weeks, we’ve been exploring how countries across the Gulf Cooperation Council (GCC) are restructuring End-of-Service Benefits (EOSB). We began with Oman last week. Next in the series is the Kingdom of Bahrain and interestingly, Bahrain has been the first in the region to fully switch from the traditional gratuity model to a funded system in March 2024.

However, while Bahrain now operates a funded EOSB system, it looks very different from both Oman’s planned Provident Scheme and the UAE’s alternative EOSB Savings Scheme.

Here’s how it works.

The basis: Decision No. 109 of 2023

Decision No. 109 of 2023 issued in December 2023 is the legal basis for the EOSB reform in Bahrain. This regulation introduced a new system effective from 1 March 2024, which requires employers to pay monthly contributions for non-Bahraini employees into the Social Insurance Organization (SIO) rather than making a lump-sum payment at the end of employment.

Contribution rates closely mirror the existing gratuity formula:

• 4.2% (~15 days per year) for each of the first three years of service; and
• 8.4% (~30 days per year) for each year thereafter.

The wage base includes basic salary plus any social allowance, where applicable.

For employees who already had more than three years of service as of 1 March 2024, the 8.4% rate applies going forward.

What happens to past service?

For the period before 1 March 2024, companies continue to be responsible for the accumulated EOSB gratuity, which must still be paid directly by the employer in the old way.

For instance, say, an employee joined a company on 1 March 2014 and left on 31 March 2025. On exit:

• The employer pays the EOSB accrued from 1 March 2014 to 29 February 2024.
• The employee applies to the SIO to receive the EOSB accrued from 1 March 2024 to 31 March 2025.

The two systems co-exist, but only temporarily until all the accumulated EOSB gratuity is fully paid by employers over the next few years.

How are pay rises handled?

The Bahraini system, in other words, remains a defined-benefit arrangement. Each employee ultimately receives a gratuity calculated using a formula that multiplies the final salary by the accrued number of days of service. What has changed is not the benefit itself, but how it is funded and paid, following the introduction of the new mechanism on 1 March 2024.

So how are salary increases treated under the new system?

Because the gratuity is now settled in two parts: (a) for service before 1 March 2024 (the employer’s responsibility), and (b) for service after 1 March 2024 (administered by the SIO), any pay rise is also dealt with in two corresponding parts:

• The “company part” of the gratuity
  This relates to service accrued before 1 March 2024 and remains the employer’s responsibility. If an employee’s salary increases, the employer must fund the higher gratuity linked to that earlier service. In practice, this means increasing the EOSB liability on the balance sheet following pay rises.

• The “SIO part” of the gratuity
  This relates to service accrued after 1 March 2024 and is administered by the SIO. Employers must notify the SIO of any salary increases and pay contribution differentials so that total contributions remain aligned with the higher future gratuity payout.

Are employer contributions invested?

Yes, but with an important caveat.

Employer contributions paid to the SIO are pooled into a dedicated account and invested at system level. This is explicitly confirmed in Article 4 of Decision No. 109 of 2023, which refers to “investment proceeds” generated by the account.

These investment proceeds are reportedly used to support the financial position of the account, and cover administrative expenses, which are capped at 7% of contribution income. If a surplus remains after meeting obligations, it is transferred to the fund.

In other words: The system is funded, employer contributions are invested but investment gains are not paid to employers or employees. Instead, investment gains are retained by the SIO which is also responsible for the pension scheme of Bahraini nationals. For non-Bahraini employees, the SIO simply pays the total of the contributions received from employers, and nothing more.

What makes Bahrain different?

Despite being described as a funded system, Bahrain has not created an investment-linked EOSB savings scheme. Instead, it has introduced a prefunded, pooled, defined-benefit arrangement, under which:

• Employers fund the system entirely, discharging their EOSB obligations through mandatory monthly contributions. These contributions automatically increase when salaries rise, reflecting pay adjustments over time.
• The SIO assumes responsibility for managing the system and paying benefits when employment ends.
• Employees receive a predictable, wage-linked gratuity, calculated on their final salary at exit, exactly as under the old Labour Law.

This last point is the most striking feature of Bahrain’s system. Employees continue to benefit from salary progression over time, even though the funding mechanism has changed.

This is not the case in Oman’s planned Provident Scheme or the UAE EOSB Savings Scheme. In these systems, benefits are tied to contributions and investment performance rather than final salary, meaning employees forgo the upside from future salary increases, but instead gain exposure to investment returns.

Conclusion

Firstly, Bahrain deserves credit for being the first country in the GCC to fully implement an EOSB reform, moving away from an unfunded gratuity model to a funded system as early as March 2024.

The reform has certainly improved outcomes for employees. EOSB gratuity is now funded (with respect of work performed after 1 March 2024)and securely held by a government institution (the SIO), while preserving certainty of outcome for employees. Gratuity continues to be calculated on final salary, just as under the old Labour Law.

In short, Bahrain has chosen stability and certainty over potential upside and has implemented a conservative, centrally-managed system rather than an investment-linked savings model.

That said, the new system is narrow in scope when compared to the UAE EOSB Savings Scheme. Expatriate employees do not have access to investment choices, do not receive investment returns, and cannot make voluntary contributions to build longer-term savings or retain balances after employment ends. As a result, the system functions well as a gratuity replacement, but less so as a broader savings or retirement solution.

At Pensions Monitor, we will continue to track how Bahrain’s system evolves over time, particularly how the SIO reports on funding levels. As more data becomes available, Bahrain will serve as an important case study of how a funded EOSB system can work without turning gratuity into an investment product.

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