Study calls for compensation scheme in case of fraud

A study that looks into the government's proposed pensions regime has recommended the introduction of a compensation scheme for workers who lose their private pension, under second or third pillar schemes, as a result of fraud or misappropriation.

The study is a thesis entitled The Regulation Of Pension Funds In Malta, The Special Funds (Regulation) Act 2002 And Beyond by Christopher Buttigieg.

Mr Buttigieg proposes that a guarantee scheme offering compensation to employees who lose their lifetime savings due to misappropriation should become part of the law regulating pensions once employees will have no choice but to invest in a private pension.

The Special Funds (Regulation) Act 2002 forms the basis of the regulation of the pensions regime as proposed in the government's White Paper.

According to the pensions White Paper published by the government in November 2004, the traditional pension provided by the government, referred to as the first pillar pension scheme, will no longer be enough for pensioners to make ends meet. Therefore, workers will have to invest in the so-called second pillar pension scheme, a private pension that will become mandatory for all and which will definitely have to be thoroughly regulated.

Mr Buttigieg's thesis was presented as part of Masters degree in the Faculty of Laws in 2003. It analyses at length the Special Funds (Regulation) Act that was enacted by Parliament three years ago and the extent to which this law could be used to regulate the new pensions regime.

With regard to the compensation scheme it calls for, it shows that in countries where a safety net was not in place occupational pension funds were misused at the expense of many unfortunate workers.

Mr Buttigieg writes about a major pensions scam which occurred in the 1980s and 1990s in Britain when the Maxwell Group, a huge business empire employing thousands, collapsed amid investigations of fraud following the death of Robert Maxwell, the group's ultimate owner, in 1991.

The group, which included a number of companies including Maxwell Communication Corporation and Mirror Group Newspapers, operated a number of pension schemes for its employees.

The business empire collapsed as it emerged that its debts outweighed its assets. More than £400 million had been "siphoned out" of a number of retirement funds that were supposedly being operated for the benefit of the employees.

A probe into the Maxwell case established that pension funds had been misused. Money from the funds had been used to buy a property in 1986 but it was Mr Maxwell's private companies that obtained the benefits from the transaction.

The Mirror Group Newspapers used £34 million in cash from pension funds to buy shares in Reuters in 1986. But when the shares were transferred back three years later, not only did the pension funds make a loss but it also transpired that profits made from the investment in the first months were not directed back to the pension funds but to Mr Maxwell's private companies.

In his recommendations for a better private pensions regulation, Mr Buttigieg states that the compensation scheme, administered as in the UK by a compensations board, should be funded by the industry itself.

The compensation scheme of the UK occupational pensions regime provides "remedial compensation to members of occupational pensions scheme by making a payment to trustees of the said scheme," Mr Buttigieg wrote in his thesis.

Compensation may be given only when the scheme is a trust scheme, the employer is insolvent, meaning that it is unable to pay debts, or the value of the assets of the scheme has been reduced and there are reasonable grounds for believing that the reduction was due to fraud or misappropriation.

Another condition is that in the case of a salary-related trust scheme, immediately before the application for compensation the value of the assets of the scheme is less than 90 per cent of the amount of liabilities of the scheme.

Finally, compensation may be awarded when "it is reasonable in all circumstances that the members of the scheme should be assisted by the Compensations Board paying to the trustees of the scheme, out of funds for the time being held by them, an amount determined in accordance with the compensation provisions".

Mr Buttigieg concludes that an increased level of security could also be beneficial to the Maltese government in promoting the introduction of supplementary pensions.

He says that similar facilities already exist with respect to investment and banking and that a legal framework for the formation of such a scheme is already in place. In fact, the Malta Financial Services Authority already has a management committee in place that is responsible for managing the investment compensation scheme and the deposit guarantee scheme.

Other recommendations made by Mr Buttigieg are the introduction of a Pensions Ombudsman, who will be responsible for resolving complaints and disputes involving consumers and service providers in the field of financial services, and what is known as the "portability" of pension schemes. This means that since there is an increased tendency towards job mobility, and therefore workers who spend all their working life with one firm are gradually becoming exceptions, the law should be drawn up in such a way that an employee would be able to transfer his accrues from one scheme to another.