Pensions: Sustainble and Adequate

Will I be forced to save for my pension?
The White Paper recommends the introduction of a new pillar - the second pillar pensions scheme - that is directed to induce people to save for their retirement.

The White Paper recommends that such savings for retirement should be mandatory - that is an individual has no choice but to invest a part of his or her income to his or her second pillar pension scheme.

Research shows that while deposits per capita have increased from 2.79 (Lm000s) in 1994 to 5.61 (Lm000s) in 2003 the savings ratio - that is how much one saves from his or her income - has decreased from 16.85 per cent in 1994 to 1.30 per cent in 2002.

The conclusions reached are that people are saving less, implying that the majority of the population would only, at best, have saved a modest amount to contribute to their standard of living during retirement.

The White Paper argues that if this trend continues, given the anticipated impacts on the pensions system, future pensioners will not be able to reach a decent standard of living on their two-thirds pension only.

Thus, the White Paper argues that in order to ensure social good the government should prompt people to save to plan for their retirement even if this means that savings have to be mandatory.

The White Paper believes that for future generations to be protected such a scheme should be introduced by 2010. It recommends that the implementation of this scheme should be phased. The first phase should be the introduction of this scheme on a voluntary basis with implementation to start as from January 1, 2006. The second phase would be to introduce the scheme on a compulsory basis as from January 1, 2010.

The White Paper however recommends that, given the long-term assumptions upon which the calculations are based the prudent way forward would be to make this decision in 2009 - thus taking into account circumstances at the time.

To what extent will I be forced to save for my pension?
The White Paper does not give direct recommendations of how much you should invest in your second pillar pension scheme. The White Paper argues that in determining the quantum of how much you should be asked to save in a compulsory second pillar pension scheme, a detailed study by professional actuaries should be undertaken to determine the impact on business and on yourself.

In this regard, the White Paper recommends that the government should commission the Malta Financial Services Authority to undertake this study.

The White Paper however recommends that the government and the MFSA should join forces with private sector insurance firms to introduce a new scheme, which will allow owners to have a life endowment or profit-related insurance policy to convert such a policy into the second pillar pension scheme.

The White Paper recommends that a person who opts for such a scheme will be able to transfer the capital accrued under the old scheme to his or her second pillar pension.

Moreover, the amount that the person will be asked to save in his or her second pillar pension will be the difference between the annual premium paid on the old life endowment or profit-related insurance scheme and the compulsory savings amount that is yet to be established.

Furthermore, the White Paper recommends that annual savings made to the second pillar pension will be non-taxable.