Pensions – why procrastinate further?

The publication of two reports some days ago, one by the Maltese Pensions Working Group and another by the European Commission, again shed light on the extent of the pensions challenge we will be facing in the near future.

We have always been a nation of keen savers even without tax incentives

The pension reform introduced in 2007 set the scene for the introduction of a fully-fledged three-pillar pension system. The first pillar is the public-funded pay-as-you-go system we all contribute to weekly.

The second pillar will be composed of contributions made by employers to pension schemes set up for the purpose, while the third pillar will consist of contributions made freely by individuals wanting to supplement their pension pot.

The framework for the three-pillar system is already set out in the Social Security Act and fleshed out in the Special Funds (Regulation) Act, soon to be replaced by the Retirement Pensions Act. The Social Security Act requires every employer to set up pension schemes for the benefit of employees and will become a legally binding requirement upon employers following publication by means of a legal notice.

When the second pillar comes to life, schemes will be set up and governed by the provisions of the Special Funds (Regulation) Act. All retirement schemes, retirement funds and retirement scheme administrators will be supervised by the MFSA.

Third-pillar retirement schemes will also be regulated by the MFSA. The Social Security Act empowers the minister to publish rules providing for tax exemptions for payments made into third-pillar schemes.

The key difference between the second-pillar and third-pillar pensions is that while the second-pillar system will only come into effect once a legal notice is published, there is no such requirement in relation to third-pillar pensions. This could be the right time for insurance companies and private pension providers to explore their opportunities with a view to tap the local market – by establishing retirement scheme administrator expertise and developing adequate schemes for our market.

It is encouraging to note that the MFSA has to date licensed a number of retirement scheme providers.

Notwithstanding the absence of appropriate tax incentives after years of debate and reports – the opportunity for second- and third-pillar pensions exists. Retirement plans and life policies sold by insurance companies locally are testament to this.

Over €400 million have, over the years, been channelled into these plans in Malta with little or no fiscal incentives over other investment products. Little is known of the amounts flowing into similar retirement insurance plans outside Malta.

The debate is often clouded by a lateral discussion as to whether second-pillar schemes should be mandatory or voluntary. This only distracts focus from the core issue. In a developed European economy, private pension provision is a need whatever the form. Third-pillar pension provision is voluntary in most places and there are many countries where the second-pillar industry is thriving, even though it is voluntary. Why not here?

Fostering a local private pension industry will satisfy a need for those willing to contribute to their retirement voluntarily and develop the local expertise in the sector. As the Pensions Working Group notes in its report, building a successful second-pillar arrangement takes time.

The same applies to the tax treatment of the private pensions industry. There may be little appetite for tax deferral of contributions made to pensions at the moment. This is understandable in the current economic climate.

Although a carrot-and-stick approach where we are all gently pushed to contribute towards our pension by the promise of favourable tax treatment will certainly help shape our behaviour, this is not essential.

We have always been a nation of keen savers even without tax incentives. Why should our pension planning be any different?

This article was submitted by Ganado & Associates Advocates’ Pensions Research Group.