Almost six months ago I wrote an article about the local pension system which followed a country report issued by the International Monetary Fund (IMF) within which, among other, the pension and health care reforms were strongly critised.
Only a few months later, in early November, the Ministry of Finance announced Budget 2014 and it seems like the IMF report has been noted – seriously noted.
The Budget announced the introduction of fiscal incentives to facilitate and promote third pillar (private) pensions. A first step which deserves a round of applause, but we must now focus on this project and keep up the momentum.
So, what is this project all about? Up to now Malta has only had a state pension in place which is normally referred to as the First Pillar in a pension structure.
This is, in my opinion, the most important pillar in any pension system as it seeks to achieve a decent minimum standard of living for all pensioners. Following the First Pillar, one could also have a Second Pillar in place, which is normally a mandatory (although this could also be voluntary or even a combination of both) private pension. This normally takes the shape of an occupational pension scheme which would impose that every individual contributes towards a private pension scheme.
In general the objective of this second pillar would be to maintain the standard of living an individual enjoys during his working years even when retired. Two important characteristics of this pillar are that this is normally mandatory and private.
The Third Pillar would be next, where the objective of this voluntary, private pension scheme would be to further supplement the pension one receives from the first two pillars. The main difference between this third pillar and the previous second pillar is that this is a voluntary scheme whereas the previous is mandatory.
Furthermore, both these second and third pillars would have some degree of fiscal benefits attached to them so as to entice (especially at the third pillar level) the working population to save a percentage of their earnings for them to enjoy at and throughout retirement age. In the case of Malta, government has decided to start by launching the third pillar before having a second pillar in place. This can be done; there is no need to have a second pillar in place before launching the third.
Furthermore, given the early stages of development locally in terms of investment knowledge and financial planning at retail level, it may also highlight the merits of such an approach. The public should follow this space closely as private third pillar pensions will become a necessity for all to have. Such a scheme could, and should, be used as a savings vehicle which is being promoted by the state through the granting of fiscal incentives; the size of such incentives will definitely impact the success or otherwise of such schemes.
Obviously, such schemes will have specific characteristics for the government to ensure that the ultimate objective is indeed being targeted and achieved.
For example, an individual should only be allowed to withdraw part of the funds when reaching a certain age. This is done purposely to ensure that the longevity of this savings vehicle is maintained and that the funds are utilised when intended. Such schemes will have other characteristics attached to ensure that the ultimate objective (that of enhancing an individual’s standard of living during the retirement years) is achieved.
At this point it seems like the ball is rolling. The government will want to proceed hastily but carefully to ensure that such a scheme is developed, structured and promoted correctly. Furthermore, there is also a need to educate the public to ensure that the scope and mechanics of such a scheme are well understood.
Hopefully in six months time, I will be able to write about the further progress made which will take us, as a nation, a couple of steps closer to having this pillar in place.
Curmi & Partners Ltd are members of the Malta Stock Exchange and licensed by the MFSA to conduct investment services business.
This article is the objective and independent opinion of the author. The information contained in the article is based on public information.
Karl Micallef is an executive director at Curmi and Partners Ltd.