The government may have to go back to the drawing board after stakeholders expresssed dismay at proposed fiscal incentives for third pillar pensions.

Finance Minister Edward Scicluna had promised some weeks ago to launch optional private pensions but stakeholders who were given a sneak preview felt that they would not be sufficient to encourage people to put more away to ensure they had a decent retirement.

Sources said the government intended to waive the 15 per cent withholding tax on interest paid on contributions of up to €1,000 a year which were put into an approved account.

This translates to a maximum tax saving of €6 a year. The government put aside €1.5 million in the Budget for this scheme.

Stakeholders were concerned about two aspects. They felt that the tax credit would appeal to those who were already putting away money for their golden years, encouraging them to switch to an approved account and get a tax sweetener for doing something they were already doing.

However, the tax incentive would be largely meaningless unless they was sufficient encouragement to give up immediate gratification for future comfort, the sources said.

There is another aspect which was brought up by the Malta Insurers’ Association: that the government would have been better off going for second-pillar – occupational – pensions first.

Pension reform started in June 2004, with the establishment of a Pensions Working Group which analysed previous work and came up with recommendations in 2005 on the way forward. Legislative changes were announced in March 2006 and finally enacted in December of that year, which among other things, raised the retirement age over a number of phases based on the age of the person. They also changed the correlation between the number of years worked, the amount of contributions made and the actual pension received. And, finally, the maximum cap on pensions was raised to €20,964.36.

The Pensions Working Group made a further 45 recommendations in 2010, including introducing an explicit link between pension age and life expectancy, launching a second-pillar pension subject to political consensus and the drawing up of a third pension framework.

However, there are still concerns that this might not be enough. The issue was raised recently by the European Commission in its ‘In depth review for Malta “While Malta does not appear to face sustainability risks in the short term, risks increase in the medium and long term. In particular, the projected growth in age-related expenditure is well above the EU average, with the increase in pension expenditure – including the impact of the 2006 pension reform – accounting for more than half of it.”

The Business Observer is organising a business breakfast on Monday July 21 at 8am at the Intercontinental Hotel to discuss the theme of ‘Pensions reform: Are we too late?’.

Head of Content (Business) Vanessa Macdonald will moderate a discussion with Finance Minister Edward Scicluna and Malta Employers Association director general Joe Farrugia. Space is limited. For reservations, send an e-mail to events@timesofmalta.com.