The Bill amending the Social Security Act to allow third pillar pensions – making it possible for people to voluntarily take up a private pension to top up their State pension – was approved by Parliament last month.

Under the new law an individual may invest up to a €1,000 in an Individual Savings Account and benefit from interest earned from the investment in interest-bearing securities/deposits without deduction of withholding/tax; and up to €1,000 in a Personal Retirement Scheme and benefit from a tax credit not exceeding €150 for every €1,000 invested during any one year. Couples will be treated as two individuals and may invest €2,000 in each scheme.

According to Philip von Brockdorff, the head of the Department of Economics at the University of Malta, the recent Bill amending the social security Act regarding third pillar pensions is long overdue.

“It will make it possible for people to voluntarily take up a private pension to top up their Social Security pension. The fiscal incentives will encourage take-up. What is also necessary, however, is a regulatory framework protecting individuals who take up this option,” Dr von Brockdorff said.

“By supplementing their incomes during retirement years, and with an increasing life expectancy, individuals would hope to afford the needs of living as elderly persons. However, they would need to revisit their consumption and savings decisions during their working lives.”

Dr von Brockdorff said that, from a fiscal perspective, the third pillar will not address the sustainability of social security pensions and further reforms, including revisiting the retirement age to reflect life expectancy, are required. Reforms to date didn’t go far enough, he pointed out.

This notwithstanding, he believes the development of third pillar pensions is a step in the right direction and could stimulate private savings as well as creating business opportunities for the financial sector.

“In my view, they will play an increasingly important role in securing retirement income. My research has shown that individuals who will retire in the future will be worse off than retirees who have retired in recent years or who will be retiring in a few years time. This unequal distribution of financial resources across generations, especially for low-income earners, also needs to be addressed.”

Robert Attard, a partner at EY Malta said that the new Bill broke new ground by allowing an ad hoc tax credit in respect of contributions to private pension schemes.

“The benefit is capped at the lower of 15 per cent of contributions paid and the sum of €150. A €150 tax credit is always a €150 tax credit but the amount will be revised from time to time because the law incorporates a revision mechanism allowing the minister to increase the tax credit from time. In addition, the same legislative instrument introduced a capped tax exemption on income from certain savings. Act XXXVII is a first step,” he said.

Justin Caffrey, managing director of Harbour Pensions, said that the third pillar initiatives are an opportunity for middle to low income earning families to gain some tax relief and to save for their retirement.

“This is a tried and tested approach in most other EU countries and a first step for Malta to assist its citizens in developing prudent strategies to provide for their future needs. In this respect one could look into promoting institutional pensions possibly by providing fiscal incentives to employers who ­contribute to such pensions”.

Mr Caffrey said that working with employers and secure investment strategies administrators like Harbour Pensions see a great opportunity for Maltese citizens to take control of their financial future.

This is a tried and tested approach in most other EU countries and a first step for Malta to assist its citizens in developing prudent strategies to provide for their future needs

“Pension investment is all about low risk, fiscal benefits and a long-term strategy. We believe the building blocks are now firmly in place. A regular monthly commitment over a time horizon of 20 to 30 years can achieve a very sensible retirement fund, beating inflation but not exposing the fund to excessive volatility.

“It is very important to work with a firm that has a proven track record in large scale pension administration, advisers who understand the retirement needs of the Maltese and an investment strategy that can afford you the peace of mind that your future has been secured,” he said.

Angela Tabone managing directorand CEO of Citadel Insurance plc said:

“In Malta as in the rest of Europe, not only are we living longer but we are enjoying a healthier old age. Based upon EU mortality statistics the current life expectancy of 76.7 years for men and 82.6 years for women is set to rise to 84.6 and 89.1 respectively by 2060.

“Coupled with reducing birth rates, relying on state pensions alone may prove to be insufficient. Without making our own provision, in the future we may expect to be healthier but not necessarily wealthier. Citadel Insurance, as a leading provider of life insurance plans, is well placed to help their customers achieve all their future financial goals.”

The Malta Insurance Association believes that while the incentives ­introduced are a step in the right direction, it should be a process which evolves and improves over time.

“The MIA has advocated for years that savers need that extra push, through fiscal incentives, to encourage them to take the plunge. However, the MIA believes that the incentives are not significant enough to encouraging savers to set aside money for their retirement on a long-term basis. The target market of these incentives is very small and the MIA anticipates that the take-up of such schemes will be negligible,” Adrian Galea, the director general of the MIA said.

Mr Galea said Malta is probably one of the very few countries which has introduced private, non-mandatory third pillar schemes before introducing mandatory second pillar schemes.

“Pensions have been on the national agenda for a long period of time. Sustainability of pensions is also on the EU’s radar screen. It would be a mistake if this country tackles this issue in fits and spurts. This is no ‘ticking the box’ exercise but a process where both parties should work hand in hand for longer-lasting solutions,” he said

Mr Galea said the government, ­together with all interested ­stakeholders, should embark on a programme aimed at raising financial literacy levels starting from the younger generation at school.

“Although we all contribute towards our national insurance, we cannot expect the government to continue providing that safety net we rely on after retirement. If we wish to maintain those life standards at that stage of our lives, we need to plan ahead and save more for our retirement.”

However, Mr Galea said the MIA applauds the government for the initiative taken in implementing an electoral promise and introducing third pillar pensions in Malta.

The Ministry for Finance explained that the people will not be able to start to receive retirement benefits before the age of 50 or after the age of 70 except in those cases where the scheme/arrangement provides that the payment is made by reason of the disability or death of a member.

On retirement, a maximum of up to 30 per cent of the assets of a member in a scheme/arrangement may be paid as a cash lump sum. The remaining assets shall be used to provide a retirement income through an annuity or drawdown arrangement in accordance to set regulations.

The ministry said: “The schemes will be regulated by the MFSA under the Retirement Pensions Act and the Insurance Business Act, and so providers will need to conform to the requirements specified under these Acts.”

Asked whether people will be allowed to invest in risky funds a Finance Ministry spokesman said: “The investment rules will be set by the MFSA and not by the government. This is the practise in every European country. That said, existing rules specify that the investment policy should be clearly specified or agreed with the scheme member and there should be clear disclosure awareness by client of ­applicable risks.

Given the long term nature of these investments, it is highly unlikely that providers will invest in risky assets

“Assets are to be invested in a prudent manner and in the best interest of members in accordance with set provisions contained in the Pensions Regulatory Framework. They should be properly diversified, and not be used in transactions with members or connected entities. Schemes may not grant loans to members or borrow on their behalf for property. Schemes may borrow only short-term in relation to asset management and should not engage in leverage.”

However, the spokesman added that it must be made clear that this is a private scheme and there are no implicit government guarantees.

“The caveat that ‘the value of investments may go up or down’ needs to be emphasised. However given the long-term nature of these investments, it is highly unlikely that providers will invest in risky assets.”

What about the possibility that if there are too many providers market forces may eventually mean some will give up and close down? How can this be prevented or managed?

The ministry spokesman said that in order to be granted a license under the Retirement Pensions Act or the Insurance Business Act, one passes through a very rigid process.

“This is much tougher than the regime for normal investment services companies. It is fairly unlikely that an insurer or a pension fund would close down after having been set up with the high level of capital required. If any business decides to close down, it would have to transfer its assets to another provider or else give them back to individuals with the condition that they place them in another ­personal retirement scheme.

“It is important to emphasise that retirement pension providers are very different from investment service providers. Their regulatory regime is much stricter and will attract only relatively strong and well-funded providers. It is highly unlikely that there will be many providers. In fact, in small countries like Malta, the number of providers tends to be very small.”