When it comes to pensions, are we perhaps busily arranging deck-chairs on the Titanic as it approaches the iceberg?
Group-breaking legislation in pension and social reform took place in Malta between 1948 and 1956. Some amendments to social insurance contributions were introduced between 1979 and 1987 and the Special Funds (Regulation) Act 2002 later laid the ground for supplementary occupational pensions schemes.
The 2006 amendments to the Social Security Act introduced the initial framework for private pensions and rolled out public consultation on pension reform. Ten years – and many meetings – later, the impact is perhaps no more than cosmetics on an old lady despite the enactment of the Retirement Pensions Act 2015 applicable from January 2016!
The Pension Strategy Group in mid-2015 issued a raft of some additional 27 recommendations; some of them no more than reiterations of earlier recommendations dating back to 2005.
The maximum weekly contributory pension entitlement [Pillar 1] is just shy of €230 – less than €12,000 annually. Employees contributing towards a state pension need to ask: “How sustainable would this pension be a few years from now?” The answer is obvious.
[A voluntary occupational pension] would sit better as a Pillar 3 amendement
Recent reference to Pillar 2 indicates that the government and Opposition are poles apart. The 2016 Budget, referring to inducements to voluntary employer contributions, moves away from the previous government’s proposals of an obligatory Pillar 2 scheme. The previous government was not reinventing the wheel with this proposal. Pillar 2 is generally compulsory in as far as the employer is concerned. Tweaking this would sit better as a Pillar 3 amendment.
Pillar 3 was ushered in by the Minister of Finance in November 2014 as a voluntary contribution. In a nutshell, it is primarily aimed at lower income earners contributing towards retirement but not necessarily towards the lowest and youngest salary earners. Why? Let us consider some facts.
The average basic salary in Malta currently stands at less than €18,000 annually and the median annual income per household does not exceed €24,000. In households with earners possessing tertiary education the average income per household can increase by more than 50 per cent.
The savings to earnings ratio varies by almost six per cent from just over one per cent of earning for lower income earners to a savings of around seven per cent of earning for higher income earners. So, by implication, most individuals or households in employment (i.e. not self-employed) and below the age of 35 years, can on average set aside less than €500 annually.
On average, debt per household is of around €35,000 annually (exceeding €40,000 for under-35s in employment) and marginally higher for households with earners possessing a university degree.
Following the introduction of Income Tax article 57, a maximum annual tax credit of €150 (15 per cent of annual contribution) is allowed on Pillar 3 contributions. Effectively there is no tax incentive for persons to contribute more than €1,000 annually. Furthermore, at current returns, it is unlikely that €500 annually would yield more than €15,000 at maturity of a 20 year retirement policy or less than €25,000 at maturity of a 30-year retirement policy; a pension or peanuts?
So whereas the private pension contributors’ demographic seems to lie with persons above 35 years (i.e. with lower or decreasing personal debt) and earning more than the national average, the incentive seems to target a lower age band or income bracket. We’re shooting low and offering even less.
A life assurance policy is one of the products that can be purchased to build a private pension. There are two types of products around which a pension plan can be structured by insurance companies, i.e. with-profits and unit linked. The latter may be dangerous since the underlying capital or saving is not protected. Extensions such as disability and accidental riders all serve to enhance the life insurance product. Needless to say, one needs to weigh the opportunity cost on pure policy value against the premium spent on such extensions. In addition to this, an applicant for any life assurance policy with a savings element (including pension products) needs to read through any disclaimers presented by the insurance company in its literature or on its website particularly on assumed rates of return and net present values.
Not all life assurance policies are eligible for a tax credit. The way insurance companies operate the fiscal framework may differ. Given the long-term nature of these products, clients should familiarise themselves with caveats tied to tax credits particularly on the implications of the client liquidating (surrendering) a retirement policy early. The Inland Revenue regulations, for example, seem to have overlooked this very important issue.
Achievements to date are disproportionately low compared to the effort that has or should have been put into pension reform. More thought and structured, decisive action is required by our pension think-tank.
One would be ill-advised not to set money aside under Pillar 3 – but shoulders need to rub at the drawing board to boost effective demand.
portellijames@gmail.com
James Portelli is a chartered insurance practitioner [views expressed are personal].