As state pension provision comes under increasing pressures in most jurisdictions, the need for private retirement provision for the elderly is becoming increasingly self-evident. In many developed countries the retirement income regime has a three-pillared structure comprising state pensions, private retirement plans and other personal savings plans.
Pillar One refers to the basic government pension provision. Pillar Two refers to supplementary retirement or pension schemes. These schemes are commonly delivered through the workplace in the form of occupational retirement schemes where they are financed by contributions made by the employers and may be supplemented by the employees themselves (the scheme beneficiaries).
Most jurisdictions that have embraced Pillar Two schemes also allow for such schemes outside an employment setting for the benefit of self-employed persons and those employees who may not have access to an occupational scheme or who may wish to opt for further retirement provision over and above their occupational scheme. Pillar Two schemes are generally funded and voluntary and may enjoy favourable fiscal treatment tailored to encourage investment therein.
Pillar Three refers to all other personal savings accumulated by a retiree throughout his working life. By definition, these savings are voluntary, funded and may be tax-spurred. The investment-linked life insurance products currently available to investors locally are one example of retirement provision falling within this third pillar.
The Special Funds (Regulation) Act 2002 enacted on September 10 and brought into force on October 1 (subject to some exceptions1), makes provision inter alia for the establishment, recognition and regulation of Pillar Two retirement funds and schemes. The Act must be hailed as a big step in the right direction by all those who look forward to enjoying an adequate post-retirement standard of living. Financial security and peace of mind is every retiree's concern and it is no secret that due to demographic and other issues, barring exceptional circumstances, Pillar One will offer little solace to those who have started their working life recently or will do so in due course.
Pillar Two pension schemes have so far played a negligible role in Malta but with an ailing public pension system, the government has long earmarked Pillar Two schemes as one probable solution to bolster retirement earnings.
The Act is the result of the legislator's desire to seek an appropriate solution to the proverbial 'pension time-bomb' and the culmination of the government's and the industry's efforts in this respect over the past few years. It is hoped that the Act will spearhead the birth of a healthy industry in private pension provision locally.
Overview of the Act
Part II of the Act - Registration and Operational Requirements - constitutes the core of the Act and lays out the regulatory regime pertaining to schemes and retirement funds. A scheme (and an overseas retirement plan) is defined in the Act to mean a contractual scheme or arrangement governing the rights and responsibilities of the parties to the retirement plan established for the principal purpose of providing a pension or other benefit (retirement benefits) to the beneficiaries thereof upon their retirement.
The parties to the arrangement are the retirement scheme administrator (the scheme administrator) and the contributor. A retirement scheme or plan is run by its administrator and all contributions made to it must be invested exclusively in one or more retirement funds in accordance with the scheme document or plan. The document contains the scheme's contractual terms and arrangements. Retirement funds are investment companies established for the principal purpose of holding the investing contributions made to one or more schemes or to one or more overseas retirement plans.
As in other legal systems, Maltese legislation allows for the establishment of retirement schemes as either defined benefit schemes or defined contribution schemes.3 A defined contribution scheme is one where the amount returned to the retiree is undefined and depends largely on the amounts contributed to the fund and on its investment performance. A defined benefit scheme is one where a retiree's benefits are determined either ab initio upon entering the scheme, or by reference to the retiree's final wage.
With a booming investment market in the late 1990s the trend in supplementary pension provision, globally, favoured defined contribution schemes over defined benefit schemes. The surge in the performance of equity markets allowed defined contribution schemes to offer substantially increased returns to retirees at relatively low risk.
This fuelled considerable interest in these schemes and their popularity far outpaced that of defined benefit schemes in most countries, particularly those with a diffuse equity culture. However, the recent collapse of the financial and equity markets in Europe, the United States and Asia has done little to bolster retirement fund performance.
Naturally enough, this has prompted a new-found interest, among contributors and beneficiaries, in defined benefit schemes which are far less susceptible to the whims of the equity markets. As with all investment decisions it is probably best never to have all one's eggs in one basket. A mixture of defined contribution and defined benefit retirement provision may be a healthy compromise for the investor.
The Act requires that all retirement funds and schemes operating in Malta be registered with the Malta Financial Services Authority (the Authority) before accepting any money or other considerations by way of contributions. The Act provides a detailed list of requirements that must be satisfied for registration of a retirement fund or scheme.
The terms and arrangements of a scheme must be laid out in the document. The document must provide that the principal purpose of the scheme is to provide retirement benefits to its beneficiaries and that all contributions made to it will be invested exclusively in one or more retirement funds. It must indicate the specific means of identifying current and future contributors and beneficiaries as well as their respective obligations and benefits on retirement.
The document must lay down the rules and criteria governing the valuation of the assets and liabilities4 attributable to the scheme and the timing of such valuations. Similarly, the document should provide for the rules governing the surrender, termination or forfeiture of any retirements; the rules applicable in the event of the inability or failure of a contributor to make the relevant contributions; the circumstances leading to the winding up of the scheme.
Naturally, the law requires that the scheme document indicates the name and contact details of the initial administrator of the scheme and the method of his appointment, removal and replacement. Importantly, the document must prescribe that unless the law provides otherwise, the scheme will have no statutory provision for compensation if a scheme or retirement fund is unable to satisfy its liabilities and that registration of the scheme or fund is by no means an endorsement by the Authority of its financial performance.
To satisfy registration requirements under the Act, a retirement fund must be a registered investment company with variable share capital whose head office is situate in Malta and whose objects and powers are limited to: (i) the receipt of contributions made to it by retirement schemes or by overseas retirement plans and the investment of such contributions for the purposing of maximising the investment return on such contributions; (ii) the payment of retirement benefits to beneficiaries under their respective schemes or overseas retirement plans; and (iii) the carrying out of all matters and functions connected or ancillary to the said objectives.
In determining whether to register a scheme or retirement fund the Authority will have regard for, inter alia, the administrator's integrity, reputation and suitability, the promotion of competition and choice of schemes, and the protection of investors and the public at large.
The law prescribes that the assets of a retirement fund are not held for the benefit of any shareholders or investors in the fund itself but rather for the exclusive purpose of providing benefits to the relevant scheme or overseas plan beneficiaries.
The board of directors10 of the retirement fund is responsible for the investment of the fund's assets. The board may act directly or through a registered asset manager11 appointed by it. The board must appoint a retirement fund administrator to administer the fund and carry out its day-to-day operations such as: receiving investors' assets and maintaining and arranging for custody thereof; maintaining accurate records; and complying with all statutory requirements generally.
Similarly, the Act requires that every scheme must have an administrator, appointed by the scheme's contributors13 to carry out the daily operations of the scheme; to invest all contributions in the relevant retirement fund/s, to maintain accurate and proper records and generally to comply with the requirements of the Act.14
Fiscal incentives
The fiscal regime applying to retirement funds and schemes has played a pivotal role in their success or failure in other jurisdictions. Legislators have generally acknowledged the social dimension of these funds and schemes and have sought to restrain undue fiscal pressures on them and their operators in a bid to encourage this form of post-retirement provision.
In Malta, the lessons learnt from our experience with other financial services products should be applied here to ensure the rapid promotion and proliferation of this budding industry in post-retirement provision.
Similarly, the success of these schemes will depend largely on the fiscal and other incentives offered to contributors and beneficiaries to invest in them. The enactment of the Special Funds (Regulation) Act 2002, marks a big leap forward nationally as it represents the first step on the road to building a sound private and occupational pension industry for the benefit of future retirees.