We are all now familiar with the three pillar pension structure as proposed by the World Bank. Each pillar represents a separate income stream to the individual upon retirement. Cumulatively, the three pillars of revenue should result in adequate earnings to pensioners during retirement. In earlier contributions, we have suggested that each pillar should be treated separately by policy-makers during the ongoing pension reform.

The first pillar, which refers to public pensions, will necessitate a broader review of our social security system which may be long drawn out. The second and third pillars should be easier to introduce as we are working on a blank canvas and may draw from experience in other countries.

Second pillar pensions

The second pillar consists of occupational pensions which are offered part and parcel of an employee’s employment contract. Employers would advance contributions in accordance with the terms of a pre-agreed plan and they may be supplemented by contributions by employees.

The gradual accumulation of such contributions would result in a substantial income on retirement. Plans are administered by licensed professionals who are supervised by the financial services regulator, the Malta Financial Services Authority, in order to ensure the highest possible level of integrity and consumer safeguards.

Occupational plans could be defined contribution schemes which establish a set periodical contribution with a vague indication of the ultimate size of the fund upon retirement, provided that all instalments are paid as agreed and investment return to the fund matches expectations. There could also be defined benefit occupational schemes whereby the scheme provider commits to a pension sum upon commencement of the plan. In this case, contributions may vary periodically to match the initial pension commitment made based on actuarial calculations.

Experience in other countries with advanced private pensions systems has underscored the risks attaching to defined benefit schemes as many of these schemes have found it hard to satisfy the commitments made initially, generally owing to changing financial and demographic pressures. As a result, most modern private pension systems advocate a defined contribution set-up as this avoids the inherent risks in the other system.

The schemes offer the individual full transparency as to the investment performance and growth of the pension fund. Individuals are able to obtain information on their own future pension in much the same way as they obtain information on their bank savings. This contrasts sharply with the situation in the case of public pensions where, in the most optimistic of scenarios, individuals would only receive scant information on their future pension.

Ideally, fiscal incentives should be introduced to stimulate reliance on second pillar schemes. However, as we have already argued in previous contributions, the current state of public finances might not make it possible to introduce these incentives. The current situation should not discourage us from introducing occupational pensions now and then bolt on incentives at a later stage, once the local fiscal situation improves.

International organisations such as the World Bank encourage states to make occupational pensions mandatory across the workforce. However, current economic conditions might also prevent policymakers from introducing such a measure. Similarly, second pillar schemes could be first introduced voluntarily then to be made mandatory once conditions improve.

Third pillar pensions

Third pillar pensions consist of additional voluntary personal savings, contributions to non-occupational pension schemes, investment-linked life insurance products, and other annuities or post-retirement investment plans.

Other than the typical savings opportunities already available locally, it would be appropriate to see the introduction of non-occupational pension schemes as these would allow the self-employed, professionals as well as others in employment who wish to supplement their occupational plans, to also save through these personal plans.

In the absence of the availability of these plans, the banks and insurance companies have promoted retirement plans based on insurance and investment arrangements. These retirement products are similar to personal pension products but may only be provided by life insurance companies and financial institutions. Opening the market up to personal pension plans will allow more service providers access into the market. This should ultimately be of benefit to the saver.

As with the second pillar, the third pillar could be encouraged by appropriate tax incentives. However, there is no need for the immediate introduction of these incentives and they may be introduced once the appetite is ripe.

Private pensions – both second pillar and third pillar – will offer the saver more choice for a transparent savings plan for retirement.

mbianchi@jmganado.com

• Dr Bianchi was assisted by Matthew Mizzi, a law student training with the firm.

Dr Bianchi is partner of the Insurance and Pensions Team at Ganado & Associates, Advocates.