Automatic enrolment occupational pensions would instil a savings culture to supplement third pillar pensions, even if the employer is not expected to match employees’ contributions, according to consultant David Spiteri Gingell.

Mr Spiteri Gingell said it was important to consider an automatic enrolment savings scheme being proposed by the Pensions Strategy Group as something completely distinct from the state pension – and also one that could exist independently of fiscal incentives if absolutely necessary, at least at the beginning.

“I always assumed that tax incentives are necessary to incentivise savings for retirement. In an ideal world incentives should be introduced but you have to acknowledge that these reduce government’s income as consumption is deferred to the future. So if it came to a choice between limited third pillar take up in 2020 or introducing the automatic enrolment without incentives, I would definitely say ‘just get it going’.”

In such an event, the Strategy Group is recommending a completely different model to that in both the 2004 and 2010 reports, leaving out the need for the employer to also make a contribution, one of the main bones of contention for both the government and for employers’ representatives at the time, who felt this was an expense the economy could well do without.

Instead, the group underlines that in event that third pillar performance in 2020 is not as expected, serious attention should be given to introducing mandatory enrolment in a savings fund, with the possibility of opting out, based on sound behavioural science which shows that the vast majority do not opt out.

“In 2004 and again in 2010, we made a mistake of using technical jargon which deflected the ensuing discussion from what we were trying to resolve: the fact that we need to imbue a savings culture if a person wants in retirement a quality of life similar to that enjoyed while in employment. No more and no less.

“Ideally you try to nudge a person into a savings culture as soon as they join the workforce. What is so clever about automatic enrolment is that it catches the employee at the moment when his or her inertia is at its lowest, so they are less likely to opt out. It is also based on the thinking that if you start saving at a young age, you get used to living without that portion of your income, even as other priorities like buying a house or raising children come along,” he said.

Mr Spiteri Gingell said that the task force had studied two models – one in New Zealand (Kiwisaver) and the other in the UK (Nest) – but Malta could design its own. The recommendation presented by the group, he underlined, cautions against doing so before the third pillar pensions had sufficient time to establish themselves.

The Strategy Group found significant differences between the state of play 11 years ago when the first report was issued and now – with much more positive news to report.

In 2004, less than 30 per cent of women worked. Now around 50 per cent do – and when you look at those aged 35 and younger, Malta’s average is significantly higher than that of the EU.

“This means that households in the future are much more likely to have two pensions, rather than trying to survive on one. That changes the landscape.

‘The keyword is choice’

“The second thing that has changed since 2004 and 2010 is that the third pillar pension has now been introduced. For everybody out there it was a no-brainer. And yet for 11 years, we denied all those people the chance to be nudged into saving. Finally a breakthrough!

“Maybe its design has been criticised but it is a learning process and that is why we need to wait until 2020 to evaluate its success, reviewing it and tweaking it along the way. It is a learning process for society as well: to become educated and knowledgeable of complex saving instruments. Then – and only then – if the third pillar does not deliver for any reason, we should seriously look at automatic enrolment,” he said.

The Strategy Group is also recommending home equity release through a proper regulated framework, given that 77 per cent of the Maltese own their homes.

“Does home ownership have anything to do with pensions? It has to do with quality of life in retirement! The point is that if you want a quality of life that goes beyond the basic pension, you have to save and to leverage your assets.

If you want a quality of life that goes beyond the basic pension, you have to save

“In Malta, we still have the tradition of leaving our property to our children but perhaps the time has come for a new model which will give people a choice to liquidate their assets to increase their retirement income ­– without losing the right to live in them. The keyword is choice,” he explained.

He was quite honest about the fact that there were many other decisions to be made in due course – such as whether employers should also make a contribution and whether the government should offer fiscal incentives – but at least the principle of automatic enrolment needed to be accepted.

The 2015 recommendation states that the government should “should strategically assess the introduction of a mandatory opt-in, voluntary opt-out framework, which would see the employer responsible for managing the administration aspects of the scheme and the government responsible for the fiscal incentive”.

There are other conditions to be decided: the automatic enrolment scheme could be limited to companies of a certain size – as in the UK – and the fund could exempt categories of earners like those on very low income as it might not make sense for them to save in this way.

The third pillar has so far failed to attract any takers because of the implementation cost (in fact it is being extended to non-annuity insurance products) but an automatic enrolment scheme should have much more of a critical mass, making it much more attractive to providers. Nevertheless, it could still prove expensive to administer.

Mr Spiteri Gingell said if automatic enrolment were ever to be introduced, options exist with regard to lowering the cost of administration. Sweden, for example, had introduced a clearing house concept, which in Malta’s case this could be the inland revenue department, through which all contributions would be channelled.

“These would then go to whatever financial services firm is providing the pension instrument. Kiwisaver in New Zealand uses a default low-risk (and therefore low-interest) fund but gives the saver the option to move their savings into something with a higher return – which, over time, the majority do. We have to remember that the government’ has no role in the performance of savings for retirement, just as it has no role when you invest in unsecured bonds.

“The government, of course, has the responsibility for setting regulatory framework and policy instruments directed to stimulate people to channel their money to save for their future retirement.”