Second pillar pensions, also known as occupational pensions, have been in existence for several years in countries like the UK, France and Italy.

Before 1979, we too had occupational pension schemes but with the so-called two-thirds pension scheme, any pension received from an employer had to be deducted from the national insurance pension. Inevitably, this led to the virtual prohibition of all private pension schemes and the burden of all retirement pensions fell on the national insurance account.

Thirty-five years have flown by since then and the pay-as-you-go pension scheme, despite generating windfall gains for pensioners in the earlier part of its life, has now proved to be inadequate for today’s and tomorrow’s pensioners. Besides being inadequate, the pay-as-you-go pension scheme is an increasing burden on public finances and, therefore, on the active labour force.

Despite all this, we seem to persist with the pay-as-you-go pension scheme while tinkering with reform and hoping that individuals will take up private or third pillar pensions to address the inadequacy of pay-as-you-go pensions. The latest ‘reform’ proposals, motivated by the need to address European Commission concerns with regard to the sustainability of State pensions, rule out an increase in the statutory retirement age and also rule out increasing social security contributions. They also rule out compulsory second pillar or supplementary pensions paid by State or private sector employers and employees.

UĦM assumes that the reason they are being ruled out by the Pensions Strategy Group is that stated by the Prime Minister: namely that thousands of households would not be able to afford paying part of their income towards an occupational pension scheme. Whereas UĦM acknowledges that occupational pensions would appear unaffordable for low-income households, the motivation for their reintroduction should be the same as the government’s stated objective for third pillar or individual pensions: prospective retirees topping up their pensions.

UĦM insists that this objective can equally be attained by second pillar pensions. Despite economic growth rates exceeding the EU average, the saving rate in our economy is lower today than in the past and a recent study by the Central Bank reaffirms that an important motivation for saving is the precautionary motive. In layman’s terms this refers to households’ attempt to save for a rainy day or – in the context of retirement – when household income falls. We know for a fact that the two-thirds pension scheme is a misnomer. When we retire we do not receive two-thirds of our income but much less than that and this proves again that the now ‘mature’ pay-as-you-go pension scheme is failing to provide adequate coverage for our pensioners. Against this background, second pillar pensions, if carefully planned and structured to our specific context, could provide much-needed supplementary income for future retirees.

The saving rate in our economy is lower today than in the past

It should be stressed that in the UK, over five million workers are today enrolled into second pillar pension schemes, and membership of workplace pension schemes stands at around 40 per cent for men and 31 per cent for women. In Italy in 2014, second pillar pension schemes recorded a third consecutive year of positive returns and Labour Minister Giuliano Poletti praised pension funds as an important source of finance.

True, there may be risks involved in second pillar pensions including State intervention as in the case of Hungary – where in 2011 pension reform sent shock waves across Europe. In order to reduce its budget deficit, Hungary collapsed second pillar pensions into the State scheme and appropriated all private funds. Now there is no second pillar pension system and as a consequence the average consumer has little trust in saving at all.

UĦM is wary of this but we have confidence that no government in Malta would resort again to appropriation of private funds. We are, therefore, asking the government not to rule out the second pillar as an option for encouraging saving in the economy, at the same help addressing both the sustainability of state pensions and the question of adequacy for future retirees.

We are also asking the government to provide the funds for a study to assess the effectiveness or otherwise of second pillar pensions, its possible impact on public sector entities and private sector firms, and coverage. To rule it out by claiming that it does not help address either the adequacy question or the sustainability of pension in the long run, does not wash.

The Hungarian experience actually shows that by appropriating all second pillar pension funds to address its huge budget deficit, the Hungarian government destroyed in one swoop all that had been accumulated by individuals to live adequately once they retired. By implication, it resulted in a greater reliance on state pensions – causing further problems in terms of their financial sustainability.

We rest our case.

Josef Vella is the secretary general of the Union Ħaddiema Magħqudin.

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