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Expert calls for 'automatic enrolment' second pensions

Sounds warning on State pensions

Pension expert David Spiteri Gingell has called for the introduction of an “automatic enrolment” system to complement the State pension whereby the beneficiary could choose still to opt out of this mechanism if they wish.

On the other hand, he pronounced himself against obligatory second pillar pensions, saying this was no longer being considered as a solution - even by the World Bank.

Mr Spiteri Gingell, who chaired the pensions reform group between 2004 and 2010, made this recommendation during a seminar on pension sustainability organised by the Malta Institute of Management.

He noted that under the existing system even though the maximum pensionable income was gradually increasing up to 2027, middle and high-income earners would suffer most as they would see a sharp drop in their earnings, and consequently face a decline in their standard of living. He noted that for those born after 1962, the maximum pension will be €19,900.

In view of this he insisted that State pensions would not be enough to guarantee a decent living for pensioners. He also warned that Malta’s demographic trends still showed a declining fertility rate. The rise in population to 460,000 was down to migration, he said.

As for possible solutions, he noted that the take-up of third pillar pensions in Malta was very low. Another alternative, second-pillar pensions where the employer and the workers contribute to a special fund pose problems as well, he said.

Mr Spiteri Gingell remarked that Maltese society was not yet ready for such measures, while pointing out that successive governments have skirted this option. Nonetheless, he admitted that obligatory second-pillar pensions are no longer being viewed as the best solution, even by institutions such as the World Bank.

The way forward, he said, was to adopt the model used in New Zealand: the Kiwisaver scheme. Under this system, employees get automatically enrolled to a second pension but have the choice to opt out.

Experience shows that only a small percentage exit from the scheme. In New Zealand, the opt out rate is just 11 per cent, while in the UK where a similar system was introduced under the name of Workplace Pension the rate is 9 per cent. Countries like the US and Canada have also adopted this model.

The expert pointed out that the system could be made flexible for low-income earners by introducing temporary opt-outs like "contribution holidays" and give the possibility to use some of the funds to purchase a property.

"If other countries have done it, I don’t understand why we did not,” he said.

Read: A solution for pensions?

Read: Workplace savings: a simple and effective alternative to second pillar pensions

Read: Occupational pensions possible without employer contribution

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