Insights

Minor adjustments made to the pension system recently may result in slight increases to our pension benefits but these will by no means be adequate to meet our real needs.

Saving and putting money aside for a rainy day is never a bad thing but it is only possible if you have the luxury of sufficient excess disposable income to do so. That is, income left over after paying for your family’s daily needs, your capital expenses, your kids’ schooling, your loan repayments, a short much-needed vacation and, of course, your taxes.

The drain on our household budgets is substantial and very few young families afford this luxury. The result is that savings rates are dropping rapidly and the long-term consequences will be painful to fathom but sure to come.

Various pensions commissions and pensions working committees commissioned by the Government over the past few years have made damning projections of the pensions system. Demography is not on our side, our population is aging gradually and the pace will only accelerate as time goes by, largely due to the low birth rate and longer life expectancy.

The latest Pensions Working Group report suggests that the only real remedy is the immediate introduction of a mandatory second pillar pension system flanked by incentives for a voluntary third pillar pension structure. The timing of this recommendation in 2011 – shortly before the last general election and in the midst of a global financial crisis – made it very difficult for the previous Administration to implement but we are now over the first hurdle and, thankfully, in a better state financially than most other jurisdictions.

The difficulties with this recommendation are multiple. Mandatory second pillar pension contributions will come at a cost to employers and (usually) a mandatory deduction from an employee’s monthly salary. The pill is often sweetened by the State renouncing to all or part of the income tax that would otherwise be due by employer and employee on the amounts contributed to the second pillar pension or by deferring taxation until the pension payments are eventually paid out. But it is no news that forfeiting or deferring tax collection is never top on a government’s priority list, particularly in trying times.

Third pillar pensions are usually voluntary schemes where contributors are gently persuaded to save because they may benefit from favourable tax deductions or other incentives.

The third pillar may provide incentives to employers who contribute to the savings pot of their employees but most incentives are usually channelled towards employees and self-employed individuals. The new Government’s manifesto has not wholly endorsed the Pensions Working Group recommendation but it has gone some way to suggest that pension reform is one of the key areas of focus in this legislature.

In its introductory paragraph to the pension proposals, in chapter 7, it indicates that “while seeking to ensure a strong pension for future generations, the Government will not ignore the needs of today’s pensioners”. The pledges made in this part of the chapter are supportive of measures that have been taken in recent years to strengthen the social security benefits and the State pension.

Many will be delighted to read that the new Government has pledged not to raise the retirement age any further; to introduce a minimum national pension that will be benchmarked to 60 per cent of the average national wage; and to seek to iron out the anomaly created in respect of pensioners entitled to more than one pension having to forfeit all or part of their State pension (incidentally, a matter now taken before the European Court of Justice by the European Commission).

For those young families looking ahead to the prospect of a long retirement on a meager pension, the more interesting pledge is certainly the one listed in paragraph 35. This reads: “we will encourage the introduction of third pillar pensions by considering various tax and fiscal incentives to facilitate this without creating additional burdens” (author’s translation).

This is a bold pledge that could only be read to mean that, at some point within the next five years, the Government is committed to introduce a much-needed lifeline for thousands of families who wish to put some money aside for retirement but simply do not have sufficient net disposable income to do so.

This model is tried and tested in many other jurisdictions and the results have generally been positive and encouraging.

If the incentives are adequate and properly targeted to mitigate the tax burden for third pillar savers it is almost a sure guess that young families will be drawn to the opportunity to save for their retirement. Any fiscal initiatives, when introduced, will be supplemental to the incentives already bearing some fruits including reduced tax rates on bank interest income and other fixed income investments when tax is withheld at source; a favourable tax system for investment-linked life insurance policies that are often promoted as retirement planning tools, and others.

The regulatory and legal framework for third pillar pension structures is already in place. Indeed, unbeknown to most, Malta already has a budding retirement scheme industry with a significant number of retirement scheme administrators and retirement schemes licensed and regulated by the Malta Financial Services Authority.

The building blocks are in place and I am confident that, with goodwill and the right focus, we could all be living out our retirement more comfortably when the time comes.

Published in the Times of Malta, 1 April 2013.