Call for private-public administration of second pillar scheme

The Malta Institute of Management (MIM) believes that a Second Pillar Pension Scheme as proposed in the Pensions White Paper does not offer a reassuring solution to reform the current pensions system and can "actually constitute a risk both to the people and entities involved and to the economic, political and social fabric of our society".

The document drawn up by the Pensions Working Group claims that a second pension should be introduced to top up the state pension - referred to as the First Pillar - which is gradually being eroded by inflation. It makes the case for an occupational pension which, paid by employers and employees, would yield returns for the employee's retirement pension.

In legislating the reform, the government may opt for privately managed occupational schemes and funds regulated under the Special Funds (Regulation) Act, complemented by a compensation scheme to mitigate fraud. Otherwise, a public body under the supervision of a trustees' board, which could include the social partners, could administer an occupational pension scheme.

Agreeing with the introduction of a second pillar pension in principle, the MIM has warned in a document sent to the working group that if such a scheme were left in the hands of the private sector, the second pillar regime would become an oligopoly of "the two big banks and the two insurance companies.

"Present financial service providers would be prepared to enter this market, and the second pillar regime would be characterised by an oligopoly type of fragmentation," the MIM said. This meant there would be a situation where the market would be controlled by a limited number of firms and the whole purpose of competition giving rise to a reduction in costs would be lost.

The MIM said if pension funds were administered by the private sector, employers would be subjected to added risks in times of poor cash flow.

Small businesses, which rely almost exclusively on service providers with respect to administrative works, would incur extra costs as well. Future pensioners would ultimately incur the fees and charges paid to a chain of service providers, the MIM said.

Instead, the problem could be solved by a private-public partnership where the government, together with the social partners, acts as an administrator. Through an Occupational Pensions Scheme Act which would set up an independent public authority, the management would be awarded by means of a competitive tender to a single private firm or to the Central Bank of Malta.

The institution, which should be accountable to Parliament, would be responsible to manage the assets of the scheme and redirect profits made into the scheme.

If the manager were not the Central Bank, the Malta Financial Services Authority would be empowered to supervise the regulatory standards.

The MIM said the second pillar pension should be established on a voluntary basis and the government should provide tax incentives to encourage such schemes.

"Given the size of Malta, this option would minimise the cost of administration of the SPPS and benefit from economies of scale," the MIM said.

With regard to the First Pillar pension which has "sustained very little changes" since its inception, the MIM said a reform should redress the disadvantages in the way that pensions are calculated "especially with regard to self-employed".

The government should gradually remove the capping of the state pension, and this should be planned and introduced gradually because of the effect it will have on disposable income, costs and cash flow.

The institute said retirement should not be tied to the age of a person but to the number of years of contribution s/he has paid. Providing that the economic climate is favourable and that the employment of young people is not jeopardised, experienced managers should be encouraged to work beyond retirement age, the MIM said.

In conclusion, the institute called for caution in implementing measures, as rushing through the reform could be harmful in the long run.