Editorial: Getting real about pensions

When people hear the word ‘pension’, many think of the traditional company jobs that once provided a stable income after retirement. Not long ago, it was fairly common for someone to spend their entire career with a single employer and retire with the security of a pension.

Today, this rosy scenario is no more than a mirage. As time goes by, many will find that they face retirement poverty due to insufficient savings.

The government has launched a public consultation on auto-matched pension schemes.

The plan announced in the last budget is for the government to incentivise employers to get workers into private pension schemes. The government intends to kick-start this strategy by offering public sector workers a €100-a-month matched contribution.

The Malta Employers Association (MEA) sees this initiative as a threat to the private sector, as it will encourage a ‘brain drain’ toward the public sector. So, it is time to ask whether we can afford to keep kicking the can of pensions reform down the road, hoping that future administrations will resolve this challenge in the next decade or two.

Private pension schemes are already available locally, as banks and insurance companies have developed pension products with various risk-reward profiles.

Despite some aggressive selling campaigns, including cold calling potential clients, the private pension products have so far not achieved the level of success necessary to effectively address the risks of pension inadequacy for those retiring over the next two decades.

Despite the fiscal incentives, many still underestimate the consequences of not providing financially for their retirement. Depending on the state pension for a decent retirement income is dangerous. Even today, getting by comfortably with a state pension of about €13,000 is a continuous struggle.

The MEA has resisted the introduction of the mandatory pension schemes that could mitigate the risk of future pension income for many. It argues that this will increase the cost of labour for many small enterprises. It now fears that the new scheme will encourage a ‘brain drain’ from the private to the public sector.

It is time for the MEA to undertake a reality check of the local labour market worrying trends that are underpinned by insufficient investment in human capital.

Treating workers as a disposable commodity that can be hired and fired as and when required is not conducive to building a loyal, experienced workforce that improves an enterprise’s productivity. 

In most cases, salaries in the private sector are higher than those paid by the public sector and there is realistically little risk that skilled workers will be lured to join the public sector.

What is more important is that private providers of pension schemes must be tightly regulated. This is crucial to ensure that the hard-earned money invested by workers is well-managed, without excessive fund management fees and without excluding low-income workers who struggle to save even relatively small amounts each year.

While all investments carry some level of risk, the public must be educated to understand and manage the risks associated with specific do-it-yourself investment strategies.

For instance, some believe that they can secure an income for their retirement by investing in property during their working lives, hoping that the capital value and the rental income of this property will continue to increase indefinitely. While property investment could be an element in a retirement strategy for some, it is unrealistic to expect that investing in the property market is risk-free.

The government initiative is a positive development that, in the long run, should benefit workers and their employers.