In the last three decades, actuaries have predicted that retirement savings come under pressure as large populations age – the so-called ‘pensions time bomb’. Malta’s unfunded national pensions scheme could collapse in the next two decades, leaving thousands of retirees with inadequate incomes to see them live decently in retirement.
The introduction of mandatory private pensions has been discussed for a long time, with different administrations shying away from forcing employers and employees to subscribe to private investment schemes. The Insurance Association Malta recently urged the government to make workplace pensions mandatory in the budget.
The government prefers to let workers decide whether to subscribe to private insurance schemes. It intends to enhance the advantages of voluntary retirement savings through attractive fiscal benefits. Put simply, the long-term strategy is to transfer the political and financial risk of the shortening fuse of the pensions timebomb from the national insurance system to individuals and their employers.
Private pension schemes come with significant pros and cons. Poor returns in private pension schemes already in existence convinced many not to commit to voluntary schemes. Some people prefer to rely on property to see them through their retirement, but investing in property does not come without risk.
The first significant benefit of a private pension is that one can enjoy tax relief on contributions. In private occupational or public services pension schemes, employers usually match workers’ pension contributions up to a certain level. Of course, this system helps to build the retirement pot faster.
The flip side of this reality is that many workers are already struggling with their take-home pay due to low income, mortgage commitments, and inflation. Similarly, while employers can reap fiscal benefits if they set up a private pension scheme, they may not be in such a healthy financial condition to absorb the increased costs.
Low-income workers must not be frozen out of private pension schemes simply because their everyday financial commitments leave them with little disposable income.
Pension scheme managers invest heavily in stocks and shares. If pension investments perform poorly for a while, the trend is usually reversed in the long term. However, those approaching retirement may be extremely worried if the pension fund managers fail to mitigate the risks of falling financial markets.
When private pension schemes become more popular, the oversight on the insurance industry must be enhanced. This applies in particular to Malta, where the market size poses the risk of market dominance by very few major operators. Regulators must discourage high fund management fees, especially when investment returns are depressed.
Many people find pension schemes complicated. Increased financial literacy, through simplified language in forms and websites and better access to qualified financial advice, could noticeably impact whether workers can be incentivised to subscribe to a private pension scheme. To close the retirement savings gap more must be done to break down the barriers to consumer financial education.
The 1970s socio-political commitment to guarantee retirees two-thirds of their last employment income on retirement has proven to be no more than a mirage. As a result, many pensioners today struggle to make ends meet. Individuals are increasingly being asked to shoulder the burden of saving for retirement.
The magnitude of the protection gap has been growing for decades, and it can only get worse unless reforms are made.
Hopefully, voluntary pension schemes will be introduced based on equitable principles that provide retirement financial security and stability to all future pensioners.