Following the presentation to the Pensions Working Group’s latest report in December, it is disappointing but not really surprising to hear reports that the government has no intention of introducing mandatory second pillar pensions this year.
Of the 45 recommendations made by the Working Group, the one that seems to have raised most concern is this very proposal, which would introduce mandatory pensions funded by both employers and employees.
It is recognised that current financial circumstances may not be optimum and there has been comment that an opportunity was missed to introduce a mandatory scheme in 2006 when the fiscal climate was stronger. There is no point crying over spilt milk but, instead, the lesson should be learned that it is important to start making concrete plans now, rather than putting them off to a tomorrow that never seems to come.
The Working Group asks the pertinent question: “In truth, is there a right time of when such a pension is to be introduced?”
This is not a simple question to answer and perhaps, in the meantime, the following related question should be asked: “Is it right to put off making plans for the introduction of mandatory pensions, until there is a right time to introduce them?”
Since the last Working Group Report in 2004, there has been a consensus that the current system is inadequate in the long term and that a “no reform” option is not viable. Having a consensus over such a fundamental issue is a good starting point but there is a difference of views over the details.
The Working Group recognises the need for all parties to be involved in the design and implementation of a mandatory system, with a view to achieving national consensus to the extent possible. Pensions are a social issue that will, eventually, affect everybody.
While the time may not be right to introduce the mandatory second pension, the time must be right to start working on reaching a consensus on how and when it can be introduced so that the country can be ready to launch it when the fiscal situation is improved. This will not be easy and the detail contained in the report only serves to highlight the challenge ahead and the need to begin work on this complex issue as soon as possible.
In the meantime, as recognised by the Working Group, there does not seem to be any good reason why a framework for voluntary pensions cannot be introduced. These could be both second and third pillar systems, where individuals and employers could make the choice of whether or not they wanted to invest specifically for retirement within long-term schemes designed for this very purpose.
As such, these are less controversial than any proposal for mandatory schemes and their introduction could help to build knowledge and develop an infrastructure that would ease the passage of mandatory second pensions, as and when the time is right to introduce them.
It is welcome that the working group recognises the need for voluntary schemes to be flexible enough to allow anybody who makes use of them to be able to choose to transfer into a second pillar pension in future. It is also welcome that there is recognition of the validity of fiscal incentives, which might provoke more people to choose to save.
Again, while the time may not be right at present to introduce fiscal incentives or mandatory contributions, and these will require careful thought, this should not be a deterrent to grasping the chance right now to prepare for the future and to allow people the choice to make their own provisions for retirement.
Dr Bianchi is partner at Ganado & Associates Advocates, heading the Insurance and Pensions Department. Ms Charlton is a senior associate in the department with a particular focus on pensions.