Beating the drum for sustainable pensions

At a recent political meeting, the prime minister assured delegates that his party is not going to whitewash the problems to cover the defects; he gallantly asserted that “where there are defects we are recognising them and we will try to fix them”.

His assertion points a poignant reference to state pensions. He noted, that there are still pensioners living close to, or in, poverty, adding that female pensioners were amongst those most vulnerable to poverty. Demographics show a higher proportion of ageing population, with the average age increasing which in turn creates a strain on the state pension scheme.

In simple terms, one can add that when compared with the number of people entering the labour market, the cohort of retired persons is growing faster. One cannot underestimate, the exacerbation of the government revenue problem when one notes how Malta has Europe’s lowest labour force participation, in particular among women.

Many theories and suggestions have been pronounced by both political parties over the years. In essence, all the improvements that can be doable are just cosmetic touches since a lot depends on how fast the economy grows and the inherited national debt burden.

These two factors can stifle the chances of generous pensions. Typically, we notice how two years ago, in a bid to improve the chances for a second pillar pensions, Government has rolled out a tax scheme, that is strictly voluntary. The concept is welcome but a lot depends on how fast it is taken up by employers. The latter can benefit through a tax credit on profits earned, calculated as a maximum of €150 for every €1,000 contributed.

One appreciates that the unions are not too keen to burden members with more contributions (apart from obligatory state pension) to build up a second pillar. It is interesting to note that the GWU are proposing amendments to the Social Security Act which will see the legislation be split into two separate acts, one for Retirement and Pensions, and one for Social Security and Welfare.

This is a complex problem which seems to have taken a lower stance ever since the announcement by government of the economy registering higher GDP growth with recurring three-year national surpluses. But taking an Ostrich approach, can only be a wasteful exercise.

Unfortunately, poverty at retirement age is still a hidden problem that we have to face. Efforts to fight relative poverty and social exclusion affect various social and economic aspects of society. Individuals who live in poverty are more likely to produce adverse outcomes for themselves (i.e. abuse of alcohol and drugs) and for the society (increase the criminal activity).

The national state scheme is called the “two-thirds pension”. This aims to provide a pension equivalent to two-thirds of the average earnings of insured persons capped at a fixed limit. However, there is also a minimum pension guarantee that is about 60% of the current average wage. But, is this enough and acceptable in a growing economy of 2019? Is it protecting the welfare of our society?

The first noteworthy observation from the press comments is that almost 70% of families rely on a single pension nowadays. For this reason, it is important to focus on households composed of two people or more that only receive one pension, since without other source of income these may fall below the poverty line.

Instead, those receiving the maximum pension said the two-thirds pension system would not be representative of their total contributions given that pension limit is capped. As can be expected, saving is identified as being one of the most important means to avoid running out of finances when unforeseen events occur, indicative of a traditional aspect of Maltese culture – ‘save for a rainy day’.

It is important to emphasise that nowadays rent of flats and bills for food, medicines, electricity, water, prices are creeping up. It does not rain but it pours when one reads about a scandal associated with private pension funds operated out of Malta for Swedish pensioners.

Such stories, make one wonder if we take for granted the security and quality service afforded by our state pension, even though it is unfunded and works on the principle of collecting sufficient dues from the workforce to match present claims by pensioners.

Hence, the importance of introducing a supplementary second pillar pension is slowing taking traction but it is still not mainstream. The scandal of a major Swedish pension fund domiciled locally has recently hit the headlines - its rogue administrator was jailed for fraud. The Swedish pension fund was recently placed by MFSA under the control of KPMG, (ex-auditor of Pilatus bank) which discovered that at least €60 million in savers’ cash were poured into obscure investments layered under one company after the other, to benefit Serwin, its founder.

As an administrator, he was discovered to have had a formal role in setting up Falcon Funds for which he attended 13 board meetings in Malta together with directors Tonio Fenech, the former long serving Nationalist finance minister, Ian Zammit, and Joseph Xuereb. It is a shame, that such shenanigans occur which place pensioners life savings at a grave risk.

Recently, it was revealed by KPMG that the pension fund held €270 million in savings on behalf of its 22,000 clients. In this complex structure, nobody expected that clients from another pension fund had been misleadingly transferred into Falcon Funds. This makes us wary how state regulation needs to be vigilant when issuing licences to foreign pension administrators and the need for constant monitoring of such pension schemes.

At this juncture, one may ask what is the ideal pension plan to build your second and third pillar fund. In simple words one can best advise workers that the ideal path is to start early. In the first phase, you’re trying to build up as big a fund as possible for retirement – financial advisers call this the “accumulation” phase. Moving on to stage two – is to invest in such a way that you can preserve and even build up further capital, while also taking an income from your savings.

A pension plan ideally uses investments chosen primarily with capital growth in mind to generate an income. Equally, investments that generate generous amounts of income are often good options for growth, since you’ll typically be able to re-invest the income back into your savings.

Quoting a survey published by the stockbroker AJ Bell, six of the 10 best-selling investment funds with pensions savers proved to be investment companies. In the interim, we hope the economy continues to march along galloping at a steady pace. Only then, can workers in Malta earn sufficient amounts to be able to supplement state pension with a comprehensive second and third pillar structure.

The future beckons.

Will Dr Muscat’s aspiration of meeting pensioners expectations secure us the golden pot at the end of the rainbow?