Workplace savings: a simple and effective alternative to voluntary second pillar pensions

Noel Grima speaks to MSV Life CEO DAVID G. CURMI about encouraging higher savings through a workplace savings schemes with auto-enrolment as a solution to complement the mandatory state pension system.

David G. Curmi, CEO of MSV Life, Malta's largest life insurance company, has long been a pioneer in advocating a system that encourages people to save through the workplace from an early age as the best alternative to a voluntary second pension.

"The most sustainable solution for a second pension," says Mr Curmi, "is a workplace savings scheme with auto-enrolment where employees are encouraged to regularly put aside an affordable amount of money which is invested throughout their working life. The money that is saved can then be accessed either at or shortly before retirement."  

What are the benefits of such a scheme, which Mr Curmi refuses to refer to as second pillar?

"Voluntary savings schemes through the workplace are considered to be the best and safest option to encourage people to start becoming savers again from an early age. Our company has been advocating the introduction of such schemes because we genuinely believe that they are the most pragmatic and easily understood solutions. 

"Essentially, all employers over a certain size will be required to provide access for their employees to a workplace savings scheme where employees put aside a monthly contribution which is deducted through the payroll. All employees will be automatically enrolled but may choose to opt out.

"Employers, on the other hand, would be encouraged to supplement the employees' personal savings through additional contributions and benefit from tax incentives if they want to, but do not have to. This means that both employees and employers are free to do what they want. The auto-enrolment feature of such schemes has its largest impact on participation for those workers who have the least amount of financial awareness and sophistication. In countries where auto-enrolment schemes already exist, the opt-out rates among employees have been very low particularly in the younger age groups."

"These schemes are also very simple to administer," Mr Curmi says, "since employers have no additional costs other than arranging links to a workplace savings scheme with an authorised provider. Occupational pension schemes that are run by employers on behalf of employees are becoming far less popular because the risks and costs are too high and such schemes do not work well in the case of SMEs which represent the majority of employers in Malta.

"The trend throughout the world in 'second pillar pensions' is a shift from occupational pension schemes to personal schemes and Malta should be no different. Due to the large number of small to medium enterprises and the costs associated with establishing occupational pension schemes, the argument for personal arrangements is even more compelling in our country."

Mr Curmi says the state pension will over time become unsustainable and cannot be strengthened without taking very drastic measures. While we can continue to carry out further parametric changes to our state pension system, we are never going to be able to change demographics and socio-economic trends. The options to strengthen the state pension are limited and politically very sensitive, such as increasing contributions or the statutory retirement age. The most effective solution would be to encourage higher savings through voluntary second and third pensions.

Statistics on the demographic challenges pension systems face, published by The World Bank (2014), show how Malta's pension spending in 2010 was 10% of GDP. This figure is set to increase to 16% by the year 2060 as Malta has a comparatively generous state pension.  

Demographics cannot be altered and the longer people live the more they will place public finances under stress. For countries, this will mean higher investment in healthcare and long-term care while for individuals the risk of outliving one's life time savings becomes so much greater. The notion that retirees will require less money as they grow old is fast becoming obsolete," he says. "Similarly, it is very difficult to influence socio-economic trends. Savings levels throughout Europe are falling and the current savings of the average household are insufficient for their long-term financial security."

Reform is, therefore, imperative, says Mr Curmi. "We need to give people control over their own future financial requirements. One of the responsibilities of the state should be that it does not stifle incentive, opportunity and responsibility for each individual to provide more than the minimum provided by the state pension. Measures which encourage a person to save voluntarily for a worthwhile purpose are important especially when the motive in actuating the thrift is family welfare and long-term provision."

Mr Curmi explains: "This is precisely what MSV Life is proposing. In order to rectify the 'pension's gap' and alleviate concerns over pensioner poverty, the OECD suggests mandating pensions on top of the state pension as a means to do this. While compulsion would be the less costly and most effective approach, this is no longer regarded as the answer to get more people to save. Auto-enrolment and voluntary empowerment is today regarded to be the second best-approach and the new social norm.

"Auto-enrolment schemes already exist in the UK and New Zealand while both Ireland and Germany have signaled support for the introduction of auto-enrolment. There is a tendency for procrastination in retirement savings where people agree that they should save but delay the action. The auto-enrolment mechanism addresses this important consideration and is another advantage of such schemes. On the other hand, the opt-out provision gives individuals the flexibility to temporarily take a break from having to save when they need to do so. Portability is not an issue under such schemes because savings are effected on an individual basis and are owned by employees who have complete control and flexibility over their savings.

"To incentivise employees to save voluntarily, tax incentives must be offered. Initially employers should be encouraged, not obliged, to supplement the savings of employees through tax incentives.  Making employer contributions mandatory is a decision for the future and should not detract from the task group government has set up to consider the best ways to encourage employers to save for their employees on a voluntary basis."

The advantages and benefits of workplace savings schemes with auto-enrolment are many.  Primarily such schemes encourage employees to start saving for the long-term from an early age while the employer does not incur any additional costs. Auto-enrolment avoids the cost of second pillar pensions as employers are not required to contribute but may opt to do so.  Contributions are carried out seamlessly via payroll and tax rebates can be processed automatically. Workplace savings schemes with auto-enrolment can in future be used as the foundation for a fully-fledged mandatory second pension. 

Mr Curmi concludes: "Our recommendation for the introduction of a workplace savings scheme with auto-enrolment for Malta is motivated by international experiences of such schemes. Two countries that have undergone extensive pension reform and which have successfully introduced workplace savings with auto-enrolment are the UK and New Zealand. 

"In the UK, employers are responsible for ensuring that employees are enrolled in a scheme. An employee holds a personal account and is free to choose the level of contribution which will be invested in a limited choice of funds which include a default fund. Cost savings and simplicity were the main drivers behind the design of the UK model. The expectation is that there will be six to nine million new young savers in the UK as a result of the introduction of auto-enrolment, since opt-out rates have been very low, less than 2% in certain age groups.

Kiwi-Saver came into effect in New Zealand in 2007. All persons in employment between the ages of 18 and 65 are automatically enrolled but can choose to opt-out between day 14 and day 56 of their employment. There are three levels of contributions for employees to choose from 3% / 4% and 8% of gross salary. In order to discourage opt-outs, the New Zealand government provides a NZ$1,000 tax free kick-start to the individual's savings account. It is now compulsory for employers to contribute a minimum 3% of an employee's gross salary.

David C. Curmi is the Chief Executive Officer of MSV Life plc