Noel Grima

Pension reform is never far from David G. Curmi's mind. As a former  president of the Malta Chamber of Commerce and Industry, he played a leading role in public debate and consultation on reforming Malta's pension system. At the helm of MSV Life, Malta's largest life insurance company, pension reform is still very much his focus. We met recently to discuss the subject.

The recently published Pension Report is the result of the latest five-yearly sector review. Much thought and effort was put into it by an excellent team. However, although it addresses parametric and regulatory changes, it fails to address the central concern: how to get more people to save for their retirement voluntarily rather than compulsorily, as happens at present.

Disappointingly, Recommendation 19, which should address this issue of voluntary savings, has been postponed by a further five years. It will now be reviewed in 2020. So in five years' time, the Pension Review team will again find itself facing the same issues. Malta is missing out on an important opportunity. When unemployment is at its lowest, when female participation in the labour market is increasing and when a significant cohort of the young working population are earning very decent salaries we should really be making the most of the workplace to get people into a saving habit..

There has been a flurry of articles about the need for a robust pension system but they skirt around the issue of what really constitutes a strong scheme system and what benchmarks should be used. The one thing on which there has been wide agreement is that there should be a strong private pension system outside the state's mandatory pension system.

States have the responsibility to deliver a stable comprehensible state benefit system that does not penalise but encourages personal voluntary saving.  Countries that have robust pension systems are those that have managed to build significant private liquid pension assets. Countries that have not managed to do so have weak pension systems, and Malta is weak and lagging behind in this respect. The reality only kicks in on retirement when one's income shifts from a regular salary to a pension that is often a fraction of one's pre-retirement earnings.  Even the highest available state pension usually means a sharp drop in monthly income. The income shock effect can only be countered with proper preparedness. That means educating the workforce about the need for personal savings and making sure savings happen.

Shifting downwards from, say, gross earnings of €60,000 a year to a pension of €14,600 per year has a huge impact on one's quality of life and sense of security. Some argue that this doesn't matter as older people do not have the same sort of expenses that younger people do. It often comes as a surprise that the actual cost of living is usually the same or greater if different in nature, with more spending on healthcare, medication, home help and so on.

Investing in property is often seen as a way of securing one's future. However, being asset rich but cash poor poses its own set of problems. A sudden need for cash - to help with an increased need for home care, for instance - could mean having to sell one's home at a loss, with the attendant emotional trauma and loss of capital.

One way around the problem is the use of equity release arrangements where home owners sell excess equity in their property for cash which they can then use to enter a private retirement home. In principle the idea is a good one, but it seldom works well. Regulatory changes and developments will make it increasingly difficult for financial institutions to become involved in this space. Disposing of one's assets to be able to move into a private retirement home works in principle but the culture has yet to firmly take root here in Malta. What's worse is that time is not on our side. We are one of the last countries to tackle the pension gap properly and while we can learn from what other countries have done well or badly, we cannot reinvent the wheel. The UK, for example, has in 2012 carried out ground-breaking reforms to its pension system and has joined countries such as the U.S. and New Zealand in introducing     a workplace auto-enrolment system which has started to transform the UK's long-term saving culture on an unprecedented scale. While in Malta and elsewhere people  speak about first, second and third pillars in pensions - a World Bank solution that has worked well for many - the UK have opted for a blend of soft compulsion and hard compulsion to get more people to save.   

People do not need to be forced to save but can be "nudged." The most popular "nudge" in getting people to do what is good for them is workplace auto-enrolment. Workers are automatically enrolled in a workplace savings scheme and may opt out if they do not want to join.  This has been a real policy achievement where behavioural economics was used to distribute risks between government, employers and individuals. The same model can be rolled out to incentivise further risk sharing in that the distribution infrastructure in operation for auto-enrolment could provide avenues for other forms of welfare.  Under workplace auto-enrolment schemes, every month a very small part of   an employee's salary is deducted and initially, the model can work without any contributions on the part of the employer.. An employer's contribution can be introduced at a later stage. One of the distinct advantages of automatic enrolment into workplace savings schemes is that it encourages young people to start saving early. People, particularly the young, tend to have a strong focus on the short-term and find it more difficult to engage with the long term. People worry about sacrificing their liquidity by putting away money for their retirement. They may have money to save now but think they might need it next year. But people may change their behaviour if the problem is explained to them in the right way. In the UK more than five million employees already auto-enrolled into workplace savings schemes and the opt-out rate is less than 10%>.

The problems Malta faces in terms of financial illiteracy and in getting people into a saving habit are not unknown in other countries. However, things are starting to change in other places and will need to change in Malta too. In the wake of the UK's success, other countries are considering instituting similar reforms to their pension systems.  The UK has also removed compulsory annuitisation which is the process of converting a savings pot into a series of periodic income payments. The move was correct as most people do not like compulsory annuitisation since they hate losing control of their money.  In Malta, the third pillar legislation and regulation introduced at the beginning of this year include an element of compulsory annuitisation but over time this requirement should also be reviewed. We need to create a system which sets saving for one's retirement as a default.  Life is getting more complicated. With multiple marriages, single parents, cohabitation, extended families, blended families and a larger number of dependants, the current savings of most households are insufficient for their long-term financial security.   On the other hand there are many good employers in Malta who treat their people well and who would be willing to enrol their employees in workplace savings schemes that are often used by employers to increase job engagement and employer loyalty. However, the fiscal regime actively discourages such important incentives.  Currently, if an employer contributes into a workplace savings scheme, the employer contribution is treated as a fringe benefit and will be subject to tax in the hands of the employee.  This runs counter to the need to plug the pensions gap. If we really want employees and employers to do their bit, we need to make sure that voluntary savings are encouraged and not discouraged.

MSV is receiving several enquiries from employers who would like to start workplace savings scheme for their people because they want to retain their people as good talent is difficult to find. However, under the current fiscal regime these schemes are virtually impossible to do.

In Malta, the recent announcement by the Minister of Finance that third pillar benefits will be extended to insurance products is a very good move and it underscores the importance that government gives to the insurance sector. In 2013 the life insurance in Malta grew by 14% and registered the sixth highest growth rate in Europe. In 2014, the market grew by another 24% respectively as more and more people are using insurance products as savings vehicles. We are nowhere near where we should be on our pension reform agenda but a few crucial changes to our regulatory regime would take us a long way.  The bottom line is, we all need to start saving and we need to do it now. The tenets of behavioural economics should be applied by Government and industry to incentivise more long-term private savings by individuals. Starting to save early and saving more make by far the biggest difference.