Malta: Reviewing The Pensions Paradigm: A Disruptive Opportunity? (Part 2)

As the dust has finally settled in the electoral arena, and the victors have taken their places at the helm of the country, the obvious question remains: what's next for pensions? A quick view of the electoral manifesto of the now incumbent Labour government will reveal myriad proposals concerning measures that improve or boost the national pension system or 'first pillar'. Once again these increases, tax cuts and exemptions in relation to pension income form the baseline of any electoral campaign and are for the most part well received by all the electorate.

Having a closer look, it appears that the most salient issues addressed under the first pillar are the following points:

  • An increase in pensions payable in general and vis-ŕ-vis various age groups;
  • The ability to regularise one's position with regard to their outstanding social security contributions;
  • An income tax exemption on any pension income up to the first €13,000;
  • Various schemes relating to people suffering from debilitating or terminal illnesses or disabilities; and
  • Increases in pensions for servicemen (police, armed forces and civil protection).

All well and good! However, without going into complex economic assessments of the feasibility of these proposals, it is opportune to ask the pertinent question; "Is there room left for further improvement?"

The short of it is definitely. The long goes as follows...

In light of the long-term demographic and economic trends of Malta and the rest of the world one cannot ignore the fact that a State pension alone will not hold the roof over our heads for eternity. Even in the most radiant vision of the future, this would be too reckless and unintuitive a move to allow to subsist indefinitely.

Unfortunately, the notion of 'pensions' traditionally finds itself in bad repute with the younger generation as it is mistakenly perceived as a tool to manage gentrification with nothing more to offer to the young and ambitious. But, this is where the missed opportunity lies and this is where I found some comfort as a continued reading through the Labour manifesto.

During the electoral campaign Labour proudly announced it would continue to build upon the achievements of the past, particularly with what was announced in the previous 2017 Budget Speech concerning Occupational Pensions and Private Pensions – the famed Second and Third Pillars.

In short, in the area of private pensions, Labour committed itself to granting a tax credit of €150 on every thousand deposited in a Private Pension Plan up to a maximum of €300 on €2,000. Labour went as far as to offer the same tax credit on pension plans set up for children under 18, a small yet meaningful gesture in view of instilling a mindset of financial discipline in the population.

In the area of occupational pensions, being pension plans established and contributed to by employers for their employees, the manifesto does not provide any specific details but if we take the milestone left in the Budget speech we can anticipate a substantial opportunity at hand. As expressed in the speech, any sum invested in a private or occupational pension by an employer would be considered as a recurrent expenditure for the purpose of tax computation for said employer. This means that all amounts deposited during the year will be deducted from the total amount of revenue of the employer, thereby indirectly lowering the tax liability of said employer. In addition, the employer will be allowed an additional tax credit of €150 for every €1,000 invested on behalf of its employees.

This tax incentive would not only apply to large corporations but would also extend to self-employed workers and to employers in small-scale enterprises who participate in a larger pension plan set up for any given business sector to administer these collective pensions. From an employee's perspective, this investment on his behalf by his employer will not be considered as a fringe benefit and, consequently, the employee will not be required to pay tax on this amount.

On reading the above from the Budget Speech, while one would regard the incentives put in for private pensions as somewhat dull and uninspiring, one would wow at the fantastic effort put in driving the occupational pensions market with such incentives on just the first attempt.

That being said, it is also pertinent to note that while the previous administration should be commended in coming up with the incentives in the previous Budget Speech, such measures were temporarily shelved partly due to the election's timing. Nevertheless, such promises need not remain idle, and Labour's impetus to revamp these proposals in the manifesto confirms the government's intention to bring new life into the idea.

Indeed, the true incentive for this government goes beyond these fiscal proposals. The pension administration business is a multi-billion dollar industry that has the potential to run toe to toe with the other heavyweights in investment services and insurance industries, creating massive opportunities for expansion of local operations and local employment. Much like Malta has become a hub for operations that service overseas clients of financial services, the field of private and occupational pensions remains an untapped cornucopia of opportunities for both local and foreign employers, employees and services providers.

With the increasing importance that pension provision carries in recruitment and employee retention in many foreign jurisdictions, it will not be long until overseas employers relocate their pension plans to a more favourable cost-effective jurisdiction. It is at this point that we need to ask ourselves, are we ready to seize this opportunity?

This article was first published in The Sunday Times of Malta - August 13, 2017.

This is the second part of two articles on pensions. Click here to view Part 1.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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