After many years of an exclusively state operated pension system in Malta the occupational scheme seems to be set for a comeback. Company schemes existed in until 1979 but these were replaced by state provision when the government of the day decided that state provision should be good enough for all and promised all pensioners a full pension equivalent to two-thirds of final salary.
“The government thought that the state system was good enough for everyone,” says Alfred Mifsud, chairman of Valetta-based asset managers Crystal Finance Investments in Valetta, Malta. “Now it is clear that the government can’t afford this any more and it is only the lower paid workers that are getting the two-thirds replacement ratio.”
He adds: “As a result most people make provision at an individual level, but they are saving on their own account with no fiscal incentives. We see a great sensitivity among working people to make provision for their retirement.”
Until recently Malta had a very strong savings culture. “This has dwindled to almost zero over the last 10 years,” says Mifsud. “One reason is the younger generation doesn’t want to save; the other is that interest rates have fallen in the last five to six years. So to provide for their retirement needs people are moving to direct investments such as property or equities rather than leaving their money in the bank. Home ownership is broad, thanks to the government which has provided access to cheap mortgages.”
Household liquid/term deposits at Maltese Banks stood at LM2,236m (e5,209m) at the end of March. Taking 50% as the available pool for long-term investment alternatives, then the amount that could benefit pension funds could be $3bn (e2.5bn). “This will shift to a long-term pension plan if there is a fiscal incentive to do so,” says Mifsud.
As the state sponsored system becomes more and more inadequate the government is suggesting the reintroduction of a second and third pillar system. There is a white paper before parliament which suggests a voluntary second pillar which would become compulsory by 2010.
But even once the fiscal incentive is in place the investment environment will remain fairly restricted. “The regulator will favour cautious asset management for pension schemes,” Mifsud notes; “the investment structure is not clear yet although details of the investment philosophy will need to be approved by the government-appointed regulator.”
Asset managers operating in Malta include independent providers, asset managers that are affiliated to a banking group or an insurance group with financial services subsidiary offering life products.
The main independent is Crystal Finance, a UBS distributor; then there are two major banks – HSBC and the Bank of Valetta. There is also the Middle Sea Insurance company which has a joint venture with the Bank of Valetta. “The pensions directive is being implemented with the aim of attracting foreign investment via the European passport,” says Mifsud.
As with any new pensions system there are cost implications. “The economy is not moving, so companies are cost-conscious,” Mifsud continues. “Even if a second pillar were introduced it would have to be introduced in a way that would not affect the competitiveness of the industrial base.”