Last Updated on Thursday, 22 June, 2023 at 12:20 pm by Andre Camilleri
In my previous article, I stated that the demarcation line of what constituted “future pensioners” resulted from the conclusion that 20 years was required for a private pension to accumulate (and buffer potential economic shocks) sufficient funds to bridge the 9% difference between the minimum goal set for reform in terms of pension adequacy – retaining a 54% adequacy level project for persons retiring up to 2020) and the 45% adequacy level that reforms to the architecture of the PAYG would result (increase in retirement age and so on). At the time, it was decided that the best way to this gap would be through the adoption of the World Bank vanilla solution: (a) focusing on the state pension that allows a person to retire in dignity; (b) introducing a second pension to partially bridge the gap between income earned in employment and the state pension and (c) a third pension for those who wish to have an income stream during their retirement that equals and perhaps improves that earned while in employment.
The recommendation made in 2004 for a mandatory second pension was not received well, neither by the government at the time, nor the Opposition, and constituted bodies representing employers and employees, among others. And the terms of reference assigned to the pension strategy group by the new government in 2013 specifically excluded the group from presenting recommendations to it on a mandatory second pension. The Musu strategic review, in late 2013, issued an interim report on the setting up of a voluntary personal private pension (PPP) and a voluntary occupational retirement pension (VORPS). The recommendations of this interim report were consistent with those of a task force specifically set by the Ministry of Finance to draw up a regulatory framework for PPPs and VORPS. By late 2015 the first local PPP products were on the market while VORPS followed in 2017 or thereabouts.
The PPP and VORPS framework sought to nudge uptake by incentivising through tax credits – whether for individuals to invest in PPPs or for employers to introduce VORPS for their staff. Experiences in other jurisdictions show that PPP and VORPS uptake is not pervasive. As a reform measure on its own, voluntary incentivised PPP and VORPS do not provide a solution to the adequacy conundrum. The Musu strategic review recognised this and emphasised that should these voluntary pensions “not have delivered as planned… [a future review should] strategically assess the introduction of Mandatory Opt-In Voluntary Opt-Out framework”. The mandatory opt-in voluntary opt-out framework is today referred to as Automatic Enrolment.
Regrettably but foreseen, the PPP and VORPS frameworks have not gained traction. During the 2021 tax base, PPP membership was 13,672, and VORPS 1,685. The number of persons in 2021, aged 46 years and over, enrolled in a PPP constituted 38% and those in VORPS 29% of the respective total cohorts. This suggests that these are substitute savings, which already form part of a person’s saving portfolio but are transferred from one product or instrument to another. In this case, these substitute savings are potentially the result of people shifting their savings from no and minimal-interest savings and deposit accounts to voluntary pension schemes to benefit from the fiscal incentive. The number of persons aged 19-29 who are the “new” savers and who will, over 40 years, accumulate a significant retirement egg nest investing in the PPP and VORPS in 2021 stood at 9.1% and 12.3% respectively.
I have long concluded that in a polity, where the political and social climate for a mandatory second pension does not exist, the most appropriate solution to address the adequacy issue is the introduction of Automatic Enrolment. AE is a creative solution designed to turn behavioural heuristics, in particular inertia, on their head, for under a purely voluntary scheme, inertia affects a person in a way that inhibits them from enrolling. Even if a person believes that becoming a member of a voluntary workplace pension is important to them, they may keep taking action as more immediate and pressing matters require their immediate attention. Under a voluntary workplace pension based on AE, inertia inhibits the person from opting out of the PS once enrolled. The same inertia that propels a person to procrastinate enrolling in a voluntary pension scheme now restrains the person from opting out once enrolled. AE schemes, such as those introduced in New Zealand (Kiwi Saver) and the United Kingdom (Workplace pension), successfully meet their objectives of engaging and retaining individuals to save for their retirement over time.
When my involvement in the pensions strategy group following the presentation of the 2020 strategic review terminated, I worked with the Chamber of Commerce and the General Workers Union to establish a framework for AE that they would jointly be prepared to present to the government. In March 2022, both the Chamber of Commerce and the GWU jointly presented to the government a framework based on the following principles:
- As is the case today, employers are nudged to contribute on behalf of their employees based on a fiscal incentive (that is, no mandatory contribution) and through collective bargaining;
- Employees earning below a certain income are excluded from opt-in on employment so that no negative pressures are placed on their disposal income, though they will maintain their right to opt-in should they wish;
- Each employee will have the right to opt out or suspend their contribution;
- The contribution that an employee will pay, which will continue to be subject to a fiscal incentive, will be the annual minimum requested by the pension provider selected by the employer or that selected by the employee;
- The only obligation to be placed on the employer is that of presenting information on retirement on the engagement of an employee, enrolling an employee in the pension provider selected by it or that chosen by an employee, managing the monthly contribution payment deducted from the employee’s wage and transferring this contribution to the selected pension scheme provider; and
- The pension scheme is introduced incrementally over five years, initially targeting large employers and rolling it out to micro and small enterprises.
The government has two major players at its side in implementing a fundamental pension reform that will go a long way to address the adequacy conundrum. It should grasp this opportunity.