The Sustainability of State Pensions

Private Pensions

Workplace Pensions

Benefits & Tax Incentives

Mario Farrugia FCII

Chartered Insurance Practitioner

Head Bancassurance

BOV plc

Types of Pensions

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Three-Pillar System

1st Pillar 3rd Pillar2nd Pillar

MandatoryFunded by

employer & employee

Voluntary Funded by Individual

State Funded

State PensionOccupational

PensionPrivate Pension

Origin of Pension Problem

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Post War Baby Boom

Increase in Life Expectancy

Drop in Fertility Rate

= Lower working population for every pensioner

Statistics 60+ yrs.

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• 11% of population2012

• 16% of population2030

• 22% of population 2050

Statistics Working Population

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• 12 working to 1 retired1950

• 4 working to 1 retired• (in 2019 < 3.75 to 1)

2010

• 2 working to 1 retired 2050

Life Expectancy

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• +8 hours every dayPast 20yrs

• +3 yearsNext 10yrs

• Males 80

• Females 83MALTA

Life Expectancy

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• 1400 persons 90yrs +2010

• 3000 persons 100yrs +2050

• Chance of reaching 65yrs of age99%

• Change of reaching 85yrs of age45%

Malta’s Ageing Population / Old Age Dependency Ratio

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4 for 1 2 for 1

Number of people working for each person retired

In 2014 the ratio had already dropped to 3.45:1

Source: NSO Demographic Review 2010

Projections 2060 Malta

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Fertility rate → from 1.45 to 1.78

Life expectancy → + 6.4yrs

Immigration → + 1400 per year ???

Population → to reach 476,000 ???

State Retirement Age is Increasing

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Year of birth State Retirement Age Year of Retirement

1952 - 1955 62* 2014 - 2017

1956 - 1958 63* 2019 - 2021

1959 - 1961 64* 2023 - 2025

1962 onwards 65** 2027 onwards

* May retire at age 61 with 1,820 contributions (35 years) ** May retire at age 61 with 2,132 contributions (41 years)

Perception

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The State will provide a pension

Equivalent to 2/3rds of salary

WHY 2/3rds?

Maximum Pensionable Income

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Remember that your Pensionable Income is capped:

Year of birth Maximum Pensionable Income

Before 1962 €18,562 (2019)Max. Pension €12,375 p.aWeekly €238

From 1962 onwards * €24,194 (2019)Max. Pension €16,129Weekly €310

*Up from €21,749 in 2015, increasing annually by 70% average wage and 30% inflation

Government pensions expense for 2017 amounted to €509M

Maximum Pension

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Pre 1962 €238 per week = €34 per day

Post 1962 €310 per week = €44 per day

2017 Average Pension €7,586

Weekly = €146

Daily = €21

Minimum Wage €166 per week

Risk of Poverty Threshold €120 per week

LIVE or EXIST?

Addressing the Shortfall

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Change of economic scenario over the past 20 years

Low Interest Rates

Asset Rich

Lack of Liquidity or ease of accessibility

Addressing the Shortfall

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1. Assess level of income & expenditure

2. Quantify the shortfall

3. Take measures to address shortfall

Addressing the Shortfall

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2/3rds

€24,194

Maximum

Pensionable

Income 2019

€16,129

2/3rdsIncome of

€30,000 €20,000

= Approx. €4000 Shortfall

Third Pillar Pensions

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Private and Voluntary

Introduction of the word ‘Pensions’ through Legal Notice

Tax Credits

Obligations

Third Pillar Pensions

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Contributions Investments Benefits

Tax rebate

available on

contribution

Investments to

grow free of

income tax

At retirement:

Tax Free lump sum

Pension subject to

income tax

Exempt Exempt Exempt / Taxable

Taxation – EET system

Third Pillar Pensions

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25% tax credit on max. contributions €2000 p.a.

(max. tax credit €500 p.a.) up from €150 p.a.

Non-working spouse also eligible for tax credit

(max. tax credit €1000 p.a. for married couple)

Tax Credits cannot be carried forward

18yrs +

Single Life only - no joint pension plans

Cannot be pledged against a loan

Third Pillar Pensions

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Benefits accessible between age 61 and 70

30% tax free

70% taxable

Withdrawal Programme : until fund is exhausted

Annuity Programme : guarantees a fixed annuity for life

Transferable to another Qualifying Pension

(charges & MVR may apply)

IMP. Personal Pension Plans are not suitable for.....

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Anyone who needs/might need access to the fund before age 61 Personal Pensions are a long term commitment and your money is tied up until at least age

61 under current legislation

Anyone who requires access to 100% of the fund value at retirement Under current legislation you may only access up to 30% of the fund as cash

Affordability As with all regular savings plans clients should only save what is affordable to them today and

for the foreseeable future

Anyone who fails to meet the criteria to be eligible to receive the tax rebate Because of the tax structure of personal pensions it can be argued that contributions only

make sense if tax rebates are granted (due to the final pension income being taxed)

Should someone wish to save more than the maximum amount eligible for

the tax rebate (€2,000 p.a.) then they are likely to put the extra into a non-

pension saving vehicle Under current legislation it is probably wise to only save the maximum allowed for tax rebates

under the personal pension (€166.66 p.m.),

Proposal: Outline of Plan

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Workplace Savings

Incentives were announced in previous budget speeches

Corporate tax credits

Additional personal tax credits

Removal of Fringe Benefits Tax on individual savers

More information required before we are able to provide product details

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Tax Incentives for Employers

Employer contributions in a Voluntary Occupational Pension Scheme are taxdeductible as a business expense.

Furthermore employer receives a Tax Credit of €500 for every €2,000 that itcontributes on behalf of an employee.

These tax incentives apply to all employers, large or small, as well as to self-employed persons.

Tax impact on the employer:

Trade Associations representing self-employed persons, sole traders and employersof small businesses will be authorised to administer Voluntary Occupational PensionSchemes on behalf of their members to help enrol their workers in such voluntaryschemes and the employees of such small businesses shall enjoy the same taxincentives mentioned.

Contribution € 2,000

Tax deduction on contribution €700 @35%

Tax Credit €500 @25%

Bottom Line €800 for every €2,000 Contributed

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Tax incentives for Employers

Employer contributions in a Voluntary Occupational Pension Schemeare tax deductible as a business expense.

Furthermore employer receives a Tax Credit of €500 for every €2,000that it contributes on behalf of an employee.

These tax incentives apply to all employers, large or small, as well as toself-employed persons.

Tax impact on the employer: Trade Associations representing self-employed persons, sole traders

and employers of small businesses will be authorised to administerVoluntary Occupational Pension Schemes on behalf of their membersto help enrol their workers in such voluntary schemes and theemployees of such small businesses shall enjoy the same tax incentivesmentioned.

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Employers have no additional costs, other than selecting a provider and arranging linksto an approved Voluntary Occupational Pension Scheme.

Voluntary Occupational Pension Schemes are not mandatory and avoid the cost oftraditional Second Pillar and Occupational Pension Schemes – Employers are notobliged to contribute but are free to do so if they want.

Employers are however encouraged to contribute towards the savings of theirEmployees through tax incentives.

Employer contributions lead to greater Employee loyalty and retention. Employee contributions are automatically deducted and paid monthly via payroll. Low cost and low administration – simplicity and ease of use. Tax incentives also apply to self-employed persons of whom there are many in Malta. Trade Associations representing self-employed persons, sole traders and employers of

small businesses will be authorised to administer Voluntary Occupational PensionSchemes on behalf of their members to help enrol their workers in such voluntaryschemes and the employees of such small businesses shall enjoy the same taxincentives mentioned.

Benefits of Voluntary Occupational Pension Schemes to Employers

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Tax Incentives for Employees

Employer contributions made on behalf of an employee will no longerbe taxed as income in the hands of the employees as a Fringe Benefit.

Employee receives a maximum Tax Credit of €500 per annumdepending on the amount that he/ she voluntarily contributes into aVoluntary Occupational Pension Scheme. This Tax Credit will be inaddition to the tax rebates that already exist in respect of PersonalPension Plans (i.e. Third Pillar Pensions).

Tax impact on employee:

Employer Contribution € 2,000

Employee Contribution € 2,000

Tax Credit €500 @25%

Net employee contribution € 1,500

Amount contributed towards employee's pension p.a. € 4,000

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Employees receives Tax Rebates on contributions made into Voluntary Occupational PensionSchemes and Personal Pension Plans.

Employees own savings and have complete flexibility over contributions made:increase/decrease/ stop/start.

Employees can increase savings by paying a lump sum at any time.

Employees can benefit from employer contributions which are added to their owncontributions.

At any time after age 50 or at retirement employees can take a 30% Maximum Tax Free CashWithdrawal.

Tax free lump sum payment of accumulated savings to legal heirs or designated beneficiaries inthe event of early death of employees.

Choice of local and international investment funds.

Contributions are automatically deducted and paid via payroll.

Tax-deferred contributions: Employees do not pay income tax on investment return until afterretirement.

Benefits of Voluntary Occupational Pension Schemes to Employees (1)

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Employees benefit from compounding which helps growth ofretirement savings.

Employees benefit from cost-averaging.

Portability of Voluntary Occupational Pension Schemes fromjob to job.

Transparency: participating employees receive annualStatement of Contributions made and investment returnearned.

Benefits of Voluntary Occupational Pension Schemes to Employees (2)

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Choice of Investments

Bond FundsEquity Funds

Balanced Funds

Target Funds

With Profits Fund

Cash Funds

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MAPFRE MSV Life at a Glance

as at 31 December 2015

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MAPFRE MSV Life Shareholding

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MAPFRE MSV WITH PROFITS FUND

The MAPFRE MSV WITH PROFITS FUND: At a Glance

Largest local managed savings fund in Malta.

Fund size at 31.12.15: €1,429m (2014:€1,254)+14%.

Over 60,000 policies in force.

2015 Gross Investment Return: 7.05%.

2015 Net Investment Return (after fees): 6.87%.

2015 Total Investment Return: €86m.

Investment Style: Prudent Active.

Performance Objective: To offer competitive long-term real returns whilstsmoothing the peaks and troughs of day-to-day market movements.

Annual Management Charge: 0.56% on Funds Under Management.

Global Custodian: Bank of New York Mellon.

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The MAPFRE MSV WITH PROFITS FUND: How it Works

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The MAPFRE MSV WITH PROFITS FUND: How it Works

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Capital guarantees: Amounts saved, after charges, guaranteed to be repaid on maturity or

death.

Secure Growth: Annual bonuses added to savings to provide a steady return.

Bonuses determined by Mapfre MSV Life, based on returns, liabilities andforecasts.

Tax efficient returns: With Profits returns are tax free in the hands of policyholders or

beneficiaries.

Potential for final bonus: Savings held for more than10 years may become eligible for a

discretionary additional Final Bonus.

The MAPFRE MSV WITH PROFITS FUND: Benefits

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The MAPFRE MSV WITH PROFITS FUND: Past Performance

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MAPFRE MSV UNIT LINKED FUNDS

Various fund objectives and risk profiles:

Equity Funds Bond Funds Balanced Funds Cash Funds

Investment choice starts with an aggressive portfolio, mainly in equities androlls-down into a more conservative mix of equities, bonds and cash

Disclaimer

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"The information herein is not intended for distribution in the general media but only for presentationpurposes to a limited audience. The contents thereof are not intended to be an offer to buy or sell, or asolicitation of an offer to buy or sell, investment instruments or retirement insurance products. Nor isthis presentation intended to provide pension/tax advice and its contents should not be construed assuch. It is strongly recommended that before committing yourself to an investment decision, retirementplan or other long-term insurance policy, advice is sought from a professional investment, legal and/ortax advisor according to your personal financial situation.Past performance is no guide to futureperformance (except where capital is guaranteed) and the value of your investments may fall as well asrise. Bank of Valletta p.l.c. is a public limited company regulated by the MFSA and is licensed to carry outinvestment services in terms of the Investment Services Act (Cap.370 of the Laws of Malta) and is also anenrolled tied insurance intermediary of Mapfre MSV Life p.l.c. Mapfre MSV Life is authorised by theMFSA to carry out long term business of insurance under the Insurance Business Act 1998."

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Questions

Thank You

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