Mandatory workplace pensions: Could Malta’s SMEs shoulder the burden?

The discussion around mandatory workplace pensions in Malta has gained traction over the last decade, driven by concerns about the adequacy of the existing pension system in the face of an ageing population and longer life expectancy.

The debate primarily revolves around whether Malta should introduce a second-pillar pension (i.e., employer-contributed pensions), in addition to the current state (first-pillar) pension system.

This week, the Insurance Association Malta called on government to implement a mandatory workplace pension with a voluntary opt-out in the upcoming 2025 budget, which falls under the second-pillar category with the caveat that this would be legally mandated.  

It also called for an introduction of a transitory framework for employers to contribute towards their employee’s pensions.

For insurers, the introduction of such a scheme would create the potential for increased business, long-term revenue generation, while also improving economic stability as those entering pensionable age would no longer rely solely on their state-provided pension.

Various business interest groups and employer bodies, such as the Malta Employers Association and The Malta Chamber have expressed support for some form of second-pillar pension, with clearly defined opt-in and opt-out provisions for employers and employees alike, in order not to overly burden Malta’s business community, in particular smaller businesses which make up the bulk of enterprises.

Successive governments have historically been cautious on the issue of mandatory workplace pensions. Various administrations have acknowledged the need for pension reform and discussed the introduction of second-pillar pensions, but no formal plan for mandatory implementation has been adopted to date.

In public discussions, the government has emphasized the importance of striking a balance between safeguarding retirement incomes and not placing undue financial pressure on businesses. Various administrations have also promoted third-pillar pensions, which are voluntary, tax-incentivised personal pension schemes, as a way to encourage additional savings without imposing mandatory contributions.

Ultimately, a mandatory workplace pension in Malta would have several potential impacts on business, depending on the structure and specific regulations of the pension scheme, which can take various forms. Here are some key considerations:

1. Increased financial responsibility

Cost implications: Business leaders would need to factor in the additional costs of contributing to employees’ pensions. For SMEs, in particular, this could strain budgets. Large corporations might be better positioned to absorb these costs but would still face challenges in managing these new financial obligations.

Payroll adjustments: Employers might need to reallocate funds or adjust payroll structures to accommodate pension contributions, potentially influencing wage growth or bonuses.

2. Administrative burden

Operational adjustments: Business leaders would need to implement new administrative processes for managing pension contributions, tracking employee eligibility, and ensuring compliance. This could require additional resources, such as hiring HR staff or using third-party pension administrators.

Compliance and regulation: Ensuring compliance with government regulations related to the pension would require ongoing legal and financial oversight. Business leaders must stay informed on any future pension-related legislation to avoid fines and penalties.

3. Impact on cash flow and investment

Reduced liquidity: Regular pension contributions could reduce business cash flow, affecting day-to-day operations and long-term investment plans. Leaders might need to reassess investment strategies or look for cost-saving measures to maintain healthy liquidity levels.

Long-term planning: Businesses would have to adapt to long-term financial commitments, encouraging more strategic financial planning.

4. Changes in employer-employee relations

Shifts in Expectations: With mandatory pensions, employees may expect employers to offer additional financial wellness programs or support for retirement planning. Business leaders might need to enhance communication and provide guidance on pension options to help employees make informed decisions.

Workplace culture: A pension scheme can shift the dynamic in the workplace, promoting a culture of long-term planning and financial security. Leaders would need to foster this mindset among their teams.

5. Potential competitive advantage

Standardisation across industries: If all businesses in Malta are required to offer a pension, this levels the playing field in terms of employee benefits. However, business leaders who can offer more generous pensions or additional perks may gain a competitive edge in the talent market.

6. Impact on SMEs vs. larger corporations

SMEs: Smaller businesses might find the financial and administrative burden of mandatory pensions more challenging than larger corporations, leading some leaders to reassess hiring or expansion plans.

Large Corporations: Larger businesses might be better equipped to absorb the costs but may still need to balance pensions with other compensation elements to remain competitive.