An analysis of the relationship between private pension fund enrolment rates and tax mechanisms in Malta

Abstract

Purpose: Population ageing and its repercussions pose a significant challenge for Malta. In response, the Maltese Government implemented a voluntary private pension pillar by enacting various pension schemes, with the aspiration of alleviating pressure from Malta’s State Pension. The main scheme of interest for this study is the Personal Retirement Scheme Rules, which features taxation as an enrolling incentive. These rules have had multiple revisions, yet to date have had limited success. Hence, the main purpose of this study is to assess which form of tax incentives, if any, can induce further enrolment rates. This study also seeks to provide recommendations for policy setting based on the established interaction between tax incentives and pension fund enrolment rates. Design: This study adopts a quantitative research methodology to address its research objectives. The research process consists of the collection of primary data through the use of a survey, and subsequently using regression analysis to evaluate the interaction between the two variables of interest. This study’s main model specification comprises of a multiple linear regression model. Moreover, the study also estimates an ordered logit model to validate the results obtained by the main model specification. Findings: The findings stemming from the regression analysis show that under both the multiple linear regression model and the ordered logit model, there is no significant relationship between pension fund enrolment rates and tax incentives. Effectively, this finding indicates that tax incentives are unable to induce further enrolment rates. Conclusions: The findings from this study indicate that a voluntary private pension pillar by itself is unable to address Malta’s ageing population concerns. Furthermore, this study’s inferences align with the empirical literature that claims that behavioural polices are superior to tax incentives at inducing retirement saving. Hence, the study advocates in favour of the implementation of either a mandatory private pension pillar or a policy which features automatic enrolment with the option for individuals to opt out. Value: This study displays that the approach undertaken by policy setters to date has been ineffective, and that further modifications in the existing scheme’s generosity will result in similar fruitless results. Hence, this study displays that local policy setters need to consider other stimulants to induce retirement saving. Lastly, this is the first local study to consider the interactions between these two variables using regression analysis, hence closing a gap in the local literature.