Fiscal incentives for private pensions are insufficient

Fiscal incentives for private pensions are insufficient

Mrs. Estela Koçi, general director of the fund management company, Credins Invest, in an interview for Monitor magazine, says that fiscal incentives for promoting the development of private pensions today, are insufficient. According to her, a higher limit of exemption of contributions from personal income tax and profit tax, is needed for employers. Mrs. Koçi says that voluntary pension funds as a third column can be a solution to the pension problem for Albanians. She thinks that this column, as in developed countries, will be complementary to the two main, mandatory columns. You can read the full interview below:

How would you assess the performance of your pension fund in 2020?

For several years in a row, the Credins Pension Fund ranks first in the market according to the number of members and the second for the volume of assets. On 31.12.2020, the Credins Pension Fund had approximately 18,000 members and an asset value of about ALL 1.1 billion, holding 57% and 30% of the market in number and value, respectively. Although 2020 was an extraordinary year because of the pandemic, the Credins Pension Fund grew by 31% in value and 3% in membership compared to a year earlier. There is a slowdown in the growth trend compared to the last 3 years, where the increases have been significant both in number (on average over 20% per year) and in value (on average over 50% per year). But considering the difficulties of 2020, maintaining the upward trend is a very positive indicator. The crisis did not affect the existing portfolio of members, who continued to contribute to their voluntary pension account. The effect of panic on the members of the pension fund was not felt at all, and consequently, there was no withdrawal of funds as a result of the state of emergency. In general, members of pension funds are consistent and aware that investing in these funds is long-term and has a defined retirement age. Moreover, because of the pandemic situation that increased humanity’s insecurities about the future, our members say that having a savings account for retirement, has had a positive impact, making them feel more protected for the future. Even the employers who have created professional schemes for the employees in the Credins Pension Fund, have not stopped their contributions in 2020 and onwards, and this is another positive indicator for the fund.

How much was the private pension market affected by the effects of the pandemic and the economic crisis?

Based on the data, the fact that the market has had an increase in key indicators, despite the state of emergency, shows that the performance has been positive and generally unaffected by the crisis. But, of course, the upward trend in both value and number that this market has had in recent years (2019: 47% increase in number and 27% increase in asset value) has declined in 2020, especially the number of young members. The fact is related to the state of the pandemic, due to which direct contacts with the public were limited to raise awareness towards membership in voluntary pension funds, despite the measures taken by Credins Invest for a normal course of information and transparency to the public. Also, financial difficulties and uncertainties about the progress of the pandemic made individuals and companies, more cautious about the spending process, a wave which is felt in the first quarter of 2021.

What was the return on investment trend for 2020? How did the crisis affect this indicator?

The Credins Pension Voluntary Pension Fund has been operating in the market since 2011, and this fund has generated a positive net return of 4-5% per year on average. Pension fund assets are invested in securities issued by the Government of the Republic of Albania, mainly long-term securities for the very long-term nature of the pension fund. For this reason, the performance of the Fund’s rate of return and the quota price is affected by the volatility of interest rates in Albanian Government securities auctions. Government securities rates are characterized by low volatility and therefore, fund price movements are minimal. The Credins Pension Fund is conservative in terms of the securities that make up the portfolio and, consequently, is unaffected by crises such as the pandemic. Changes in long-term securities rates during the year have slightly affected the decline in the annual rate of return. However, the pension fund is a product of long-term financial investment and the essential element is long-term sustainability. Pension fund members expect benefits over a period of 30-40 years, and minimal changes in the yield curve of government securities over the years of accumulation do not significantly affect the performance of the pension fund.

What are your assessments regarding the draft law “On Voluntary Pension Funds” that was submitted for consultation last year?

The law in force, which regulates the activity of voluntary pension funds, is law no. 10197, dated 10.12.2009. Since this time, 11 years, the law and bylaws in its implementation, have remained unchanged, while the voluntary pension market has had positive developments and has constantly sought to review and improve the legal framework. The demands come from the long experience of management companies, as law enforcement in practice and the regulations issued in its implementation, as well as from the growing demands of clients to have other incentives. In many aspects, law no. 10197 can be considered outdated. First, what is noticed is that voluntary pension funds continue to be treated as independent and not as part of the overall pension system in Albania. It is regrettable that there is no long-term strategy to address the major problem of the pension system in Albania. The initiative of two years ago, to develop the private pension system and specifically the mandatory private column, seems to have been left in oblivion again. It is a fact that the first column or mandatory state scheme in Albania is not self-financing, there are currently more beneficiaries (pensioners) than contributors (employees who pay social security contributions) and the ratio is projected to increase to 140% in 2040, according to demographic forecasts.

On the other hand has been approved the Law no. 29/2019, dated 23.05.2019 “On the supplementary financial treatment of employees who have worked in underground mines, employees of the oil and gas industry and employees who have worked in metallurgy”. The law was approved by the Albanian Parliament, dated 20.06.2019, and has not yet been completed with bylaws for its implementation. According to this law, for the employees of 3 categories of difficult professions, miners, metallurgists and oil workers, who belong to the age of under 48, additional contributions will be paid in the amount of 5%, in the private pension schemes, divided between the employer and employees. This will enable these categories to benefit from a more complete financial treatment, an additional pension in addition to the state pension. The law aims to cover with benefits before the time of reaching the retirement age, as well as additional benefits over those granted by law no. 7703, dated 11.5.1993, “On Social Insurance in the Republic of Albania”, as amended. The sooner the legal framework under this law is completed and harmonized with the legal framework of pensions, the sooner its implementation will begin, and sooner the burden on these categories in the state budget will begin to be eased. The third column, voluntary pension funds, cannot be claimed to be the solution to the pension problem for Albanians. This column, as it is in developed countries, will be complementary to the two main columns. However, there is still much room for improvement in the legal framework for voluntary pensions, with fiscal incentives being the main focus.

Overall, the essence of the changes introduced in the new draft law is the improvement of problems arising from the implementation of the law in practice and updating with international provisions governing the activity of voluntary pension funds. Despite the positive changes, in my opinion they are not enough to further develop the pension market, which although it is 10 years old, is already quite negligible compared to the potential. Through the Association of Insurers, Pension Funds and Investment Funds, for more than a year, management companies have submitted opinions and suggestions on the draft law on voluntary pension funds. This document presents an analysis of different Balkan countries and presents some proposed scenarios for the fiscal treatment of the benefits from the voluntary pension fund in Albania. Specifically, the market has demanded a higher limit on the exemption of contributions from personal income tax and profit tax for employers. The limit proposed by the new draft law is still low, considering that it has been unchanged since 2009, and the more time passes, the more insufficient it becomes. Also, regarding the tax on benefits, the proposed scenarios are: 1) benefits are not taxed, when the conditions for retirement are met, ie the Exempt-Exempt-Exempt system, or 2) the progressive tax system is applied as on income from salary, or 3) the tax is applied only on the return on investment. Also, during the last 11 years, technological developments have been significant and have significantly influenced the approach of companies towards communication with the public and customers. Some of the requirements of the law regarding transparency or communication with customers are unnecessary, in conditions when digital communication allows modern and coherent ways.

Do you believe that the current incentives, provided by law to encourage investment in a private pension are sufficient? How can these incentives be further improved?

Fiscal benefits are among the main and measurable incentives to evaluate the voluntary pension fund as the most convenient form of long-term investment, compared to any other traditional form of savings. Specifically, according to Article 88 of Law no. 10197, the contribution made by each member to the voluntary pension fund is deducted for the effect of personal income tax, which became applicable only from January 1, 2015, the date when it was reflected in the law “On income tax”, as well as in Instruction no. 23, dated 9.12.2014, “On the collection of compulsory social and health insurance contributions”.

Although after January 1, 2015, the shortcomings of the legal framework for the implementation of the 2009 law were systematized, the implementation challenge remained, causing many individuals to be penalized by being double taxed, both during the payment of periodic contributions and at the time of withdrawal from the fund. Theoretically, the individual who contributes individually, should submit to the institution where he is employed, the membership contract in the voluntary pension fund he has chosen, where the contribution is specified, which must be declared as deductible for the employee, before applying personal income tax. In practice the individual faces the refusal of the employer institution to implement the fiscal deduction of the contribution, which comes as a result of the inability to absorb the entire legal framework, to the point of irresponsibility to implement it. Whereas if each employee were part of a professional scheme with contributions from the employer, the infrastructure to enable voluntary contributions and to automate the periodic payment of contributions, would be considerable convenience and quite tangible for the individual. The number of employers who have currently created professional plans is small. Companies consider a burden on their budget an increased expense for employees, in addition to compulsory state insurance, and in conditions where membership is voluntary they simply do not take it as an initiative. So, the existing fiscal incentives are not fully enforceable and moreover, they have already become insufficient, as I explained above and as the market has expressed with suggestions to regulators and legislators.

Do you see suitable new investment instruments where private pension funds in Albania can invest?

Currently, voluntary pension funds operating in Albania have a conservative profile with a minimum level of risk, as they invest in Albanian Government debt securities, which have generated a positive and relatively satisfactory return. The current law and the draft law regulate only the illicit assets and for the moment the legal framework is not clear, including the regulations in this aspect, as the allowed assets are regulated by specific regulations, which has not yet been presented in the form of a draft consultation. The instruments allowed in the voluntary pension law and regulations have been unenforceable due to the lack of a functioning regulated market. With the start of operation of the ALSE Securities Exchange, even for voluntary pension funds, the allowed investment alternatives are added.

The specificity of voluntary pension funds is their lifespan 35-40 years from the beginning of the contribution accumulation phase to the pension benefit phase, of which no investment instrument currently meets this deadline. The Treasury bond with a maturity of 10 years is the longest-term instrument available for investment, creating a significant maturity gap along with the missing benefits of longer-term instruments. Assets very suitable for investing pension funds are real estate and infrastructure projects that have a higher life and profitability in the long run, as well as bonds with a maturity of more than 10 years, which are indexed to inflation. These are not included in the permitted assets in the current permitted investment regulation and may be the subject of discussion between the market and regulators to promote these new instruments suitable for pension funds.