01 Aug Promoting private pensions, the facilities offered should be reviewed
In an interview for the weekly magazine with economic profile “Monitor”, Mrs. Estela Koçi, General Director of Credins Invest answered a series of questions related to the investment market in Albania.
Read the interview below:
Voluntary pension funds have seen, year after year, an increase in the interest of individuals, reflected in the increase in the value of assets, but of course, they remain modest in the overall financial markets. Estela Koçi, the general director of Credins Invest, says that, although the third column is a supplement to a somewhat more dignified pension, but it is not a substitute for the first two columns, it can be stimulated through various fiscal incentives, increasing the interest of individuals to become part of these funds.
1. How has the performance of private pensions been in 2018? How is the trend in 2019?
The voluntary pension market has followed an upward trend for 2018. For several years, this market has been growing by over 30% in asset value and over 20% in number of contributors. This is a very positive indicator. As of December 31, 2018, the market numbers 25,298 contributors and a total asset value of approximately ALL 2.9 billion. The Credins Pension Fund has grown steadily over the years, both in number and in asset value.
At the end of 2018, this fund reached 15,320 contributors or 60% of the market in number, as well as a continuous increase of market share in assets value. When it comes to performance, it is worth noting that individuals are more aware of contributing to a voluntary pension fund, with the aim of maintaining quality of life even at retirement age. The same growth trend has shown the first quarter of 2019, according to the latest market data, published by the Financial Supervision Authority. Regarding the Credins Pension Fund, the increase in the number and value of assets has continued. At the end of the first 6 months, approximately 16,300 members are counted. The net rate of return of the Credins Pension Fund, in the last 12 months, has been around 5%.
2. What factors limit the growth of this market in the country?
Voluntary saving in a private pension fund is the only alternative that every Albanian currently has to add an additional income to the state pension, in conditions when the latter allows only 35-40% replacement rate and when the optimal ratio should be 75%. So the monthly income upon retirement should not be reduced by more than 30%. This method of saving and investing for the retirement age consists of the voluntary payment of contributions, individually or through a professional pension scheme, created by the employer for the employees and their investment by the management companies to increase its value over a long period of time up to at retirement age. The individual who has contributed to a voluntary pension fund is entitled to benefit at the legal retirement age or even 5 years before the legal retirement age, the accumulated amount (contributions + interest from the investment) in immediate form or as a periodic pension.
Although the pension system in Albania lacks the main column, the mandatory private one, and although the individual is left with the burden of filling a gap of 30-40% of the income he must have at retirement age, the number of members in voluntary pension funds is very low, against the potential of about 690,000 individuals declared employed in Taxation. Total fund assets are only 0.11% of GDP according to the latest data published by the OECD, very low compared to other countries (Chart 1).
Although the funds have been operating for about 8 years, according to law 10197 “On voluntary pension funds”, they are very little known and the level of people’s trust is still low. Fiscal incentives are among the most significant and measurable facilities to show that this form of investment is more profitable than 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 personal income tax effect.
Due to non-harmonization with the law “On income tax”, the application of Article 88 of Law 10197, was inapplicable until January 1, 2015, the date when it was reflected in the law “On income tax”, as well as in the Instruction no. 23, dated 9.12.2014, pages 24 and 28 “On the collection of compulsory social and health insurance contributions”, which details how to complete the online payroll. Although after January 1, 2015, the shortcomings of the legal framework for the implementation of the 2009 law were systematized, the implementation challenge remained. Many individuals were penalized, being double taxed, both during the periodic payment of contributions and at the time of withdrawal at the end.
Theoretically, the individual who contributes individually, should submit to the institution where he is employed, the contract of membership in the voluntary pension fund he has chosen, where the contribution is specified, which must be declared as deductible for the employee, before the personal income tax is applied.
But, in practice, the individual faces the institution’s refusal 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. This is another burden left to the individual, who at the end of the day no longer finds it convenient to proceed with the contributions, and the result is that members who regularly make contributions are 50%, while 80% of fund withdrawals are premature. At this point the mission of the voluntary pension fund and the whole model on which it is built falls down.
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 a considerable and quite tangible facility for the individual. The number of employers who have currently created professional plans is low. Companies consider a burden on their budget an increased expense for employees, in addition to compulsory state insurance. In conditions where membership is voluntary, they simply do not take it as an initiative. The ratio of members-individuals to members from the professional scheme is 70:30. In fact, it should have been the opposite.
A major problem remains the reconciliation of new legal practices with the existing framework. In the new electronic format of the social security declaration for the General Government Units, the fiscal deduction for voluntary pension contributions has been “forgotten” (cited above according to the Instruction no. 23 in force). This created a new stagnation and ease of giving up the application of the fiscal contribution deduction in March 2017.
3. How can you stimulate this market that has more Albanians who are also privately secured?
The spirit of the law on voluntary pensions goes towards incentives for individuals for pension courses, in a different and very flexible way, which today is not possible for Albanian individuals. The third column is destined to remain at these levels, and you cannot claim to solve the pension problem for Albanians. This column, as it is also in place of development, complements the two main columns. Anyway, to push it further, the lower limit for fiscal effect needs to be raised.
The current law has set limits as follows:
- If the member in the Fund is under 50 years old, the maximum limit for tax benefits for annual contributions is the smallest value resulting from the comparison of the amount of ALL 200,000 and 15% of the gross annual income of the member.
- If the member is over 50 years old, the maximum limit for tax relief for annual contributions is the smallest value, which results from the comparison of the amount of 250,000 ALL and 25% of the gross annual income of the member.
- Contributions made by the employer in the interest of its employees in an occupational pension plan are estimated as operating expenses, up to the annual amount, equal to ALL 250,000 per employee, and this amount is estimated as a deductible expense, for the purposes of the employer’s profit tax.
The above are limits set 10 years ago, since the law on voluntary pensions was adopted on 10.12.2009. The market, through fund management companies, has been demanding an increase in these limits for years, but to date there has been no change in the law. Also, a strong fiscal incentive would be the exemption of voluntary pension tax at the time of benefit, taxing only the return (interest) from the investment, and not the contributions made over the years.
4. The Parliament has instructed the FSA in the resolution of this institution to make an analysis on the second column. How do you see this initiative and what effects can the second column bring to the pension scheme? How does this column work?
This initiative has been long awaited for years now. It is a fact that the first column or mandatory state scheme in Albania is not self-financing, currently there are more beneficiaries than contributors (employees who pay social security contributions) and the ratio is projected to increase from 103% to 140% in 2040, according to demographic forecasts. The reform of the current scheme to date has been parametric. The conditions of benefit and the formula for calculating the pension have been changed and it has remained 100% based on the solidarity of the generations and the financing from the state budget. It is necessary to have a long-term and sustainable solution to the problems of the pension system in Albania. The second column of the pension system refers to the mandatory private scheme, which has been implemented for years in developed countries, and which in our region is missing only in Serbia and Bosnia. This scheme channels mandatory contributions to private pension funds, where contributions are administered and invested according to a certain investment policy and where the individual benefits from their contributions, plus the return on their investment as an organic supplement to the first column.
While analyzing this initiative of complete reform of the pension system, a concrete and very good news in this regard has to do with the adoption of 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, was published in the Official Gazette no. 88, dated 20.06.2019 and is expected to be supplemented with bylaws for its implementation until the beginning of September 2019. According to this law, for employees of 3 categories of difficult professions, miners, metallurgists and oil workers, who belong to the age of under 48, additional contributions of 5% will be paid to private pension schemes, divided between the employer and the employee.
This will enable these categories to benefit from a more complete financial treatment, an additional pension in addition to the state pension. Also, 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. This initiative, already concretized, can be considered as the beginning of the second column of pensions, as it will constitute a mandatory joint contribution between the employer and the employee in the private pension scheme for a certain category of professions, where the contributions will be invested according to certain investment policies and thus, their value will increase over the years.
