The introduction of mandatory Private Sector Pensions remains firmly on the political horizon and the expectation is that when a new Government is sworn-in, following the elections, we will see the start of a consultation process which will likely have only one outcome.

It is anticipated that the party manifesto’s will indicate the need to address the issue. It would be a mistake however if the debate is limited to the social benefit of having, or not having, work pensions for all employees. There is no argument with the merits of having a work pension. The political question however should be: do the advantages that employees derive from a work pension sufficiently outweigh the disadvantages, namely the long term risks of adopting additional costs, to entitle our legislature to make the practice mandatory? The temptation to interfere is strong but the economic sclerosis that follows interventionist practices have deterred previous administrations.

Mandatory or otherwise there are a number of Private Sector companies which have already introduced pension provisions for their employees. These pension schemes fall into two distinct categories, and the lessons learnt from the experience of both deserves close scrutiny. The two classes of pensions are termed “defined benefits” and “defined contributions”. The first class, which has now largely been superseded by the second, is designed to pay out a sum equal (to say) 2/3 rds final salary. The second class ‘defined contributions’ have been more successful. The employer (and the employee) pay into a retirement scheme which pays out based on the schemes performance in a typical ‘defined contribution, pension the employer contributes between 5 % / 7½ % of basic salary and the employee is free to contribute in whatever proportion chosen. The tax benefits only apply to the employee’s personal contribution. The employers’ contribution is deemed a ‘benefit in kind’. Most frequently these are personal pensions: personal to the employee who can transfer the pension to another company in the event of a change of employment. In brief ‘defined benefits’ have proved to be unsustainable. Especially in a Private Sector, which is required to remain competitive, and which operates on ‘open market’ basis.

Regardless of whether the pension schemes are ‘defined benefits’ or ‘defined contributions’ the Private Sector has shown that it is unwilling to enter into mandatory pension commitments, which could eventually threaten the long-term future of the company. To underline the need for caution one should look to those companies with pension schemes for employees who have paid dearly for their generosity to one generation of employees when the accumulated commitments prove unsustainable. Ford is just the latest example of a once successful company, which finds itself over-burdened at a time, when the company is facing difficulties and needs to shed overhead costs to regain flexibility and maintain its competitive edge. Current analysis of Ford’s financial predicament points strongly at the company’s pension obligations as the black hole’ which is consuming its resources. The problem extends equally to the Public Sector, although, its effects remain hidden for longer. In Gibraltar the Public Sector pensions have been structured on the 2/3rd final salary formula albeit the cost may be unsustainable going forward. This actuarial predicament applies equally to the United Kingdom and the recent Turner Report has served to spell out the risks associated with a Government policy that is based on ducking hard decisions and leaving the problem to accumulate to the disadvantage of future generations.

It may be that the Private Sector will concede the need to introduce pension schemes but for Government to hold the moral high ground it would be as well to see a radical overhaul of the Public Sector pensions scheme to ensure that civil servants of less that 5 years standing and all future entrants are placed on a ‘defined contribution’ scheme which is sustainable on an actuarial basis.

Currently those Private Sector companies that choose to introduce a pension schemes are very limited in the options available to them. In theory a company may apply to the Income Tax Department for approval of a specific investment scheme but in reality the Income Tax Department is not yet resourced to discharge this function. The only remaining alternative therefore is Provident No 3. A pension investment scheme administered by the Crown Agents. Provident No 3 has performed adequately to date but does not meet the requirements for flexibility and diversity, which may attract local companies looking for a pension solution, which meets additional objectives. In particular being able to achieve two goals at once, for example buying a property in the name of the pension scheme and renting the property to the company. Investing in property in Gibraltar is also a benefit to the Gibraltar economy as a whole and there should be sufficient discretion in the Government department responsible for approving individual pension schemes to take into account both the needs of the company and the benefit to the Gibraltar economy. Pension schemes for the Private Sector should not be limited for the benefit of employees only but also for the retiring directors. Currently the legislation prohibits owner/managers who own 20%+ of a company from being a member of a pension scheme in Gibraltar. Not only is this discriminatory but if mandatory pensions were to be introduced such legislation would need to be amended. (see George Olivera letter to CM Edward to write up). These measures, if introduced, should further increase the number of companies entering into Pension Schemes on a voluntary basis.

Assuming that flexibility and diversity are introduced into the Pension formula, the question still remains whether the Private Sector, as a whole can afford to meet the cost of mandatory pensions? Not all branches of the Private sector are buoyant, for example: retail is in the doldrums and hotels are struggling. It is not a good time to add additional costs to their infrastructure. In fact there is unlikely to be a time when the economy is proving equally strong for all branches of the Private Sector. Additionally for existing business their financial models are based on the current cost of doing business in Gibraltar today. The models take into account the considerable tax burden, which we have inherited from the closed frontier and the enlarged Public Sector that ensued. It would seem therefore that there is little room for manoeuvre to allow business to take on pension obligations other than on a voluntary basis, which in turn can be encouraged by a more consumer conscious government able to supervise ‘a la carte’ pension schemes.

There is however one major opportunity ahead: the prospect of reduced corporation taxes pursuant to a favourable ruling from the European Union on our ability to have our own tax laws. This could provide for a reduction in existing overheads, which could be re directed for the benefit of employees without the spectre of unsustainability. This means therefore that where Government introduce substantive tax reductions equal to approximately 5% of turnover this saving could be applied by the company to fund a Pension Scheme for its employees. It would be more encouraging however to the Private Sector to see the issue of Pensions being tackled across the board and to see Government showing a lead by ending the practice of offering Public Sector employees ‘defined benefits’ pensions and giving a strong indication that long term Government spending commitments are structured on a sustainable basis and are not a time bomb waiting to happen. In this scenario the prospects of mandatory Pension requirements for the Private Sector might gain the support of employers without whose consent a mandatory scheme would be politically irresponsible.