Retirement Planning: A Literature Review: Sara Pavia and Simon Grima

CHAPTER 8
RETIREMENT PLANNING:
A LITERATURE REVIEW
Sara Pavia and Simon Grima
ABSTRACT
The authors herein carry out a literature review of retirement planning and
highlights that proper retirement planning starts by looking at the level of
income an individual is likely to continue receiving at retirement if they were to
take no action, then comparing this to what they would need to lead the lifestyle
they desire. The authors review the traditional economic theories that many
are accustomed to when interpreting financial matters (i.e., rational behavior)
and compares this to the various studies and articles found in literature. The
authors then dig into retirement planning in Malta and the behavioral obstacles
to proper planning and how these are tackled in different European countries.
Keywords: Retirement planning; behavioral finance; financial literacy;
financial planning heuristics; personal pensions; market sentiment
1. INTRODUCTION
Retirement Planning is the act of looking at one’s financial situation and choos-
ing to set money aside specifically for use during the retirement years. Individuals
who plan for their retirement will make a conscious decision to lose out on some
enjoyment today (by not spending all their money now) in the hope that they are
able to have a better future.
Proper retirement planning starts by looking at the level of income an indi-
vidual is likely to continue receiving at retirement if they were to take no action,
Contemporary Issues in Behavioral Finance

Contemporary Studies in Economic and Financial Analysis, Volume 101, 97–138
Copyright © 2019 by Emerald Publishing Limited
All rights of reproduction in any form reserved
ISSN: 1569-3759/doi:10.1108/S1569-375920190000101008
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98 SARA PAVIA AND SIMON GRIMA
then comparing this to what they would need to lead the lifestyle they desire. The
idea is to plan how to mitigate any gaps by saving the required amounts in the
right products over the available period. The exercise may be undertaken with or
without the help of an advisor. Whatever the case, it would probably be rational
to set a plan, and stick to it (albeit reviewed if and when necessary) if the indi-
vidual feels it is important to achieve the retirement lifestyle they want.
Looking at it this way, it is simply a matter of planning and applying financial
concepts. But the reality is that other factors come into play. These may distract
one from the plan and jeopardize one’s livelihood after they stop working. For
instance, an individual might not have enough knowledge or information about
the right savings vehicle to use, and this ambiguity may put them completely off
from saving. However, empirical evidence, shows that even if an individual had all
the relevant information in hand, their decisions may not always be the optimal
choice for them, because they may have been influenced by a number of biases,
such as for example the “status quo bias” (Samuelson & Zeckhauser, 1988), inter-
temporal behavior, emotions, or the context in which the decision is being made
(Knoll, 2010).
According to UN data, the Maltese population will have the ninth highest
life expectancy at birth in the world by 2055 (84.5), the fourth highest by 2105
(90), and the second highest from 2150 onwards (94.9+) (United Nations, 2004).
Essentially, this means that retirement is expected to extend over a period of
25–30 years on average but may last even longer for some (National Statistics
Office (NSO, 2015).
International studies show that society is aging worldwide, with the median
age of the population gradually increasing, and expected to increase even further
(Bussolo, Koettl, & Sinnott, 2015). Fig. 1 illustrates this in terms of the European
population.
In 2011, the old-age dependency ratio for Malta was 23.7% (NSO, 2014),
meaning that there were four persons of working-age to sustain each retiree,
mainly through the income taxes they pay. The Malta NSO expects the working-
age population to decrease, while those aged 65 and over to grow in number over
the next few years. This will result in an increase in the dependency ratio to 50.4%
Fig. 1. Median Age of Total European Population (1950–2100). Source: United
Nations Department of Economic and Social Affairs, World Population Prospects:
The 2015 Revision (UN, 2015) (Custom Data Acquired via Website).
Retirement Planning 99
Table 1. Projected Old-Age Dependency Ratio Based on Total Expected

Population (000s).
Population Age Group 2011 2015 2025 2035 2050 2060 2070
15–64 287.6 284.6 275.3 279.6 274.3 266.8 271.4

65+ 68.2 82.2 105.9 112.8 124.2 136.3 136.7
Old Age Dependency 23.7% 28.9% 38.5% 40.3% 45.3% 41.1% 50.4%
Ratio
Source: (Compiled using data from NSO, Demographic Review 2013 (NSO, 2015) – Calculated
by dividing the population aged 65 or more by the working-age population (those aged 15–64), as
projected in each of the years.
by 2070 (see Table 1) – this means that there would be only half the workers who
currently support retirees.
With longevity on the increase, individuals who do not support their own
future could be faced with a number of problems, such as, lower social benefits
caused by a reduction of state income from a shrunken working population, dif-
ficulty in supporting themselves for a longer retirement period without adequate
provisions, and the mental distress which may result from both “inactive ageing”
and recognizing that they are financially incapable of maintaining the lifestyle
they once enjoyed. Some may also need to extend their employment beyond the
time that they would otherwise be willing to work, if they are unable to cope
financially.
However, the problems do not stop with the individual. Other parties may
become prejudiced if, in this demographic scenario, individuals do not take on
more financial responsibility for their own retirement. The state, for instance, will
likely need to spend more on old age benefits like healthcare and elderly care
homes; the future working generation might need to support the increased gov-
ernment spending by paying more taxes or by working for longer; family and
friends closest to the individual may find themselves having to offer their support;
the economy will be deprived from spending power, which the individual might
otherwise have had; and older society, in general, may be margined away from the
rest of society if it is unable to participate in certain activities because of financial
constraints.
2. EUROPEAN DATA
In order to better understand the dynamics of the different European system, a table
was compiled when comparing the different countries’ demographics and systems.
The full summary can be found in the Appendix. Notably, the following emerged:
• Old-age dependency ratio for 2015 stood at 32.05%, higher than the European
average of 30.2%.
• Life expectancy at birth for the Maltese was 81.8 years of age in 2014, one of
the highest among European countries.
• Malta has the lowest labor force participation rate of the listed European
countries, at 0.2% in 2014.
• The Maltese were less likely to borrow, and about as likely to save as the aver-
age European in 2014.
• But, between 2010 and 2014, the Maltese were saving 16.68% of GDP, almost
a third lower than the reported European average of 24.1%.
• The Melbourne Mercer Global Pension Index (MMGPI) rated France and
Italy as having the lowest overall levels of integrity, and Denmark and Finland
as having the highest. Malta was not rated by the index.
3. THE SCOPE OF THE STUDY

The aim behind this study is to collate and discuss the current literature on demo-
graphics and behavioral traits of the European and local market when it comes to
retirement planning. We use literature on behavioral patterns of European coun-
tries to assess which environments elicit the most beneficial behavior to stake-
holders. Moreover, in doing so, we will look at obstacles to positive behavior (like
procrastination, distrust, option overload, and so on).
4. BEHAVIORAL INFLUENCES
The basis of traditional economic theories which many are accustomed to using
when interpreting financial matters is that market players act rationally. These
theories normally assume that rational behavior will achieve the best possible
outcome if all relevant information is at hand (Goodwin, Harris, Nelson, Roach &
Torras, 2013). The “Efficient Market Hypothesis,” for example, maintains that
stock market prices reflect all available information and that any potential
abnormal returns, which are possible because of gaps in information between
parties, would quickly be corrected when the information becomes available to
everyone (Bodie, Kane, & Marcus, 2014).
Of course, it is by far easier to develop statistical data, economic models and
hypotheses if emotional and situational factors (such as myopia, inconsistent
preferences, pressure to make decisions, lack of trust, etc.) are kept out of the
equation, but one must consider the limitations they pose in situations involving
people taking decisions or acting.
In 2002, Professor Daniel Kahneman was awarded the Nobel Prize “for hav-
ing integrated insights from psychological research into economic science, espe-
cially concerning human judgment and decision-making under uncertainty”
(Kahneman, 2014). In his prize lecture, Kahneman explains one of the major
concepts for which he is known. That is, that our minds work on two systems, and
the way we make our decisions is linked to the system which we use at a specific
time (Kahneman, 2002).
“System 1,” describes the way our brain functions when we are performing
activities which we consider automatic, like understanding simple sentences
Table 2. Comparing Kahneman’s Two Systems.

System 1 System 2
Fast Slow
Unconscious Conscious
Automatic Requires effort
Everyday, repetitive decisions Complex decisions
More prone to error Less prone to error
Source: Adapted from McIntyre (2015)
or driving a car on an empty road (Kahneman, 2011). In these situations, the

brain would act on intuition, functioning without much effort by using previous
similar experiences, stereotypes, and emotions from the subconscious as a base.
In contrast, “System 2” is our conscious brain, activated in situations in
which we normally need to pay more attention, such as comparing the value
of two products, completing a tax form or understanding a complex argument
(Kahneman, 2011) (Table 2).
Whereas traditional economics assumes rational market behavior, behavioral
finance acknowledges emotional, more irrational behavior based on several exter-
nal factors. These theories are relevant to financial situations where human input
is required, including retirement planning. Notwithstanding that the planning
exercise requires conscious effort, and that the brain’s rational “System 2” would
be expected to prevail; many times, this is not the case. If the market was rational,
then wouldn’t everyone undergo a retirement planning exercises to ensure that
they are in an optimal financial position in the long term?
The decision making involved in retirement planning is not a simple linear
process of weighing the pros and cons, because other factors will affect the
outcome. For instance, peoples’ tendency to relate more to their present self rather
than their future self, means they are more likely to want to consume (spend their
money) today rather than save for retirement. This could result in people indef-
initely postponing retirement planning, or never putting any plan into action.
A UK study also found that older people tend to “seek less information when
making decisions as a way of minimizing the negative emotions associated with
making difficult choices” (Association of British Insurers (ABI), 2015) leading to
less-informed decisions.
We could deduce that each phase of the planning process involves a balance
between both of Kahneman’s Two Systems since the decisions taken will likely be
influenced to some degree by the unconscious system (Fig. 2).
An international index (the Mercer Melbourne Global Pension Index,
2016) classifies the sustainability and adequacy of different countries’ pension
systems. According to the MMGPI, a pension system is only adequate if it
offers a 70% replacement rate for those on a median income, and sustainable if
at least 70% of the working population is a member of private pension plans
(Mercer, 2016)
Unfortunately, based on these requirements, the existing local system would
probably not rate highly on these attributes (Malta is not rated by the Index).
Fig. 2. Phases in the Retirement Planning process. Source: Author.
Although the State Pension offers a replacement of two-thirds of pre-retirement

pensionable income (Social Security Act, 1987), this amount is subject to lim-
its and conditions. Furthermore, personal pension plans only became available
locally in August 2015, making it highly unlikely that the take-up has reached the
70% mark expected by the index.
Although in the meantime other vehicles have been available for retirement
savings (such as life assurance policies and direct investment in the markets, or
foreign investment), according to the NSO, only 34.2% were actively saving in a
life insurance or private pension plan in 2005.
5. SIGNIFICANCE OF THE STUDY

The topic of retirement planning is important to the market, not least because
of the concerns on the unsustainability of the current pension structure, and the
awareness being raised about the fact that society should become more respon-
sible of its own financial future. Looking at it from a behavioral perspective
allows us to focus on the consumers themselves and attempt to suggest how they
can be better served in the long term, while keeping in mind that they might
not be entirely rational when it comes to making important financial decisions
(Kahneman, 2011).
On an international level, Griffin, Loe, and Hesketh (2012) have conducted
a study on predictors of retirement planning behavior. Several traits have
been linked to positive or negative behaviors, including personal attitude,
social influences, sense of control as well as demographic variables. van Rooij,
Lusardi, and Alessie (2012) delve into the relationship between financial lit-
eracy and an individual’s net worth, showing that retirement planning is posi-
tively correlated to financial literacy. Hira, Rock, and Loibl (2009) conducted
research to determine trends in retirement planning behavior based on dif-
ferent age-groups in the United States. The study found that, apart from age,
other factors which had a significant influence on behavior included the source
of financial information, whether someone is an early investor or not, the
type of investment activity, income, employment, and whether any automatic
deposits have been set up.
Locally, as far as we know, no specific study on this area has been undertaken.
In fact, the importance of behavioral finance has only recently been recognized
and put into practice (Ministry for the Family and Social Solidarity (MFSS)
Public Consultation, 2016; PSG Report, 2015). Similar work was conducted by
the NSO in a study undertaken in 2005: Perceptions on Retirement and Pensions
(Bonnici, 2005). The results gave a high-level interpretation of the market’s views
on the topic; however, it did not go into perceptions and behavior, and establish
relationships between the different variables.
The PSG Report (2015), as part of its proposed strategy, published its research
on behavior in terms of retirement savings in a Supplementary Paper. The PSG
Report (2015) discussed behavioral heuristics effecting people’s inclination to save
for retirement, referring to several case studies beyond Malta, especially going
into detail with the state of affairs in the UK and New Zealand in relation to their
automatic-enrolment pension systems. Although similar research was undertaken
in this study, it is only a small part of the overall scope.
As part of its public consultation on financial literature, the MFSS (2016)
studied the lack of interest in saving, the complexity of the topic, the mismatch
in communication media and the “low level of financial awareness, literacy, capa-
bility, and responsibility of consumers.” Several suggestions are made to tackle
these issues, which areas are also explored in this research as part of the over-
all scope. The recommendations made by the MFSS, which are concerned with
financial literacy, will be examined in connection with the research results and
recommendations.
A 2015 dissertation analyzed the local financial education scenario (Mangion,
2015) and determined that although financial literacy is not drastically low, the
savings behavior of individuals is not reflective of their knowledge. Another the-
sis published in 2015 explored retirement planning awareness among the younger
generation in Malta (Galea, 2015) and found that financial education signifi-
cantly increases one’s inclination to be concerned about their retirement. Whist
these findings are relevant, this study’s focus is to link behavior to the many
influences one is exposed to and attempt to determine their effect specifically
on retirement planning behaviors. Moreover, another thesis entitled “Restoring
Investor Confidence in the Provision of Investment Services” studied, among
other areas, investors’ attitude to risk (Scicluna, 2014).
6. BEHAVIOR IN FINANCIAL SERVICES

By simply looking around us, we immediately notice that people think differently
and act differently to one another. Because beliefs and values vary among us, indi-
viduals may have their own interpretations and reactions when faced with the same
situations. One such situation involves retirement planning, which can mean vari-
ous things to different people, depending on their current lifestyle, life goals, priori-
ties, and preferences (Fouquereau, Fernandez, Fonseca, Paul, & Uotinen, 2005).
Anyone who lives to retirement will need some degree of financing to pay for
the basic expenses and more to cover any “extras” like travelling, hobbies or din-
ing out. If at retirement the individual needs special medical attention, then their
financial requirements will probably increase further. Why then do some people
shun the idea of planning ahead to make sure that when their monthly salary is
replaced by the State Pension they will be able to make up for any gaps in the
income they were used to while in employment?
Dan Ariely, Richard Thaler, Daniel Kahneman, William Samuelson, Shlomo
Benartzi, and Amos Tversky have all conducted rigorous studies in the field of
behavioral finance, shedding light on why individuals the world-over, even those
with the best intentions, hold back from proper retirement planning. The way
in which people behave can be heavily influenced by situational and emotional
factors which may seem unrelated to financial planning. By linking behavior to
the factors which cause it, the study aims to uncover how to structure the most
efficient regulatory regimes, policies, pension framework, market designs, and
product offerings.
7. RETIREMENT PLANNING IN MALTA

Malta is not immune to the problems linked to insufficient retirement provisions
which result from behavioral biases. A survey carried out by the Central Bank
of Malta in 2013 reports that less than a quarter of Maltese households are net
savers, with mean savings of around 4% of household income (Caruana Briffa,
2014). The same study reported that 24.6% of households reported holding some
form of a voluntary pension scheme or life insurance product, compared to one-
third in the EEA.
In 2005, the NSO collated data on perceptions about retirement and pensions,
and found that, from those who had not yet retired, only 22% believed that income
from existing provisions would be adequate to retire on, while almost two-thirds
think that they are not sufficiently prepared for retirement. Furthermore, less than
a third of those aged 65 or more felt that they had a good or very good standard
of living. It is reasonable to think that this could be a consequence of the lack of
proper planning, whereby spending is not properly distributed over one’s lifetime,
resulting in insufficient income at retirement to maintain their desired lifestyles
(Bonnici, 2005).
In 2015, legislation was amended to allow for tax credits on contributions
made by eligible individuals into qualifying retirement schemes in Malta. The
objective of this incentive was to “nudge” people into saving more for the longer
term, although the fruits of these efforts (if any) can only be assessed in a few
years’ time.
Notwithstanding the empirical evidence showing that individuals think that
they do not have adequate provisions (and by deduction, that they should save
more), they continue to hold back from taking any action. Behavioral finance
theories and research may hold the key to this phenomenon, and may be used to
determine ways of encouraging positive behavior.
8. BEHAVIORAL OBSTACLES TO PROPER PLANNING

AND HOW THEY ARE TACKLED IN DIFFERENT
EUROPEAN COUNTRIES
Through research conducted on his students, Professor Dan Ariely suggests
that people tend to procrastinate if their freedom is not restricted to any extent
(Ariely, 2009). Similarly, if individuals are free to choose whether to save up
for retirement, they will not normally find any urgency in doing so before it is
too late.
In addition, individuals tend to favor immediate gratification as opposed to
long-term rewards and may lack self-control, prioritizing less important tasks to
the detriment of the bigger picture (Ariely, 2009). These are all symptoms of pro-
crastination seen in several different countries, and many will be able to relate to
the following – “everybody knows someone who has been meaning to set some-
thing aside for retirement,” and that someone may be us.
Inertia is the tendency to remain in the current state and can result in procras-
tination. In Behavioral Finance, this is explained by the term “status quo bias.”
This refers to the prevailing behavior observed in people who have a choice of
either doing something or doing nothing, and who normally tend to do the latter
(Samuelson & Zeckhauser, 1988). The effect of this bias is that people refuse any
change, even when it benefits them.
Some may not save because they are used to (and can identify with) their cur-
rent situation; or if they do save, they will not factor any changes which should
lead them to change their contributions or asset allocation. This phenomenon is
observed in several research studies. For instance, the ABI reported tendencies
toward status quo bias, and a prevalent preference for the default option when
one is available (ABI, 2015). If a person does not feel any negative impact at
present (because the effect of not saving is only really felt when it is too late), it
might be difficult to find a reason to act today. Combined with the risks which
one may associate with the unknown financial future, it might seem easier to
push back any thoughts and actions planned for their retirement, and simply
do nothing.
In an effort to curb the effects of inertia, the UK adopted an auto-enrolment
employer pension system with a voluntary opt-out, which has been available
since October 2012 (Pensions Act, 2008 (UK), s3). This meant that UK workers
between the ages of 22 and pension age and earning more than the prescribed
amount could be enrolled into a pension scheme automatically through their
workplace with contributions made by both the employee and employer. The
government also contributes through tax relief on contributions. Employees have
the option to opt out if they do not want to participate but would be re-enrolled
every three years (with the option to opt out again). The re-enrolment process
was in fact set up to counter the effects of inertia of those who once opted out by
engaging them at regular intervals and compelling them to make an active choice
if they would like to stop contributing to the scheme.
The effect of this change was evident soon after, with employee participation
in workplace pensions increasing from 55% in 2012 to 70% in 2014 (Department
Fig. 3. Eligible Employees participating in workplace pensions in the UK. Compiled
using DWP estimates derived from the Office for National Statistics, Annual Survey
of Hours and Earnings: 2004–2014 (2015).
of Works and Pensions (DWP, 2015) (Fig. 3). The increase in participation was
attributed to the fact that:
inertia will lead many people to remain automatically enrolled, just as inertia [before] appears
to [have been] an important reason for a lack of pension saving by many people. (Johnson
et al., 2010)
This may be a critical nudge toward increasing personal retirement provisions,

and there might be a motive to introduce a similar scheme locally for workers who
fall within certain parameters.
A similar positive effect was observed in New Zealand, where automatic-
enrolment was introduced in July of 2007 (Organisation for Economic
Co-operation and Development (OECD), 2014). The country had been experi-
encing a downward trend in private pension coverage before KiwiSaver (as their
automatic-enrolment scheme is called) was launched.
Within the scheme, employee contributions are matched by employer contri-
butions and a capped government contribution. Furthermore, there is an option
to opt-in for those who do not automatically qualify (e.g., individuals under the
age of 18). Between July 2007 and the end of 2013, coverage of individuals under
pension age increased from 15.2% to 64.4% (OECD, 2014).
A different, less positive result was seen in Italy after auto-enrolment work-
place schemes were introduced in January 2007. Within a year of its intro-
duction. The participation rate of the working-age population increased from
8.5% to 11.9% (Paklina, 2014), although the majority of the increase in new
participants has been attributed to voluntary enrolment (OECD, 2014). A
paper by Ambrogio Rinaldi (2011) which looked at why this system failed,
points toward both structural and implementational factors (mainly to do with
communication).
Fig. 4. Indicators Used to Calculate the MMGPI. Source: Adapted from MMGPI
(2014)****.
The MMGPI of 2014 measured and compared the retirement systems of

25 countries (11 of which are European) on three factors: Adequacy, Sustainability,
and Integrity. Each of these elements was measured based on several indicators
(identified in Fig. 4), and on this basis, each country was allotted a rating. Together
with various other important findings, the 2014 Index notes that the score for the
UK, in particular, was improved, among other things, “through the continued
introduction of auto-enrolment” (Mercer, 2014). Furthermore, one of the points
raised is that many countries will find it challenging to increase the take-up of per-
sonal pensions by the employed population, and that “many individuals will not
save for the future without an element of compulsion or automatic-enrolment.”
In fact, standard voluntary coverage (i.e., without automatic-enrolment) tends
to be very low, with countries like Greece, Luxembourg, Portugal, and Turkey
reporting take-up below 5% (OECD, 2013). Workplace automatic-enrolment sys-
tems may, therefore, be an effective solution to counter some of the behavior
biases observed around Europe.
The overall positive effect that the inertia-overcoming design of auto-
enrolment schemes has on individual behavior is clear, and other European
markets are looking into introducing an automatic-enrolment system, notably
Germany and Ireland. It could also be worthwhile to explore its application to
the Maltese market. In fact, the PSG (2015) report suggests that automatic-
enrolment may be an optimal solution for Malta to direct people toward saving
more toward their retirement. It further suggests that any such scheme should
be properly “framed” (Tversky & Kahneman, 1986), using familiar concepts
(e.g., using the word “savings” as opposed to “pensions” because people can
relate more to it), and with a simple default option available, and setting lower
entry levels so as not to enroll lower income-earners automatically (as it may

not be optimal for them).
A theoretical concept behind inertia and procrastination is Hyperbolic
Discounting, which defines people’s tendency to choose a smaller reward over a
larger one if the former will be available sooner, but this preference diminishes as
rewards will be made available at a later time (Frederick et al., 2002). The concept
also implies that people will tend to reverse their preference the closer they are to
the occurrence of the reward. For example, studies held by a number of special-
ists show that most individuals prefer €100 now as opposed to €110 tomorrow but
will prefer €110 in 31 days’ time over €100 in 30 days’ time.
The studies delve even further, showing that preferences change: when those
who preferred €110 in 31 days’ time over €100 in 30 days’ time were contacted by
the researchers after 30 days, they were likely to prefer receiving €100 on that day,
then €110 on the following day (Frederick et al., 2002). This may be due to the
fact that people cannot relate to their own future, and are therefore likely to make
more short-term decisions, disregarding the harm that they may be doing to their
future selves. We may also assign this to the effect of uncertainty on behavior and
decision making.
The “noise” in one’s life can also make it difficult to stop, plan, and act for the
future. One’s present life could easily get in the way of longer-term goals, so there
may be no “right time” to save. Until the time comes for an individual to retire,
they can always find more imminent things to spend their money on without feel-
ing any immediate negative impact, primarily because it is easier to relate to one’s
present self. This means that retirement planning continues to be postponed over
one’s pre-retirement lifetime.
According to data from the NSO’s latest Household Budgetary Survey, the
average disposable income available for savings are rather low for those below the
age of 45 in Malta (Table 3), making it seem extremely difficult for the younger
generation to save. In 2008, the average 35-year old was likely to have a negative
balance (−€73) on disposable income, while a 45 years old would have an average
of €506 a year after deducting consumption expenses (NSO, 2010).
It is debatable whether it would be reasonable to expect individuals to adjust
consumption behavior to allow for more saving. It would probably be more dif-
ficult to reduce spending on necessities (utility bills, daily groceries, etc.) than on
certain “extras” (like entertainment, luxury goods, and non-essential items) to
make more space for saving. However, if it is a question of behavior, people may
tend to avoid doing so even where possible. According to the 2016 Caritas report,
Table 3. Amounts Available for Saving of Average Maltese Households.

Age Group 19–34 35–44 45–54 55–64 65+
Income € 20,412 € 22,500 € 25,259 €22,549 € 13,076

Consumption € 20,306 € 22,573 € 24,753 €19,109 € 12,284
Amounts available €106 −€73 € 506 €3,440 €792
for savings
Source: Compiled using data from NSO, Household Budgetary Survey 2008 (NSO, 2010).
the minimum required the budget to maintain a decent lifestyle is €11,455.99 for
households with two adults and two dependent children, €9,197.37 for single par-
ent households with two dependent children, and €6,526.72 for elderly couples
aged 65 or more (Piscopo, McKay, & Bonello, 2016). Essentially, this means that
according to the NSO study, the average income of a Maltese household seems to
be more than adequate to cover a decent living.
According to Richard Thaler and Shlomo Benartzi (2004), once a person gets
used to a certain level of spending from disposable income, any reduction would
be viewed as a loss to them. They would, therefore, tend not to increase their
savings in order to avoid this loss (i.e., the reduction in disposable income which
they would experience as a result). The NSO’s 2008 Household Budgetary Survey
revealed interesting spending behaviors based on demographics, which may sub-
stantiate this in terms of the local scene.
Thaler and Benartzi (2004) coined and successfully implemented a scheme
which aimed to increase employee savings through the workplace by using behav-
ioral finance to curb myopia and the tendency toward immediate self-gratification
and loss aversion. “Save for Tomorrow™,” as it was called, was piloted on a
medium-sized American manufacturing company in 1998, which company was
experiencing low rates of participation and savings in occupational pension
schemes among its employees. The scheme was set up in such a way that there
was no immediate increase in the amount of savings an individual would make.
Rather, individuals would pre-commit themselves to increase the amount of
retirement savings by a specific rate each time their salary increased or at set time
intervals.
The results showed that most of the employees who were offered the plan took
it up (78%), and a large proportion of these (80%) continued to save in it through-
out the four years of the study. As a result, those who participated in “Save for
Tomorrow™” saved around four times as much over the period, a clear indication
of the negative effects of biases like inertia and loss aversion. Furthermore:
much of the gains from the program come from those who are saving little or nothing now. This
means that the increase can be presumed to be virtually all new savings, as opposed to substitu-
tion from other forms. (Thaler & Benartzi, 2004)
Thaler and Benartzi (2004) expanded their study by simulating the impact
of widespread adoption of the scheme on employee saving rates in three differ-
ent scenarios (see Fig. 5). It resulted that the scheme could potentially positively
impact savings rates, increasing them by 1.1% to 5.9%. It also became evident that
the best potential outcome would result from combining “Save for Tomorrow™”
with automatic-enrolment, where the savings rate would be expected to double
within five years.
A point brought up in the chapter is that automatic-enrolment and automatic
increases are not designed to take away individuals’ freedom or to lure them into
saving, but rather to help them make better judgments and make it easier to act on
them. There is no intent to coerce people maliciously, and individuals would still
be able to opt-out at any time. This is what Thaler and Benartzi (2004) dubbed
“Libertarian Paternalism.”
Fig. 5. Impact of Widespread Adoption of Save for Tomorrow™. Source: Adapted
from Thaler and Benartzi (2004) S184.
One of the first European companies to introduce such a scheme was the UK
division of Kellogg’s in 2008, along with auto-enrolment and financial educa-
tion plans (Chartered Institute of Personnel and Development (CIPD) and
BlackRock, 2009). Less than a year following its introduction, take-up increased
from 60% to 97% of employees (Rowlands, 2009). Respondents of a survey con-
ducted on members of a DC occupational scheme in the UK were presented with
the proposal of adopting a scheme similar to “Save More Tomorrow™,” where
they would pre-commit a proportion of their future salaries toward retirement
savings. The results were positive, with 60% of respondents saying that they were
ready to do so (Byrne, 2004).
Alistair Byrne conducted a study on employed individuals who were members
of a UK DC occupational scheme. He found that although participants had a
clear idea of how much they needed to save in order to achieve their ideal retire-
ment income, 57% believed that their current savings fall short of this amount.
He further discovered that most respondents prefer having fewer investment
choices (Byrne, 2004).
Similar results were seen in another UK workplace survey published in 2012,
which found that confidence in financial wellbeing decreases with age, most
probably because people regret not having saved earlier (NAPF, 2012). This
may be a result of a well-known bias – overconfidence – which leads people
to believe that they are managing their finances well and that they will be able
to manage financially when they retire, even if they do not actively contribute.
The Department for Work & Pensions (UK) (DWP, 2015), in its survey on atti-
tudes toward pensions, found that a third of individuals believe they should have
started saving sooner.
According to Karam et al. (2010), the most effective reform with a long-term
positive effect on public pension sustainability is that of extending working years.
Would people be willing to accept such reforms, and would it improve their
behavior? Ariely (2009) infers that people are fundamentally selfish, meaning that
as long as they can take as much out of the system as possible without too much
suffering, they are not bothered about those who will come after them to find an
unsustainable pension system. In behavioral finance, this is sometimes referred to

as “the tragedy of the commons.”
In France, Germany, Switzerland, and Ireland, two-thirds to three-quarters
of respondents expect they would need to work beyond their State Retirement
Age (SRA), whereas Denmark, Netherlands, and Norway did not consider
this to be as likely (although in these countries, the SRA is already expected to
increase further). Around half of the respondents from Denmark, Ireland, and
the UK said that it would not bother them if they had to work for longer, with
many of them always expecting to. On the other hand, 42% of those from the
Netherlands preferred receiving less retirement income than working for longer
(AON Consulting, 2010).
AON Consulting (2010), used results from their research to gauge differ-
ent countries’ “Retirement Optimism Index,” estimated by dividing the propor-
tion of respondents saying they expect to receive at least 60% of their current
income at retirement by the proportion of those saying that they will need 60%
or more of their current salary in order to retire comfortably. At the most opti-
mistic end of the scale was Spain (90%), while Ireland was the most pessimistic
with just 23% believing that they will have enough income to live comforta-
bly. On average across the European countries studied, approximately half of
respondents did not think they will be having enough income when they retire
(AON Consulting, 2010).
This begs the question: why do these people not save more in order to increase
their chances of having a more comfortable retirement? Do they really have too
many expenses or loans and cannot afford to do so? Have they completely lost
hope that they can reach their targets?
In his research, Byrne found that participants had limited knowledge and
interest in pension arrangements. Only 59% had received some form of advice
regarding their pension, and these were mainly older and/or higher income mem-
bers. The advice was mainly received from a financial advisor (73%) or employers
(55%), with only 16% relying on online sources for information.
Of those who received advice, the majority had at least attempted to calculate
the amount of savings required to provide for retirement. On the other hand, 78%
of those who did not receive any advice had not even tried to make this calculation.
On this point, Byrne notes that other literature has shown that calculating retire-
ment savings is “far from trivial and many parameters highly uncertain,” which is
likely to deter individuals from undertaking the exercise (especially those who have
not been exposed to adequate, understandable information) (Byrne, 2004).
Since retirement planning is burdened with many challenges, like information-
overload, uncertainty about the future, financial illiteracy, and so on, individuals
tend to avoid thinking about it. Byrne suggests there should be efforts aimed
at promoting and facilitating advice at the workplace, and care should be taken
when selecting the default option available to members considering the many
biases (Byrne, 2004). MetLife researchers suggest that it is
important for advisors to take a lead role in educating and involving the client’s other tax and
legal advisors who surely will have an influence and role in the client’s decision-making process.
(Jordon, Weinberger, & Franks, 2011)
Another factor which may prompt people into behaving in particular ways is
the norms which guide behavior based on their environment, the groups around
them, or even their commitments to others (Smith, Mackie, & Claypool, 2015).
Social influences, although not literally binding, may have a powerful effect and
cannot be underestimated as they play an important role in people’s behavior
when making retirement planning decisions. For example, a person who is not
financially sophisticated may feel he is unable to make complex financial deci-
sions and may, therefore, base his actions on those of the people around him. This
heuristic makes individuals more vulnerable to making sub-optimal decisions or
falling prey to scams.
Research conducted on a sample in the Netherlands revealed that “co-workers
retiring later seem to induce delayed retirement relative to friends and family
retiring later” (Vermeer, van Rooij, & van Vuuren, 2012). Most international
research on social norms in retirement planning is focused on retirement age,
however, one must not ignore the influence it has on one’s life choices in general
(whom they seek advice from, how they spend their money, what they take an
interest in, etc.).
The ABI found that consumers are disengaged, and this may be due to, and
result in, lack of understanding of financial matters. In fact, the study observed
that individuals tend to make last minute decisions under pressure, which may
lead both to sub-optimal choices as well as greater difficulty in reaching their
goals in a short period of time. The study also found that individuals do not
tend to shop around, and may consequently select products which are not the
most beneficial. Furthermore, the decisions they make are generally based on
unreliable information. As a result of all the behavioral biases (social norms,
choice overload, overconfidence, lack of engagement), the study notes that sev-
eral individuals may be vulnerable to fall prey to scams and aggressive market-
ing (ABI, 2015).
In Malta, the NSO survey of 2005 on perceptions found that 80.4% of respond-
ents believe that the social security system was in some form of the financial crisis
(Bonnici, 2005). Professor Ariely (2009) believes that distrust is a general heuristic
observed in many and that people seem to constantly be on the look-out for a
“catch.” This sense of paranoia will undoubtedly have a negative effect on one’s
inclination to save for the long term, or on choosing an adequate product to do
so. This also tends to make them more disengaged than they already are.
The MMGPI, mentioned earlier, measures countries’ integrity rating based
on a number of factors, including regulation, governance, protection, commu-
nication, and costs (see Fig. 4). Finland and the Netherlands ranked best in this
category (91.1% and 89.4%, respectively), while France got the lowest European
score at 54.9%. One of the main suggestions put forward by the report to improve
France’s ratings was that of improving regulatory requirements set out for private
pension schemes.
The Index also provided general feedback as to which improvements could
increase confidence in the system over the long-term. It emphasized the impor-
tance of offering pension plans of good value to consumers, and with suitable
cost structures. Furthermore, it recommends that each country should work at
providing suitable, complete, and understandable information to plan mem-

bers, to ensure that they are well informed and have adequate contact points,
including:
1. Requiring specific, clear, and relevant information to new plan members.

2. Making it mandatory for providers to send out regular personal statements.
3. Making it mandatory for providers to submit an annual statement of material
disclosures to the regulator, which would be publicized.
Of the 25 countries listed in the index, only 9 had regulatory provisions

requiring providers to present members with benefit projections. Although
such information may be controversial, because it is intrinsically uncertain, this
requirement may improve knowledge and engagement. The MMGPI also pro-
poses comparative information of costs and performance of schemes offered by
different providers be easily and clearly available in order to improve transpar-
ency. The Packaged Retail and Insurance-based Investment Products Regulation
(PRIIPs) regulation, which came into force in 2018, was designed for this pur-
pose (EU no 1286/2014).
Citizens of 16 out of the 25 countries in the MMGPI have access to an inde-
pendent complaints tribunal and only seven of the countries provide access to
a protection or reimbursement scheme for failures arising from fraud or mis-
management. The Index explains that such processes have a positive effect on
the integrity of the system and increase the general trust of the market. For
those countries which introduce such processes, it is important that members are
made aware of the procedures, amounts, and occurrences which they can claim
against. Since events like crises, poor financial advice, fraud, or mismanagement
diminish trust (leading to lower voluntary contributions, thus lower retirement
benefits), regulators should strive toward, and encourage regular and clear com-
munications to develop understanding, and eventually increase long-term trust
in the market.
Once individuals make an active decision to save toward retirement, they may
find other obstacles which could stop them in their tracks. One such obstacle
is information- and option-overload. Dr Julia Sperling (Sperling, 2016) a medi-
cal doctor and neuroscientist, is a founding partner and leader of McKinsey’s
Middle East Healthcare Practice and has conducted brain research specifically
about biases. Evidence from her studies shows that the brain is constantly receiv-
ing too much information, which it then filters down. This opens the brain to
unconscious biases, specifically stereotyping (Ariely, 2009; Kahneman, 2011),
which impact decision making and behavior, leading to sub-optimal choices
(Sperling, 2016).
The members of an occupational scheme in a UK study had the option to
select any of three portfolio options: aggressive, balanced or conservative. This
means that the only decision they needed to make regarding portfolio composi-
tion was based on the level of risk that they wanted to take. Sixty-five percent
of the members found the range of options available to them was “just right,”
with only very few saying the choice was too wide or too narrow, meaning that
(as the author points out) many UK providers probably offer a much broader
choice than is ideal (Byrne, 2004). Supporting the theory that simplicity in prod-
uct offering encourages take-up, Sheena Iyengar and Emir Kamenica (2010)
found a strong negative correlation between the number of available funds and
participation rates in equity markets. This suggests that choice-overload is a
deterrent to positive retirement savings behavior, and that product designs should
properly consider this.
In the UK, around 90% of occupational scheme members are invested in
default funds and options (Gallagher & Ryan, 2015). According to Byrne, Blake,
Cairns, and Dowd (2007) even if members have the freedom to opt out of the
default option, they are always more likely not to because people tend to take
the “path of least resistance.” Although default options have very positive effects
toward increasing savings, especially by making it simple for those who are less
financially literate and sophisticated, this will mean that employers’ and provid-
ers’ choice of default options will heavily impact members’ wellbeing.
A study commissioned by the ABI backs these findings: it reported that if peo-
ple are presented with too many options or information-overload, they are likely
to make bad decisions or to avoid making decisions at all (ABI, 2015). Ariely
(2009) explains this phenomenon of human behavior by recounting the story of
“Buridan’s Ass” from the commentaries of French philosopher Jean Buridan:
In the story, a hungry donkey finds two identical haystacks at opposite ends
of a farm, but because it cannot decide between them, it eventually starves to
death. Ariely’s research to shows that too much choice will lead to a great mental
dilemma because people will not want to lose out on any of the opportunities pre-
sented. This may lead to eternal indecisiveness, without due consideration given
to the consequences of not deciding. Information-overload might be reduced in
several ways, including:
• Only providing relevant information, without any frills.

• Providing simple, straightforward explanations, without technical jargon.
• Options available should be comprehendible and not too extensive, although
enough options should be available for the more experienced investors
(presented in such a way as to not scare off the regular investor).
Interesting to point out is a heuristic which Benartzi and Thaler (2007) call
the “1/n rule,” which maintains that people tend to allocate assets to their port-
folio simply by dividing the amounts they invest between the available assets.
This means that when presented with a choice of funds, rather than diversi-
fying their portfolio intelligently, individuals may be biased by the selection
presented. Experiments conducted showed that when presented with a greater
number of a particular asset type (e.g., equity), individuals normally chose to
invest a greater proportion of their portfolio in that asset class (Benartzi &
Thaler, 2007) (see Fig. 6).
A survey conducted in 2012 by the Irish Association of Pension Funds also
found that post-crisis, defined contribution pension savings shifted from the more
traditional assets (property and equity) toward less risky ones (bonds and cash),
Fig. 6. A Simple Example of the “1/n Rule.” Source: Based on Benartzi and
Thaler’s Research Published in the Journal of Economic Perspectives (2007).
and that scheme members remain conservative notwithstanding the improved

financial situation (ABI, 2015). These evidence the change in the mind-set of the
Irish which ensued the trauma of the crisis.
Research on British consumer behavior found that individuals have difficulty
comparing products if they do not have similar features or options to compare.
This is evidently the case when trying to compare certain retirement savings assets
to one another, like property, stocks, pension plans, or workplace benefits. The
same report also found that deciding based on comparisons is more complex for
an individual if the options are sequentially presented, than if they were all to be
presented at the same time:
because sequential choosers are likely to compare each option presented against an imagined
better option. In contrast, simultaneous choosers remain fixated on the current choice set rather
than wasting cognitive energy on imagining alternative options. (ABI, 2015)
Byrne’s (2004) studies found that there is a prevalence toward investing in prop-
erty with respondents believing that it is better to own than other financial assets.
When asked which asset classes were most appropriate for retirement savings,
most respondents specified their own home (82.8%) and property (76.8%), while
around half of the respondents specified UK Equities (51.7%) and Government
Bonds (49.7%). This may result in a less optimal portfolio due to lack of diversi-
fication and the tax treatment of property investments, as well as the difficulties
which one may encounter when attempting to convert the asset into income at
retirement (Behavioural Insights Team, 2011).
A study conducted for the ABI brought to light a number of important issues
which link behavior to a number of factors, including age: it found that older
people tend to avoid negative emotions which may be caused by making complex
decisions. They are therefore more likely to make decisions without attempting to
obtain enough information, focusing on very few “alienable” features, and go for
automatic or default options when these are available.
The influences outlined above are among the most evident in the European
population, effecting how individuals behave when it comes to retirement plan-
ning. Studies conducted on the subject have revealed much to enable interested
parties to take positive steps to encourage better behaviors. Existing literature
shows us that most behavioral biases are prevalent across the board because they
are inherently human nature (procrastination, overconfidence, social influence,
etc.). Some of the countries with a more developed pension market, like the UK
and New Zealand, seem to have more engaged societies and higher participation
rates, maybe because of the exposure to and familiarity with basic financial con-
cepts. This fact has highlighted the importance of engaging with retirement plan-
ning even at an early age, with regular contact points, active participation, simpler
terminology, and product design, and better access to financial education.
Behavioral finance has had an important role in improving markets’ savings
habits. Individuals’ predisposition to behavioral biases means that they can be
nudged in the right direction toward a better retirement lifestyle, while the state
pension system remains sustainable. It is also evident that behavioral studies have
become significant within government and policy, with the UK Government set-
ting up the first global Behavioural Insights Team (also known as the Nudge
Unit) in 2010, to develop “intelligent ways to encourage, support and enable peo-
ple to make better choices for themselves” (Behavioural Insights Team, 2011).
The Team (now privatized) works together with the government to apply the
“nudge theory” in improving policies and government services in a cost-efficient
way (Behavioural Insights Team, 2015). In the United States, President Obama
recruited Cass Sunstein (a legal scholar who has published several important
studies on behavioral economics) (United States Government, 2009) and cre-
ated a Consumer Financial Protection Bureau and issued an ‘Executive Order’
whereby Behavioural Insights would be used to “Better Serve the American
People” (Department for Work and Pensions UK, 2015). The order encourages
its application to policies, regulation, public communication, so on, where it
improves the overall outcome.
9. CONCLUSION
The focus of the research was on determining factors which affect human behav-
ior in terms of financial decision making for retirement, outside the borders of
traditional economic theories. Via the analysis of existing literature and different
countries’ case studies, several relevant behavioral biases such as procrastination
were found to dominate. They linked this bias to lack of commitment, myopia
(preference for immediate gratification) (Ariely, 2009) hyperbolic discounting the-
ories (Frederick et al., 2002), overconfidence, and the inability to relate to one’s
own future (ABI, 2015).
Inertia (status-quo bias) was also prominent. As a number of studies explain,

individuals inherently prefer not taking action if given the choice; almost like a
pre-disposition to take the easy route, rather than the one in which requires an
active choice. Another reason behind this might be myopia and loss mitigation,
because disposable income will “suffer” if people save more, leading to a less
comfortable present which may require effort to adjust to.
Many studies iterate that individuals tend to be overconfident in their ability
to lead a comfortable retirement without providing for it. On the other hand, the
literature shows that too many options make it difficult for individuals to choose
because of information and option-overload causing confusion and resulting
lack of action. Moreover, it has been seen that individuals usually seek advice
from sales staff, gather product-specific information or shop around for the most
suitable option.
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APPENDIX: EUROPEAN COUNTRIES COMPARISON TABLES
120
Demographics
Country Population Old age dependency Life Expectancy Labor Force GDP per Capita Savings as a
(2015), 000s ratio (2015) at birth (2010–4) Participation (2010–2014), % of GDP
rate (2014) USD$ (2010 – 2014)
Austria 8,544.586 30.43 81.01 4.5 $51,190.81 26.51

Belgium 11,299.192 30.71 80* 5.0 $47,352.94 23.90
Bulgaria 7,149.787 32.63 74.08 3.3 $7,851.27 20.57
Croatia 4,240.317 31.31 77* 1.8 $13,475.26 20.23
Cyprus 1,165.3 20.05 80* 0.6 $27,194.39 14.68
Czech Republic 10,543.186 28.88 78.18 5.3 $19,529.84 31.97
Denmark 5,669.081 32.78 79.97 2.9 $60,707.25 24.83
Estonia 1,312.558 30.79 77.03 0.7 $20,161.58 31.38
Finland 5,503.457 35.52 80.45 2.7 $49,823.70 20.24
France 64,395.345 33.85 81.59 30.1 $42,732.57 20.32
Germany 80,688.545 34.89 80.22 42.2 $47,821.92 26.05
Greece 10,954.617 36.06 80.45 5.0 $21,498.42 9.67
Hungary 9,855.023 28.48 75.37 4.4 $14,028.72 29.48
Ireland 4,688.465 22.15 81* 2.2 $54,374.35 38.66
Italy 59,797.685 37.86 82.22 26.0 $34,908.50 19.35
Latvia 1,970.503 31.41 74.24 1.0 $15,719.24 21.23
Lithuania 2,878.405 30.85 73.95 1.5 $16,506.86 20.25
Luxembourg 567.11 21.98 82.09 0.3 $116,664.26 51.72
Malta 418.67 32.05 81.80 0.2 $22,776.19 16.68
Netherlands 16,924.929 30.70 81.00 9.0 $52,172.17 29.50
Poland 38,611.794 24.13 76.85 18.3 $14,342.91 21.55
Portugal 10,349.803 34.72 79.85 5.4 $22,132.17 15.52
Romania 19,511.324 28.03 74.76 9.5 $9,996.67 23.11
Slovakia 5,426.258 21.05 76.25 2.7 $18,501.15 24.59
SARA PAVIA AND SIMON GRIMA
Slovenia 2,067.526 28.65 80.08 1.0 $23,999.13 27.64
Spain 46,121.699 30.41 82.78 23.3 $29,767.35 22.27
Sweden 9,779.426 34.62 81.71 5.1 $58,938.77 27.44
United Kingdom 64,715.81 30.30 80.82 33.0 $46,331.98 15.60
Source(s) * UN stats database * UN stats database * UN stats database * World bank * World bank * World bank
* Worldometers * World bank
(www.Worldometers. (http://data.
Retirement Planning
info) worldbank.org/
indicator/SP.DYN.
LE00.IN
Average 18,041.1 30.2 79.0 8.8 $34,303.6 24.1
Min. 418.7 20.0 74.0 0.2 $7,851.3 9.7
Max. 80,688.5 37.9 82.8 42.2 $116,664.3 51.7
Min. (Country) Malta Cyprus Lithuania Malta Bulgaria Greece
Max. (Country) Germany Italy Spain Germany Luxembourg Luxembourg
Note: Bold values refer to the statistics for Malta; in the case of the index scores, bold values highlight results where the score is <50%.
121
Pension System
Country Pension Future State Pension Age State Pension (P1) Occupational Personal Taxation of
System Pension Age Flexibility Pension (P2) Pension (P3) Retirement
Provisions
Austria 65/60 65 (2033) • Early retirement possible if • Defined-benefit public • Voluntary Pension • Private Voluntary TET: TET for
conditions are met scheme Provisions available Pension Provision employee/
• Deferred retirement • Contributions payable insurance individual
possible for an increased for eligibility, based on contributions
pension (continue to earnings and EET for
pay contributions, thus • Benefit based on employer
increasing pension earnings (adjusted for contributions
entitlement) inflation)
• Income-tested top-
up for low-income
pensioners (ensures
minimum retirement
income)
Belgium 65 67 (GP 2030) • Early retirement possible if • Old-age pension • Voluntary Occupational • Third pillar: TET: TET for
conditions are met (60% of employment Pension provisions tax-deductible employee/
• Deferred retirement possible income) subject available savings that can individual
(can be used to make up to contribution • Benefits up to 2/3 of only be accessed contributions
for career gaps or improve conditions pre-retirement income at retirement age and EET for
pension benefit since only • Guaranteed income • Fourth Pillar: employer
the 45 last years are used in (means tested) to low- Voluntary contributions
the calculation) income pensioners personal savings
with no tax break
Bulgaria 64y4month/ 65 (2017)/ • Early retirement possible, • Income-tested old • Mandatory • Supplementary EEE
61y4month 63 (2020) depending on occupation age pension, subject Occupational Pension voluntary
• Deferred retirement possible to contribution provisions personal pension
without limit – increase in conditions
benefits
• The pension benefit
is paid based on the
account balance and
life expectancy at
retirement
• Supplementary
mandatory personal
pension accounts
(National Revenue
Agency collects
contributions which
it transfers to pension
insurance companies)
Croatia 65/61y3month 67 (2038) / • Early retirement possible • Previous PAYG • Mandatory second • Voluntary /
65 (2030); subject to conditions – system replaced pillar with individual Personal
67 (2038) reduction in benefits with mandatory and accounts at licenced Pension schemes
• Deferred retirement voluntary funded fund management available
possible – increase in schemes (http:// companies, annuitized
benefits www.pensionfunds at retirement
online.co.uk/content/
country-profiles/
croatia/89)
• Individual private
accounts accumulate
pension benefits
Cyprus 65 65+ (2018) • Early retirement possible • Public pension • Voluntary Occupational • Voluntary /
subject to conditions – scheme with minimum retirement provision personal
reduction in benefits benefits available Individual
• Deferred retirement (Cyprus Ministry, insurance
possible – increase in http://www.mfa.gov. pension plans
benefits cy/mfa/mfa2006.nsf/
All/7BF0F66F1B3A
F568C22571A9002
3B098)
(Continued )
Pension System
Provisions
Czech 62y10month/ 67+ (2041) • Early retirement possible • Public pension scheme • Privately managed • Voluntary TEE: TEE for
Republic 58y-62 (but not before age 60) with a basic element funded DC pension Personal individual
(depending subject to conditions) and an earnings- system with voluntary Pension schemes contributions
on year – accrual factor will be related element participation (cannot be available (fully and EEE for
of birth) permanently reduced as a (calculated according revoked) funded) employer
result to a progressive • Contributions based on contributions
• Deferred retirement possible formula, based on earnings (contribution
– the total accrual factor is years of service) to earnings-related
increased as a result public pension lowered)
• Accumulated in
individual accounts
at private pension
companies, invested as
per individual’s strategy
• Each pension company
offers exactly four
pension funds with
different revenue-risk
profiles
Denmark 65; 67 67+ (2022; • Deferred retirement possible • Public old-age pension • Quasi-mandatory • Voluntary ETT: TTE for
2030) (up to ten years) – benefits based on years of occupational schemes Personal “age savings”
will incrementally increase residence (40 for full negotiated as part of Pension schemes plans and
as a result (based on life benefit) collective agreements available ETT for all the
expectancy) • For higher earned cover about 90% of full- other plans.
income, the basic time employees
pension is reduced by
a portion of the excess.
• ATP (the Danish
Labour Market
Supplementary
Pension) is a statutory,
fully funded, collective
insurance based,
defined-contribution
scheme. Provides
pension income for
life, and a survivors’
lump sum benefit for
dependents in the case
of the death of the
individual member.
Estonia 63/62y6month 65 (2026)/ • Early retirement possible • Basic element: the • Voluntary occupational • Voluntary EET: EET for
63 (2016); (up to 3 years) subject to flat-rate base amount pension – Individuals Personal mandatory
65 (2026) conditions – benefits reduced which is only payable choosing the funded Pension schemes contributions
as a result with an earnings- option must make an available (fully and TET for
• Deferred retirement possible related pension. additional contribution funded) voluntary
– during the deferral period, • Earnings-related of 2% of earnings into • Insurance contributions
the worker continues to element: the ratio of their pension fund companies have
contribute and earn extra total contributions more beneficial
entitlement paid relative to average tax treatment
annual contributions as opposed
paid is multiplied by to voluntary
the value of a year of pension funds
pensionable service • Võrk A., Paulus
• Based on years of A., Leppik C.,
pensionable service Country Report:
(There are no credits Estonia (EE)
for periods of 2011-2015,
unemployment) Euromed, 2015
• Minimum retirement-
income guarantee
applies
(Continued )
Pension System
Provisions
Finland 63–68; 65 65+ • Early retirement possible • The basic state pension • Voluntary Pillar 2 • Voluntary EET
(RA 2027) from age 63 – reduction in (pension income- pension funds available, Personal
benefit tested), and a range of with tax benefits Pension schemes
• Deferred retirement possible statutory earnings- applicable up to a limit available
– increase in benefit related schemes • Contributions
• Subject to a residency are tax-
test, but no actual deductible
contribution under certain
requirements (full conditions
old-age pension
benefit subject to 40
years residence as an
adult, and accrues on
the basis of average
earnings over the
whole career)
• The guarantee pension
guarantees a minimum
level of income.
France 65 67 (2023) • Early retirement possible for • A full rate public • Mandatory • Voluntary TET: TET for
people with full contributory pension requires either occupational pension Persona Pension employer
periods. both: • At retirement, the schemes contributions,
• Deferred retirement 1. a minimum accumulated number of available TTT for
possible – points continue to contributory record points is converted into employee
accumulate during the period, and to have reached a pension benefit contributions
and benefits incrementally the minimum legal in Perco plans
increased as a result if pension age; or and TET for
contributory conditions for a employee/
full pension are met
2. Ato have reached • Means-tested minimum individual
the age of the full income benefit for people contributions
rate pension reaching pension age to other
3. The replacement • Under the occupational pension plans
rate of 50% after a pension, early retirement
full career is also possible, often
4. Ceiling on eligible subject to reductions
earnings related either to the age
5. "Minimum of retirement or years
Contribution”: of contributions or both
based on average (OECD (2015), Pensions
earnings as at a Glance 2015: OECD
measured by the and G20 indicators,
OECD OECD, Paris)
Germany 65y3month 67 (2031) • Early retirement possible • Earnings-related PAYG • The voluntary • The voluntary Offer tax credits
from age 63, subject to system. Calculation occupational pension Personal pension to people
conditions. of benefits based on which can be which can be taking up
• Deferred retirement possible, pension points provided by banks, provided by voluntary
resulting in higher pension • NI contributions insurance companies banks, insurance private
accrual. paid by employee and or investment funds companies or pensions
employer (so-called Riester investment funds EET (or in the
• State provides pension). Riester transition
regular statements pension is tax-promoted from TEE to
to the people with and subsidized by the EET); TET for
information on government. private pension
their state pension insurance.
entitlement
• Peer Review in Social
Protection and Social
Inclusion programme,
coordinated by ÖSB
Consulting, the Institute
for Employment Studies
(IES) and Applica, and
funded by the European
Commission
(Continued )
Pension System
Provisions
Greece 67 67+ (2021) • Early retirement available – • Earnings-related public • Voluntary occupational • Voluntary EET
reduction in pension benefit scheme plus a series schemes – not popular occupational
• Deferral available – no of minimum pensions/ schemes – not
change in benefit social safety nets popular
• Subject to minimum
contributions
• Basic pension based on
permanent residency in
Greece for (minimum
of 15 years) and the
ability to fulfil certain
criteria based on
previous income
Hungary 62y6month 65 (2022) • Early retirement not • Defined-benefit • Occupational schemes • Voluntary TEE: TEE for
available PAYG system with an were previously occupational employee/
• Deferral available – increases earnings-related public available and schemes individual
pension benefit pension mandatory but were all contributions
• Minimum pension wound down by 31st and EEE for
available March 2016, and funds employer
transferred to the state contributions.
Ireland 66 68 (2028) • Early retirement not • Basic scheme paying • Voluntary occupational • Voluntary EET
available a flat rate to all who pension schemes have Private Pensions
• Deferred retirement not meet the contribution broad coverage: over available
available conditions half of employees
• Means-tested pension
to provide a safety net
for the low-income
elderly
• Benefits-in-kind:
government estimates
that the price of these
goods and services
would be EUR 904
per year, excluding
health benefits.
Italy 66y3month/ 67+ (2022) • Early retirement not • Based on notional • Additional voluntary, • The voluntary EET
63y9month available accounts – all workers supplementary funded third
• Deferred retirement not currently contribute occupational system pillar
available and earn a rate of
return related to GDP
growth. At retirement,
accumulated notional
capital is converted
into an annuity
• If the contributory
pension is below a
minimum level, social
payments are available
to reach a minimum
level of pension
income per year
• People without a
contributory pension
can claim a means-
tested tax-exempted
social assistance
benefit from the age of
65: the “assign social”
(Continued )
Pension System
Provisions
Latvia 62y6month 65 (2025) • Early retirement available • Mandatory State • Private Voluntary • Private EET: EET for the
up to 2 years before SRA Funded Pension Pension Scheme: Closed Voluntary Mandatory
subject to conditions/5 years Scheme pension funds Pension Scheme: State Funded
in special situations Open pension Pension Scheme
• Deferred retirement available funds and ETT for
without limit – benefits the Private
calculated in the same way Voluntary
Pension
Scheme.
Lithuania 63y2month/ 65 (2026) • Early retirement available • A basic flat-rate • Voluntary Pillar 2 • Voluntary TEE: TEE for
61y4month up to 5 years before SRA pension that depends pension funds funded third second pillar
subject to conditions – on years of service pillar schemes pension funds
reduction in benefits plus an earnings- available and EEE for
• Deferred retirement available related component third pillar
– increase in pension benefits pension funds.
up to 5 years
Luxembourg 65 – • Early retirement available – • Basic: flat-rate • Voluntary Pillar 2 • Voluntary TET: EET for
no change in benefits depending on years of pension funds with funded third employee/
• Deferred retirement not coverage fiscal benefits pillar schemes individual
available • An earnings-related available contributions
element with a maxi- and TET for
mum pension available employer
• Minimum pension contributions
available, based on
years of contribution
Malta 62 65 (2027) • Early retirement available • Contributory 2/3 • Voluntary Occupational • Voluntary EET for
for some age cohorts, subject state pension up to a retirement schemes Personal schemes employee
to conditions maximum pensionable available from contributions
income of €22,138 for October 2015, (personal
2016
• Deferred retirement not • Based on National with tax credits contributions
available – PWG15 suggests Insurance applicable to into pension
deferral becomes available contributions over qualifying schemes receive
with a resulting increase in work-life contributions, a tax credit
pension benefits • Minimum pension up to a of 15% of the
(non-contributory) maximum contribution,
available (€1,000 in up to €150 in
contributions for credit a year)
2016) Employer
contributions
taxed as fringe
benefits, but tax-
deductible for
the employer
Netherlands 65y3month 67+ (2024; • Early retirement not • Flat-rate public • Quasi-mandatory • Voluntary The maximum
GP 2021) available scheme earnings-related funded third income for the
• Deferred retirement not • Occupational pensions occupational plans: pillar schemes EET system
available are integrated with the Although there is no available, with tax is set to EUR
public pension system. statutory obligation for benefits (Dutch 100,000 in
The current tax rules employers to offer a Association of 2015. TEE
allow a maximum pension scheme to their Industry-wide system applies
benefit of 100% of employees, industrial- Pension Funds to income
final pay at retirement relations agreements (VB) and Dutch that exceeds
from both public and are in force and around Association EUR 100,000
private systems. 91% of employees are of Company (i.e. extra
covered Pension Funds, contributio,ns
The Dutch are not tax-
Pension System: deductible).
an overview of
the key aspects,
2010)
(Continued )
Pension System
Provisions
Poland 65y7month/ 67 (2020)/ • Early retirement not • System of notional • Mandatory Privately • Voluntary EET: EET for
60y7month 67 (2040) available accounts. Managed Occupational Private Pension OFE and
• Deferred retirement not • Subject to a minimum schemes Schemes IKZE and
available level of contributions TEE for PPE
• The ceiling to and IKE.
contributions and
pensionable earnings is
set at 2.5 times average
monthly earnings
• Minimum pension
under PAYG scheme
applies
Portugal 66 66+ (2016) • Early retirement available – • earnings-related public • Voluntary Occupational • Voluntary TET: TET for
decrease in benefits pension scheme with a Schemes – low coverage Private Pension employee/
• Deferred retirement means-tested safety net (around 3.7% of the Schemes individual
available – increase in • Pension benefits workforce in 2015/6) available with contributions
benefits based on earnings, tax credits and EET for
contributions and a available up to employer
sustainability factor (an a limit contributions
adequacy factor of the
pensions system to the
demographic changes –
mainly longevity)
• minimum pension for
those making enough
contributions
• Solidarity Supplement
for the Elderly (SSE)
available to pensioners
receiving old-age or
survivors’ pension and
fulfilling a means-test
Romania 65/60 65 (2030) • Early retirement available • Contributory • Mandatory • Voluntary EET
(full or partial) – same earnings-related state Occupational pension Personal
calculation applies pension (PAYG) Pillar 3 private
• Deferred retirement not pension schemes
available available
Slovakia 62/58y3 62+ (2017) • Early retirement available – • The earnings-related, • Mandatory • Voluntary EEE: EEE for
month-62 decrease in benefits public scheme is similar Occupational pension Personal individual
• Deferred retirement available to a points system, with Pillar 3 private retirement
– increase in benefits benefits that depend pension schemes accounts
• Early retirement/deferral not on individual earnings available and TTE for
available for DC schemes relative to the average. supplementary
• Low-income workers pension plans.
are protected by a
minimum amount of
earnings on which
pension is calculated
(but no minimum
pension per se)
Slovenia 64y4month 65 (2016) • Early retirement available – • system combines • Voluntary Occupational • Voluntary EET
decrease in benefits an earnings-related pension schemes Personal Pillar 3
• Deferred retirement available public pension with available – fully funded private pension
– increase in benefits minimum and targeted • Fully or partly funded schemes available
schemes by employer – fully funded
• Tax benefits apply • Minimum
guaranteed rate
of return at law
• Tax relief
available subject
to conditions
(Continued )
Pension System
Provisions
Spain 65y3month 67 (2027) • Early retirement available – • Earnings-related • Voluntary Occupational • Voluntary EET
decrease in benefits benefit based on pension schemes Personal Pillar 3
• Deferred retirement available contribution levels available – fully funded private pension
– increase in benefits • The ceiling applies • Tax benefits apply up to schemes available
to earnings for a limit – fully funded
contributions and • Tax relief
benefit available up to
• Means-tested a limit
minimum pension OECD, Slovenia:
Review of the
Private Pension
System, 2011
Sweden 61–67; 65 – • Early retirement only • The statutory pension • Around 90 % of the • Voluntary ETT: EET for
available for Nominal insurance is obligatory workforce is covered Private Pension PPM and ETT
DC scheme, but not for for all employees, self- by non-mandatory Schemes for all other
minimum and DC schemes employed and Swedish occupational pension available with plans.
• Deferred retirement only residents. The system schemes established on tax benefits
available for Nominal consists of three the basis of collective applicable
DC scheme, but not for components: bargaining agreements subject to
minimum and DC schemes 1. Guarantee pension (www.findyourpension. conditions
income-tested and eu)
subject to minimum • Tax-deductible
residency contributions (although
2. Income pension employee contributions
(PAYG), based on are rare)
earnings
3. Premium pension:
fully funded with free
choice of where to
invest contributions
United 65/62y4month 67+ (2028), • Early retirement not • Retired before 6 Apr • In October 2012, • Voluntary EET
Kingdom 68 (2046) available 2016: Contributory automatic-enrolment Private Pensions
• Deferred retirement possible state pension benefits was introduced into available
– increase in benefits and Additional workplace pension • Tax benefits
• Cannot be forced to retire State Pension (no schemes. Employers available, subject
unless physical job (e.g. minimum/maximum, have a legal duty to to conditions
construction work)/job has but depends on NI enroll all qualifying
an age limit set by law (e.g. paid/earnings/whether workers, with minimum
the fire service) an individual has contributions paid
contracted out) in. To support
• Retired after 6 Apr automatic-enrolment,
2016: Contributory the government
retirement pension established the National
• State provides info & Employment Savings
statements re. pension Trust (NEST), a trust-
entitlement. also, based occupational
online calculators defined-contribution
easily accessible scheme with a public
online. State service obligation to
information websites admit any workers
(https://www.gov.uk/ automatically enrolled
state-pension, https:// by their employer, and is
www.gov.uk/additional- designed to provide low-
state-pension); DWP cost, quality pension
Your State Pension provision for low to
Explained, 2016 moderate earners,
transient workers and
smaller employers that
the market finds difficult
to serve.
(Continued )
Pension System
Provisions
Source(s) • Finnish • Finnish • OECD (2015), Pensions at • OECD (2015), • OECD (2015), • OECD (2015), • Tax Treatment
Centre for Centre for a Glance 2015: OECD and Pensions at a Glance Pensions at a Glance Pensions at a of pensions –
Pensions, Pensions, G20 indicators, OECD, 2015: OECD and G20 2015: OECD and G20 Glance 2015: country
ELÄKEU ELÄKEU Paris. indicators, OECD, indicators, OECD, OECD and profiles
UDISTUS, UDISTUS, • CESifo Database for Paris. Paris. G20 indicators, (OECD) –
Retirement Retirement Institutional Comparisons • Tax Treatment of OECD, Paris https://www.
Ages in Ages in in Europe, Early retirement Pensions – Country • Tax Treatment oecd.org/daf/
Member Member conditions in the EU, 2014 Profiles (OECD) of Pensions – fin/private-
States, 2015 States, 2015 from MISSOC Comparative (https://www.oecd.org/ Country Profiles pensions/
(http://www. (http://www. Tables Database daf/fin/private-pensions/ (OECD) (https:// tax-treatment-
etk.fi/en/ etk.fi/en/ (accessed Oct 2014). tax-treatment-pensions- www.oecd.org/ pensions-
the-pension- the-pension- http://www.missoc.org/ country-profiles.pdf) daf/fin/private- country-
system-2/ system-2/ INFORMATIONBASE/ pensions/ profiles.pdf
the-pension- the-pension- COMPARATIVETABLES/ tax-treatment-
system/ system/ MISSOCDATABASE/ pensions-
international- international- comparativeTableSearch.jsp country-profiles.
comparison/ comparison/ • European Commission pdf)
retirement- retirement- (Employment, Social Affairs
ages/) ages/) and Inclusion), Old age
pension (http://ec.europa.
eu/social/main.jsp?catId=1
117&intPageId=2645&lan
gId=en)
• USA Social Security
Administration, Social
Security Programs
Throughout the World:
Europe, 2014
MMGPI – Integrity Rating
Country Regulatory Annual report sub- Government’s Min Funding & Protection/ New members Access to
approval/ mitted to regulator, capacity to Solvency reimbursement must receive info independent
supervision publicly available formulate and requirements (P1) in case of fraud/ from the fund complaints
required for a industry data & implement sound mismanagement when they join, tribunal (P7)
pension plan to regulator actively policies & the or protection from and annually
Retirement Planning
operate (R1) discharges duties general employer (P4,5,6)

(R2) insolvency (P3)
Austria 88 34 78 75 50 93 100
Belgium / / / / / / /
Bulgaria / / / / / / /
Croatia / / / / / / /
Cyprus / / / / / / /
Czech Republic / / / / / / /
Denmark 100 100 95 100 25 56 100
Estonia / / / / / / /
Finland 100 92 97 100 100 91 100
France 50 82 68 50 25 43 0
Germany 88 74 80 80 75 61 50
Greece / / / / / / /
Hungary / / / / / / /
Ireland 100 82 78 100 25 100 100
Italy 100 92 30 50 0 93 50
Latvia / / / / / / /
Lithuania / / / / / / /
Luxembourg / / / / / / /
Malta / / / / / / /
Netherlands 100 92 90 100 0 93 100
Poland 75 76 45 100 25 56 50
Portugal / / / / / / /
Romania / / / / / / /
Slovakia / / / / / / /
137
MMGPI – Integrity Rating
138
Country Regulatory Annual report sub- Government’s Min Funding & Protection/ New members Access to
approval/ mitted to regulator, capacity to Solvency reimbursement must receive info independent
supervision publicly available formulate and requirements (P1) in case of fraud/ from the fund complaints
required for a industry data & implement sound mismanagement when they join, tribunal (P7)
pension plan to regulator actively policies & the or protection from and annually
operate (R1) discharges duties general employer (P4,5,6)
(R2) insolvency (P3)
Slovenia / / / / / / /
Spain / / / / / / /
Sweden 88 92 96 80 50 79 0
United Kingdom 100 100 80 90 100 71 100
Source(s): Australian Centre for Financial Studies, MMGPI, Including Trust and Transparency in Pensions, October 2014
Average 89.9 83.3 76.1 84.1 43.2 76.1 68.2
Min. 50.0 34.0 30.0 50.0 0.0 43.3 0.0
Max. 100.0 100.0 97.0 100.0 100.0 100.0 100.0
Min. (Country) France Austria Italy France Italy France France
Max. (Country) Denmark Denmark Finland Denmark Finland Ireland Austria
SARA PAVIA AND SIMON GRIMA

Retirement Planning: A Literature Review: Sara Pavia and Simon Grima

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Retirement Planning: A Literature Review: Sara Pavia and Simon Grima

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CHAPTER 8

Contemporary Issues in Behavioral Finance

Table 1. Projected Old-Age Dependency Ratio Based on Total Expected

15–64 287.6 284.6 275.3 279.6 274.3 266.8 271.4

3. THE SCOPE OF THE STUDY

Table 2. Comparing Kahneman’s Two Systems.

Source: Adapted from McIntyre (2015)

or driving a car on an empty road (Kahneman, 2011). In these situations, the

Fig. 2. Phases in the Retirement Planning process. Source: Author.

Although the State Pension offers a replacement of two-thirds of pre-retirement

5. SIGNIFICANCE OF THE STUDY

6. BEHAVIOR IN FINANCIAL SERVICES

7. RETIREMENT PLANNING IN MALTA

8. BEHAVIORAL OBSTACLES TO PROPER PLANNING

This may be a critical nudge toward increasing personal retirement provisions,

The MMGPI of 2014 measured and compared the retirement systems of

entry levels so as not to enroll lower income-earners automatically (as it may

Table 3. Amounts Available for Saving of Average Maltese Households.

Income € 20,412 € 22,500 € 25,259 €22,549 € 13,076

unsustainable pension system. In behavioral finance, this is sometimes referred to

providing suitable, complete, and understandable information to plan mem-

1. Requiring specific, clear, and relevant information to new plan members.

Of the 25 countries listed in the index, only 9 had regulatory provisions

• Only providing relevant information, without any frills.

and that scheme members remain conservative notwithstanding the improved

Inertia (status-quo bias) was also prominent. As a number of studies explain,

Austria 8,544.586 30.43 81.01 4.5 $51,190.81 26.51

operate (R1) discharges duties general employer (P4,5,6)

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