The impact of second pillar pensions on a Maltese family-run business

Abstract

Purpose: The research examines the effect of second-pillar pensions on a Maltese family business's financial statements, focusing on Defined Benefit and Defined Contribution plans. It uses IAS 19 accounting rules and various scenarios to analyse the financial implications of each pension plan possibility. Design: The actuary meticulously documented their thought process in a research journal, employing a quantitative case study on a single SME. Reliable data fuelled Excel-based calculations, seamlessly integrated into financial statements. Baseline scenarios and sensitivity analyses enhanced research robustness. Findings: From the research, it was found that Defined Benefit plans had a significant impact on profits over time. In the first year, the pension obligation ranged from €65,000 to €260,000, translating to a profit decrease of €59,000 to €248,000. Even more striking, after two years, the obligation grew, ranging from €298,000 to a much higher €1.185 million. This resulted in a profit decrease of €127,000 to €527,000. In contrast, Defined Contribution plans had a smaller and more stable impact on profits, with decreases ranging from €76,000 to €446,000. Conclusion: The study reveals that Defined Contribution plans are financially less burdensome for family businesses and more stable, indicating they may be a more favourable option than Defined Benefit plans due to their stability and lower financial impact despite underlying factors changing. Value: This research goes beyond theory. It not only adds to the existing literature on second-pillar pensions by analysing the financial impact of each plan through the lens of IAS 19, but it also provides real-world benefits for family businesses. By understanding the financial implications, the analysis empowers these businesses to make informed decisions about their pension plans, potentially leading to greater financial security. Furthermore, the research contributes to a broader understanding of the financial impact of occupational pension plans, a topic of growing significance in the current economic climate.