New law for private schemes
The problems of an ageing population are not confined to large countries, as Malta’s experience shows. Despite a buoyant economy and a well-established social security system, the government is preparing legislation to ease the introduction of private pension schemes, including provision for international retirement plans.
The latest available figures show GDP growing steadily. Indeed, the last quarter of last year saw growth of some 6.1%, with banking and manufacturing being the major contributors. However, inflation remains a problem.
The consequent pressure on government revenues has led to a privatisation programme, and ordinary revenue was boosted by Lm12m (e30.3 m) in share proceeds last year. Even so the gap between revenue and total expenditure amounted to Lm80.4m last year, an increase of 15.7% on the comparable shortfall of the previous year. Closer examination of the figures shows an underlying trend which is causing the government concern, and has resulted in the plans for pension reform. Although the proceeds from the privatisation sales are down year on year, revenue from taxes and social security contributions have both increased by more than 10%. Despite this the gap between income and expenditure has continued to grow, with the ageing population contributing to these increased costs.
Until December 1986, social security in Malta was administered through three separate laws: the Old Age Pensions Act 1948, the National Assistance Act 1956 and the National Insurance Act of 1956. One of the more significant amendments was the introduction of a minimum pension based on the national minimum wage. This is set at two thirds of the minimum wage for single people and four fifths of that figure for couples. In 1979 the Pensions Act provided for a contributory pension which provides a pension of two thirds of the average salary over the previous five years. A more comprehensive approach was adopted in January 1987 when these acts were consolidated into the Social Security Act.
Act XXV of 1994 brought about further improvements in existing benefits, as well as continuing the process of introducing new benefits in line with the new needs of Maltese society. The total annual expenditure of the social security ministry has now topped the Lm125.7 million figure, pensions contributing significantly to this figure.
With a population of some 380,000 the rump of pensioners is increasing steadily, and this in a country which so far has made no provision for private pension schemes. Although private health schemes are now commonplace, the cradle-to-grave service provided by the state remains something of a sacred cow in a state which has been independent for a relatively short period of time. Under the 1979 Act employers and employees both contribute 10% of salary to the central scheme. Contributions must be made for a minimum of 10 years during the work cycle, in order to qualify for a full pension. With limits for tax-free income set at Lm4,000 for a couple and Lm3,000 for an individual, most pensioners enjoy a tax-free pension.
Failure to make sufficient contributions results in qualification for a minimum pension, but this is means tested. Retirement age is set at 61, although early retirement can be taken at 60. The government is concerned that this will soon be unsustainable under the present pay-as-you-go system, and so reforms are likely. These are likely to be two-pronged, on the one hand providing incentives for later retirement, and on the other the encouragement of private pensions.
Mary Darmanin of the Malta Financial Services Commission says legislation is being drafted to allow the establishment of private pension funds. “There is no legislation in force currently, however a new draft act relating to international retirement funds is being drafted. It is anticipated that the new legislation will provide for both a defined benefit retirement arrangement and a defined contribution retirement arrangement,” she said. “It is understood that government is very keen on the introduction of this legislation due to the difficulties being envisaged regarding the sustainability of the current system. Due to these pressing concerns there will almost certainly be some form of fiscal incentives in the new legislation, as the idea of supplementing state provision is a completely new concept for the workforce in Malta.”
Darmanin says the government is well aware of the urgency of this matter and keen to present legislation before parliament later this year.