Reforms tops Maltese agenda

In 2004, during the launch of the 2005 National Budget, the government released a white paper entitled ‘Pensions: Adequate and Sustainable – Reforms needed now to ensure adequate and sustainable pensions for future generations’.
It was drawn up by the pensions working group (PWG), formed by the Prime Minister in June 2004. Subsequent to the launch of the White paper a comprehensive national consultation process was undertaken, based on whose findings the PWG presented to the government its final report together with eight supplementary papers.
The PWG concluded that a policy decision of no reform is not an option. Changing demographics, which include lower fertility rates and higher life expectancy, will by 2050 lead to a population that will shrink by approximately 60,000 persons as well as persons over 60 years will constitute over 35% of the population structure.
In essence, no reform, will undoubtedly lead to lower adequacy and a higher deficit to maintain the cost of pensions.
The reforms proposed by the PWG
underline that there can be no meaningful reform if the issue of demographics is not addressed. It highlights two impacts of why demographics must be pivotal to reform. Firstly, a shrinking and ageing population signifies that there will be fewer working people to sustain a larger cohort of pensions. The demographic replacement rate is approximately 3.9 persons for every pensioner.
By 2050, this will fall to approximately 1.5 persons for every pensioner. As a result, the PWG recommended that the retirement age should be increased from the current age of 61 years for men and 60 years for women to a standard 65 years of age.
Moreover, the current pensions systems is based on the PAYG principle, based on the principle that there will always be enough workers to pay for future pensioners. Thus, a pensions system that is completely linked with PAYG retains the demographics risk intrinsically within the conceptual pensions system framework. In this regard, the PWG recommended that a multi pillar pension framework should be introduced:
q A first pillar, which would consist of the PAYG two-thirds pension, which is currently characterised by a maximum pensions income ceiling of Lm6750 (€15,754); a 30-year contribution period; a contribution of 10% by the employee, 10% by the employer and 10% by the state for employees; and, for employees, a determination of the pension income on the best consecutive three years from the last 10 years; and an indexation mechanism linked to two-thirds of cost of living.
The PWG proposed that the first pillar pension would continue to be paid to all employed people to ensure solidarity between the different income cohorts. Nevertheless, the PWG proposed a number of parametric changes to the first pillar pension to be introduced in a manner that minimises impact over the three cohorts (switchers, that is persons 45 years of age or younger who will be impacted by the full recommendations of the reform proposals; transitional, people aged between 46 and 54 who will be impacted in varying degrees; and exempt, people over 55 years of age who will remain on the existing pensions system), the most important changes being that the maximum pensions income ceiling should increase to Lm9,000; an indexation formulae that biases towards wages (70% wages:30% inflation); a calculation period of the best 10 years from the last 10 years; an accumulation period of 40 years, and credits for child raising as well as life-long learning.
The PWG also proposed the establishment of a minimum pension guarantee which would be indexed to 50% of the average wage. It is pertinent to underline that no changes to the contribution percentage was proposed.
q A mandatory second pillar for persons 45 years of age and younger, which would constitute of a private pension fund based on defined contributions entered into through employers (or consortium of employers) with the funds to be portable. Governance would be on the basis of the prudent person principle and where appropriate on quantitative criteria in order to minimise potential mishaps that would undermine confidence in the second pillar, with regulation to be provided by the Malta Financial Services Authority. The group also proposed that a compensation fund should be constituted to safeguard investment in the second pillar in the event of bankruptcies et al.
The group proposed that the second pillar should be introduced in a neutral manner between 2007 and 2010 through the hiving off of 1% of the respective employer and employee contributions to the first pillar to the second pillar funds. The rationale behind this is on the one part, to imprint the shift from a single pension system to a multi pillar pension system, and on the other to minimise impacts on disposable income and competitiveness, as well as to allow individuals and firms to plan for mandatory contributions which are proposed to be set to 3% (over and above the 1% hiving off), to be reached incrementally between 2011 and 2025.
Recognising that over 75,000 persons have endowment and related insurance policies, PWG proposed that such persons should be given the ability to lock the
annual premiums towards their second pillar mandatory contribution on the condition that upon maturity the funds are routed into their second pillar pension fund. Furthermore, given that in Malta a high percentage of people own their homes, the PWG proposed that a regulated market for property-pensions schemes is introduced to allow people to convert their homes into supplementary pension income.
q A third pillar which would be voluntary. In this regard, the PWG proposed that investment in pension saving should be incentivised and commissioned a supplementary report which has recently been concluded on the nature of incentive schemes to be applied.
On 1 March 2006, the government announced its main reform principles. Firstly, it has decided to increase the statutory retirement age to 65 years in a staggered manner. Secondly, in terms of the first pillar it has decided to introduce a minimum pension guarantee which would be indexed to 60% of the median income; increase incrementally the maximum pensions income and contributions ceiling to Lm9,000 by 2014; establish the accumulation period for persons who are 25 years and younger at 40 years, and establish the calculation period at the best 10 years out of the last 20 years.
In terms of the second pillar, the government announced that will continue to study the proposals of the PWG and its goal is to seek to introduce a mandatory second pillar pension scheme as soon as possible.
David Gingell is the former chairman of the Pensions Working Group in Malta

Have your say

You must sign in to make a comment


Your first step in manager selection...

IPE Quest is a manager search facility that connects institutional investors and asset managers.

Begin Your Search Here