The Mediterranean: Stuck at the reform impasse
Malta's pension working group has recommended the development of second pillar pensions. So far there has been no action, writes Stephanie Testaferrata
Public consultations and consultative referendums are the order of the day in Malta - the most recent concerning the restructuring of the country's pensions set-up and the introduction of civil divorce in this staunchly Roman Catholic country. Yet the reaction to these two public events, and the public's participation in them, could not be more different.
Whereas with regard to the introduction of civil divorce it is anticipated most of the electorate will register their vote at a referendum on 28 May - for months now this has been the leading topic across the media - it would be quite impressive to find a layman who is actually aware that the public is invited to a consultation on pensions and that the deadline for responses is 31 May.
The pensions public consultation follows the publication at the end of 2010 of an extensive review of Malta's pension situation and calling for radical reform and its immediate implementation.
The report, compiled by the pensions working group (an independent group appointed to advise government on pension reform) went practically unnoticed with minimal coverage in the press, overshadowed by the divorce debate and political unrest in the Middle East. It's fair to note that the end of 2010 was the deadline for the government to meet its legal obligation under the social security act "to review the impact of the [pension] reform every five years", hence the timing for its release, which could not be worse, could not be altered.
Yet for anyone who was indeed concerned with what the pensions working group had to say on the matter, they would need to study a gruelling list of 45 recommendations it believes should be taken into account in order to adequately reform Malta's pension system. Among them is that mandatory private pension schemes targeted at people under 45 years old should be introduced immediately, and that the pensionable age should be tied to an index of life expectancy.
In addition, the report warns the country cannot postpone the introduction of the second pillar pensions because the present system was becoming insufficient for pensioners to enjoy the quality of life they were used to.
Further postponement of the second pillar pension reform "would only exacerbate the issue relating to the adequacy of the average pension replacement rate and, thereby, require, potentially, more drastic measures in the near future", the report points out.
The report suggests, that until the creation of the second pillar pension, the introduction - as from early 2011 - of a voluntary third-pillar pension. This would eventually allow for the possibility to switch funds to the second pillar once organised. In the five months since the report was published, no initiative in this direction has been launched.
What is certain is that the country's finance minister, Tonio Fenech, has officially ruled out the possibility that mandatory private pensions will be introduced this year, despite ongoing pressure from the European Commission to accelerate its pension reform programme - which began in 2005 - in order to guarantee the long-term sustainability of Malta's public finances. The government will study the report and will take the necessary measures to gradually introduce its recommendations, Fenech noted soon after the report was released, without committing any further to the matter.
Dolores Cristina, Malta's employment minister. whose ministry commissioned the report, said the government had a ‘strong interest' in listening to the opinion of all citizens, including young people, as well as social partners before it took a position and decided on the 45 recommendations.
"It is disappointing, but not really surprising to hear reports that the government has no intention of introducing mandatory second pillar pensions this year," notes Philip Bianchi, a partner at Ganado & Associates Advocates who heads the insurance and pensions section.
"Of the 45 recommendations made by the working group, the one that seems to have raised most concern is this very proposal, which would introduce mandatory pensions funded by both employers and employees," Bianchi continues.
"It is recognised that current financial circumstances may not be optimum and there has been comment that an opportunity was missed to introduce a mandatory scheme in 2006 when the fiscal climate was stronger. There is no point crying over spilt milk but, instead, the lesson should be learned that it is important to start making concrete plans now, rather than putting them off until a tomorrow that never seems to come."
Bianchi refers to a question raised in the working group's report: in truth, ‘Is there a right time for such a pension to be introduced?'
"This is not a simple question to answer," notes Bianchi. "Perhaps, in the meantime, the following related question should be asked: ‘Is it right to put off making plans for the introduction of mandatory pensions, until there is a right time to introduce them?'"
He continues: "While the time may not be right to introduce the mandatory second pension, the time must be right to start working on reaching a consensus on how and when it can be introduced so that the country can be ready to launch it when the fiscal situation improves. This will not be easy and the detail contained in the report only serves to highlight the challenge ahead and the need to begin work on this complex issue as soon as possible."
In the meantime, as recognised by the working group, there does not seem to be any good reason why a framework for voluntary pensions cannot be introduced, Bianchi notes. These could be both second and third pillar systems, where individuals and employers could make the choice whether or not they want to invest specifically for retirement within long-term schemes designed for this purpose.
As such, these are less controversial than any proposal for mandatory schemes and their introduction could help to build knowledge and develop an infrastructure that would ease the passage of mandatory second pensions, as and when the time is right to introduce them.
"It is welcome that the working group recognises the need for voluntary schemes to be flexible enough to allow anybody who makes use of them to be able to choose to transfer into a second pillar pension in future," Bianchi continues. "It is also welcome that there is recognition of the validity of fiscal incentives, which might provoke more people to save.
"Again, while the time may not be right at present to introduce fiscal incentives or mandatory contributions, and these will require careful thought, this should not be a deterrent to grasping the chance right now to prepare for the future and to allow people the choice to make their own provisions for retirement," Bianchi concludes.
Indeed, the authors of the pension review strongly encourage this too: "In the next ten years, a high number of life endowment and other financial products will mature," the report observes. "This provides an excellent opportunity to fast track savings for pensions. The working group recommends that the government should consider an incentivised framework to spur people to lock a considerable part of the maturity value of such instruments in savings for pension."
To what extent the government will act on this advice is difficult to tell: if indeed it really intends to at all. In the meantime, the European Commission is kept satisfied that reviews are taking place, reports are being written and from time-to-time the matter is raised in Parliament. And of course, it's not for another five years now that the government is obliged by law to review pensions again.