A pensions strategy which seeks to limit the amount of obligatory reforms in favour of incentivising certain behaviour – including saving up for voluntary pension schemes and working beyond retirement age – has been launched by the Pensions Strategy Group today.

The strategy rules out an increase in the statutory retirement age from the present 65 at this stage, and similarly rules out increasing social security contributions, presently set at 10% for both employee and employer, and what are known as compulsory second-pillar pensions, which are supplementary pensions paid by employers and employees.

Presenting the group’s reforms, chairman Mark Musù emphasised that their work, which began in June 2013, was no easy task, pointing out that while increases in retirement age and social security contributions were deemed objectionable at this stage, another challenge also needed to be addressed: existing pensioners ending up at risk of poverty due to their low income.

The strategy, he said, was based on five basic principles, including that there should be a clear definition of the aims of the pension system, and that there should be a strong employment policy to help sustain the system.

The group believed that state pensions should be a solid source of income for pensioners, but should not be the only one. It also sought to strike a just balance between the amount of time in which contributions are paid and the amount of time benefits are received, and to reform the system in such a way that it would be capable to evolve to address future developments.

The strategy includes a total of 27 recommendations, divided into four categories: reforms addressing social needs and issues related to society and work, reforms addressing the sustainability of the pension system, reforms to encourage saving up for complementary pensions and reforms to address the problems faced by those who are already pensioners.

At present, those born on 1962 or later are required to make 40 years of social security contributions to be entitled to a full pension, but the reform proposes that those born on 1965 or later should contribute another year.

However, the proposed reforms would also increase the contributions credited to those who stop working to take care of their children, up to 5 years for their first child, 4 years for their second and 3 years for their third.

It would also credit full-time studies in courses which are MQF Level 5 (undergraduate diploma or certificate) or higher. Three months of contributions are to be credited for every year of studying MQF Level 5 (undergraduate diploma or certificate) or 6 (bachelor’s degree) courses, going up to six months per year of Level 7 (master’s degree) courses, and a full year for Level 8 (doctoral degree) ones.

Working beyond retirement age is also being encouraged further.

Those entitled to retire between the age of 61 and 65 could improve their pension by up to 12% if they continue to work and forego their pension while they do so. Pensions could be improved even further if people keep working without receiving a pension beyond the age of 65.

At present, only those born on 1962 or later are entitled to a guaranteed national minimum pension (GMNP), but the reform proposes gradually extending this to older people, addressing the most vulnerable pensioners first. Those who would be 76 or older on 1 January 2016 would start receiving the guaranteed national minimum pension next year, and this would become universal by 2027.

This proposal would actually mean that state expenditure on pensions would actually increase in the short-term, but the strategy estimates that the deficit would be reduced by more than half after 2040.

A possible review of the maximum pensionable income parameter for those born before 1962 was ruled out as it was deemed to be too costly, with the strategy group noting that younger persons have faced the full brunt of the 2007 reform.

UĦM insists second pillar pensions should be considered

In an initial reaction to the strategy, representatives of trade unions and employers' associations largely welcomed its recommendations.

But UĦM secretary-general Josef Vella expressed his disappointment at the failure to commit to the introduction of a second pillar pension.

He said that he had nothing against encouraging voluntary pensions, but pointed out that only a small proportion of people could truly afford it. However, Mr Vella also said that Malta's productivity had to increase to make the introduction of a second pillar pension realistic.

But Mr Vella's call was not backed by General Workers' Union president Victor Carachi, who said that state pensions should be strengthened and third pillar pensions encouraged.

Malta Employers Association director Joe Farrugia similarly said that the government should focus on ensuring that state pensions are sustainable and encouraging private pension schemes. He said that the MEA has long argued that second-pillar pensions would increase the cost of labour and thus affect competitiveness and employment.

Bank of Valletta chairman John Cassar White said that he believed that incentives were more effective than mandatory reforms, before suggesting that employers and trade unions should develop occupational pension schemes backed by fiscal incentives as a compromise. He highlighted that studies showed that people typically started thinking about saving up for retirement 10 years before they retired, which was far too late.

'A financial and social challenge'

In his closing remarks, Finance Minister Edward Scicluna said that the pension system posed a significant financial and social challenge, the social challenge stemming from the fear or risk that pensioners will end up living in poverty.

He emphasised that pensions were not based on a fund, but on a social pact which saw younger generations support the old on the understanding that they would similarly be supported when their turn came. Consequently, he said, when one argued in favour of improving the lot of pensioners, one was effectively asking present workers to make a greater contribution.

Prof. Scicluna highlighted that the cost of addressing all the demands of present pensioners was too high for a country seeking to be prudent with its finances, warning that one did not wish seeing Malta end up like Greece.

He also observed that while pensioners had a strong lobby who was actively involved in debates on the future of pensions, the young were conspicuous in their absence, even though the issue would ultimately affect them.

On his part, Social Solidarity Minister Michael Farrugia said that while reforms have been implemented in the past, mistakes also took place, and he said that the one mistake that should be avoided in the future is to accept only what has a positive short-term impact whilst rejecting that which seems negative.

He welcomed the group's recommendations, although he said that the government still had to be convinced on a number of them and wished to amend a number of others.

But he was pleased that it agreed that the retirement age should not be raised and that social security contributions should not be increased.