Over the coming months, the pension reform put in place in 2006, will be having its first five-yearly review.

A conference organised yesterday by PKF Malta at the Westin Dragonara got all constituted bodies and opinion makers to discuss the issue, which has been rendered all the more urgent with the economic crisis.

First, with a sense of complacency, a look at what has been achieved.

Speaking instead of Minister Dolores Cristina, parliamentary assistant Stephen Spiteri underlined the main thrusts of the 2006 reform:

The Government launched the White Paper – ‘Pensions Adequate and Sustainable: Reforms Needed Now to Ensure Adequate and Sustainable Pensions for Future Generations’ with the November 2004 Budget’.

A long consultation process followed the launch of the reform which saw the Government tabling legislation for reform in the summer of 2006 – subsequently enacted in late 2006.

“The fact that the amendments had the consensus of practically all the stakeholders, albeit one, shows that the consultation process was indeed sincere, thorough, and embraced arising input. Indeed, when we discuss with other EU counterparts the scope and magnitude of the changes we introduced, they remain astounded that such reform was achieved smoothly with consensus,” Dr Spiteri said.

The reform changed the retirement age across two groups – transitional and switchers – where the retirement age with regards to the latter was increased to 65 years. The same retirement age was to apply to both men and women. An opt-out was introduced for early retirement to account for those jobs where age renders it difficult to carry out, subject however to 40 years of contribution accumulation and the person reaches 61 years of age. The reform increased, incrementally, the calculation of the contribution average of the Two-Thirds pension from 30 years to 40 years for the switchers group. Again, for persons in the switchers group the contribution average assessment was increased to 40 years.

The calculation of the applicable pension income was also increased incrementally – reaching the best 10 calendar years of basic wage or earnings over 40 years of insurance.

The Maximum Pensionable Income was changed. In terms of the switchers – this will increase from the coming year over three equal tranches to €20,970 by 2014 and subsequently by an indexation mechanism that is made up of 30 per cent wages : 70 per cent inflation. The Transitional group, who face degrees of the reforms: the Maximum Pensionable Income is allowed to increase by inflation to a threshold of €20,970. The Exempt Group – those who are 55 years and over who were not affected by any of parametric changes of the reform: the Maximum Pensionable Income was released from its €16,077 ceiling to increase by inflation to a threshold of €17,470.

Moreover, to encourage people who retire to remain in the labour market, changes were introduced to allow any retiree – including those in the Exempt category – to work and earn whatever income whilst retaining the full pensionable income.

Given our cultural context in that too often it is the woman who terminates or interrupts her professional career for child bearing and for taking care of the family home, a system of credits for child rearing was introduced directed to smoothen some of the gender pension inequities. A parent in the Switchers Group is now able to have her pension credited for two years for every child under six years of age subject to the condition that she returns to work for the equivalent amount credited.

One final other important reform is that a Guaranteed National Minimum Pension is now introduced which is indexed to 60 per cent of the National Median Income.

Not everyone was in agreement these were very important and far-reaching reforms. Speaking for the Labour Party, Charles Mangion said the changes made four years ago “did not represent any fundamental reform to the pensions system, but merely implemented parametric changes to it, postponing decisions of real reform.

Thus, for instance, raising the retirement age to 65 years was significantly diluted by allowing individuals to retire at 61 years if social security contributions have been paid for at least 40 years.

The Pensions Working Group had already foreseen in June 2005 that the average pension as a proportion of the average wage would still decline from about 53.3 per cent in 2007 to 38.6 per cent by 2050. The same report also predicted that the deficit of the pension system would still increase from 2 per cent of GDP in 2007 to 2.6 per cent of GDP by 2050.

Government, Dr Mangion claimed, had shied away from introducing substantive changes except for determining the minimum pension to 60 per cent of median income, which incidentally is the threshold that demarcates the risk of poverty.

Government had then decided that the time (this was 2006, before Lehman Brothers and the world crisis) was not ripe to introduce the second pillar of the pension system, as recommended by the Pensions Working Group. Dr Gonzi had said at that time it “would not be wise to introduce new burdens on employees and employers”

Carmel Mallia, speaking on behalf of the National Association of Pensioners said that while the sustainability of pensions was, it would seem, addressed in this reform, the adequacy of pensions was not. The gap between income from employment and pensions was widening and the price of medicines keeps going up. Mr Mallia suggested a separate indexing of pensioners’ needs.

David Spiteri Gingell, who was chairman of the Pensions Working Group between 2004 and 2007, was maybe one of those later called by another speaker as ‘demographic catastrophists’.

The first pillar of the present pension system is the Pay-as-you-go system, which could be translated as ‘I hope someone will pay for my pension’ Demographics which comes very much into this.

In his 2004 report, Mr Spiteri Gingell based himself on the World Bank figures. Today, the review group is basing itself on EU figures and coming up with a slightly more positive outcome. But still, predictions can and do vary. The first report had foretold GDP growth of four per cent to 2020 and later a 2.5 per cent growth to 2050, whereas the second report, after Lehman, sees a 1.75 per cent growth till 2060. Put like this, pensions will not be sustainable.

Then, demographics: Malta’s population is an ageing and dying one. The elderly live longer.

The options Malta has to increase the sustainability of the pensions system thus include:

• More births;

• More female participation;

• Immigration;

• Increase the retirement age;

• Link retirement age to the longevity index as other countries are doing.

Gordon Cordina, as usual, brought some much-needed sense of proportion to the whole discussion. It is clear we will all be facing increasing risks in the future but an uncertain future may not necessarily mean a worse future.

There are so many imponderables to factor in. The affordability of the pension system means we cannot live beyond our means. Among the risks to affordability are: the decline in the number of workers, and the natural population dynamics, while migration may mitigate the impacts. As for insufficient growth of the economy, this may be mitigated by increased productivity. Other factors may include a higher than expected life expectancy, political pressure to raise pension rates, etc.

At this stage of the pension reform process, the emphasis should be on increasing the robustness of the present system to face such risks.

Prof. Cordina here listed some rather technical formulae to ensure the adequacy of the first pillar of the pension system. It is very important to keep the pension system adequate.

Here, Prof. Cordina turned to the second pillar, a funded pension system may improve the adequacy of the pension system. A funded system is long-term as it is based on the capital market.

To have the two systems working together is desirable as it would diversify them and balance them out. Besides, a funded system brings to light savings that could have been used for retirement. It diversifies savings away from future consumption applications. It incentivises savings. Savings, rather than a tax on economic activity, stimulates economic activity through product investment.

In his insistence on the funded second pillar, Prof. Cordina was echoing what Dr Charles Mangion said earlier. He suggested that the second pillar could be a funded scheme administered by the government on behalf of the citizen. The experience of other countries shows that a second pillar left to private business carries considerable risks and deficiencies. Dr Mangion suggested a second pillar on the lines of those existing in Sweden and the US.

The conference was also addressed by representatives of the constituted bodies. Gejtu Vella (UHM) urged focusing on the issue as it impacts real human beings, rather than numbers. Victor Carachi (GWU) said people over 50 are finding it difficult to find jobs and are being pushed to early retirement. Joe Farrugia (MEA) agreed that the first pillar is insufficient and needs supplementing but questioned whether we really need a second pillar. The Maltese have a number of inbuilt safeguards: 80 per cent of Maltese own their own house when in Switzerland this is only true for 18 per cent. Most of the public debt is owed to Maltese. Helga Ellul (Chamber of Commerce) urged discussion at MCESD level and linked the discussion in Malta to that launched by the EU with its recent Green Paper on pensions. While countries like Scandinavia, Germany and Holland have addressed this issue long ago, France and Greece lag behind and their higher retirement age is only at 62 years and will come in by 2018.

David Curmi, from Middlesea Valletta Life Assurance, then spoke about the third pillar, that is voluntary private pension schemes. There are various ways how a government can help encourage people to save. Life insurance in Malta has seen double digit growth: €193 million were collected in 2009, while payouts amounted to €70 million. There are 130,000 savings contracts and total investments amount to €1,385 million of which 62 per cent are invested in Malta.

The conference was brought to an end by Parliamentary Secretary Chris Said.

Those who want to contribute to the discussion in Malta can do so by forwarding their comments by the end of August to david.gingell@gov.mt while those who want to give their feedback to the Commission can do so by writing to http://ec.europa.eu/yourvoice/ipm/forms/dispatch?form=pensions