The document does not bind the government. The Cabinet has seen this report and has approved its publication.
Following today’s publication, there will be a national debate until March.
The feedback will then be analysed and by the end of next year a draft legislation should be in place.
The Malta Council for Economic and Social Development chose to discuss the issue after the White Paper is made public, rather than before, so that it takes the public’s reactions into consideration.
Pensions Working Group
The Pensions Working Group was set up on 1 June 2004 and is constituted as follows:
Chairperson: David Spiteri Gingell;
Members: Joe Ebejer (Perm. Sec. at Ministry for the Family);
Edward Gatt (DG in Family Affairs Ministry); and
Leonard Callus (policy coordinator at the Prime Minister’s Office).
The group’s terms of reference were:
• To review all work carried out by successive administrations on pensions reform;
• To review international trends on issues and solutions provided for pensions reform;
• To identify the challenges facing the nation in securing a pensions system which is both adequate and sustainable;
• To review the current pensions system in terms of retirement pensions though excluding pensions falling within ad hoc occupational pensions systems such as Service pensions, AFM’s, etc
• To submit in terms of the above clause proposals and recommendations for government’s consideration for a pensions system that will secure adequacy and sustainability for future generations;
• To undertake appropriate modelling and simulations on the recommendations presented in the preceding point.
The Working Group presented its report to the Prime Minister on 5 November.
It also requested two outside audits: from the International Social Security Organisation within ILO and from the Management Efficiency Unit for a social impact assessment.
The need for change
1. The adequacy of pensions of future pensioners will be undermined in the coming years. The purchasing power of pensions is being constantly undermined by inflation.
In 1987 the average wage was established at Lm6,750 per annum while the maximum pension was indexed at Lm4,500. This is being constantly eaten into by inflation.
2. Changing demographics are generating pressures on sustainability. With pensions today being on a pay-as-you-go system, a pensioner is being supported by a corresponding working person. But with demographic change, the proportion will change and the more there is demographic change, the more will the system come under pressure.
The underlying principles of change
1. The new pensions system and the nation’s fiscal strategies cannot be assessed independently of each other.
2. Continued prevailing belief or perception that the provision of a pension is the sole responsibility of the state must be challenged.
3. Pension schemes need to be as self-contained and transparent as possible. This process has to be managed strategically.
4. Individuals should have the choice to seek to attain a pension that is beyond the statutory entitlement.
The path to the White Paper
1979: Revolution was wrought in the whole history of pensions. The two-thirds pension system was set up.
December 1997: MCED commissioned Reno Camilleri to write a report. He concluded that the pension system is not sustainable and needed a quick reform. He urged the enlargement of the labour market through increasing the retirement age. He also urged savings, the Second Pillar, which allows people to save. And finally he urged change in the pay-as-you-go system to make the whole system more sustainable.
February 1998: The Forum for a Better Economy, also known as Value 2000, came out with a paper. It refers to the need for a safety net. Every government must encourage self-help and the state, in turn, must guarantee the social net.
August 1998: The Watson Wyatt Ltd report, based on the British experience, was brought to Malta through Middle Sea and Mid-Med bank. It concluded that the system is not sustainable but was against any big bang. The report suggested that retirement age be made higher and insisted on what is now called the Second Pillar, very important from the savings point of view. The report also urged a change in the parameters.
June 2001: The National Committee for Welfare Reform published the Galdes report.
October 2003: The same committee suggested a further report by a committee led by Mr Schembri. It was this report which suggested the setting up of a Health Fund.
December 2003: Finance Minister John Dalli issued a series of guidelines.
March 2004: The World Bank report was completed.
The challenges
The challenges facing the group are:
• The population is aging. In 2004, the Maltese population is estimated at 389,000 and is expected to peak in 2015 when it reaches 394,000. It will then fall rapidly to 333,800 in 2050.
• Birth rates are decreasing. The peak was reached in 1947 with live births standing at 11,612. By 2000 the birth rate had dropped to 4,255 and it has continued to decrease.
• Life expectancy is on the increase. The life expectancy of male children at birth has increased from 55.7 in 1948 to 73.8 in 2000-2008.
• Employment participation has reached 53.7 per cent in 2003, far below the EU target of 70 per cent for 2005.
• Changing gender roles. The current pensions system is modelled on a traditional family pattern where the man is the main breadwinner and the wife is the full-time home carer who is dependent on her husband for income support.
• The economic performance and wealth. The Maltese economy has performed at an average GDP growth at current market prices of 5.8 per cent between 1995 and 2003 with growth over the years 2001, 2002 and 2003 being 4.6 per cent, 3.4 per cent and 1.6 per cent respectively. A pension system that is adequate and sustainable is strongly dependent on the economic performance of the nation and the wealth generated. A weak economy will always struggle to meet the demands of a pensions structure irrespective of the mechanisms put in place to render that structure sustainable to the extent possible.
• Checking for adequacy. The World Bank report concludes that the average pension in relation to the average wage will fall considerably by 2072.
• Ensuring financial sustainability. The World Bank estimates that the deficits will accelerate to 3.5 per cent of GDP by 2015 and to 4.7 per cent by 2030 before levelling off in the future. By 2011 the full 10 per cent government contribution will be insufficient to cover the deficit in pensions.
• Promoting education and lifelong learning. Knowledge and advanced skills will be critical contributors to Malta’s economic growth, standard and quality of life as learning outcomes are transformed into goods and services, greater institutional capacity, a better civil society and an improved investment climate.
• Encouraging savings.
The proposed value system
1. Preventing social exclusion. There should be a minimum pension guarantee that acts as a safety-net against social exclusion. The new pensions system must be supported by a strong compliance regime to safeguard honest and hard-working persons as well as to deter abuse, fraud and misuse.
2. Enabling people to maintain standards of living: The new pensions system should include a Second Pillar Pensions Scheme to increase one’s pension income to enhance the standard of living.
The new pensions system should also provide for a Third Pillar Pensions Scheme which shall be a voluntary option directed to complement the pensions income.
The Second Pillar should be established in terms of a common yet flexible scheme basis. An employee should have the right to choose the provider of the Second Pillar.
The Second Pillar will also apply to the self-employed.
Entry into the Second Pillar provision by private sector insurance firms must be subject to strict entry and performance criteria that must be met at all times.
The Second Pillar contributions paid by the employer must be strictly separated from the said employer; with the pension fund established as an autonomous ‘ring-fenced’ asset.
The Second Pillar should be managed on the prudent person’s principles together with the inclusion of specified limitations to determine the diversification parameters of the investment portfolio and restrictions to limit the private sector insurance firm managing the portfolio from investing in its own assets or subsidiaries.
Measures to provide for financial protection for Second Pillar contributors and pensioners against fraud, misuse, insolvency etc. must be introduced, and should be designed in a manner that places the least burden on the stakeholders.
The annual contributions into a Second Pillar should not be taxed on an annual basis. A maximum tax, established at a fixed percentage rate, should be paid upon the maturity of this scheme.
The Second Pillar should, upon maturity, allow for the option to convert a maximum established part of the individual matured pension fund into a lump sum and with the bulk placed as an annuity to provide for a steady annual pension income over the lifetime of the pensioner.
The Second Pillar should be introduced on a mandatory basis.
The Second Pillar should be introduced in a transitional manner, with the Second Pillar to be first introduced on a voluntary basis as from 1 January 2006.
Indications are that a mandatory Second Pillar should be in place by 2010. Nevertheless, government should in 2009 undertake an assessment to determine whether the prevailing conditions at that point in time are such that necessitate the mandatory introduction of the Second Pillar by 2010.
1. Promoting solidarity amongst generations
The First Pillar must remain as the main mechanism to ensure solidarity. Participation in the First Pillar will continue to be mandatory. Solidarity with generations requires that the First Pillar post-retirement pension scheme is annually built up for all pensioners on an annual uniform basis. The annual uniform basis to be applied should be the Retail Price Index.
2. Raising employment levels
The recommendation to increase the statutory retirement age to 65 years is a positive measure directed to broaden the contribution base as well as to enlarge the pool of labour supply.
The rising of the statutory retirement age to the proposed 65 years should be gradual with women reaching for the 61 year threshold on 1 January 2007. Individuals should be able to opt for a shorter career between the age of 61 and 65 years on the basis of proportionate benefits.
A person may opt to continue to work beyond the new statutory retirement age, whilst enjoying the First and Second Pillars pensions, with no capping on the income earned, subject to the payment of the First Pillar contribution.
3. Adjusting the existing
pension system in a balanced way
The contributions calculation base-line for the First Pillar pension should be retained on the basic salary.
There should be no discrimination between self-employed and employed persons on the time base period upon which a First Pillar pension is calculated, and that such calculation should be based on an average of the 40 year contributions accumulation history and introduced.
4. Rendering the pensions system sustainable in the context of sound public finances
The 2004 Budget declaration that health funding should be separated from social security funding and ring fenced accordingly, and that part of the social security contribution will finance health services should continue to hold.
5. Recognising periodic gaps in labour market participation
The reality of woman’s atypical employment and the resultant entitlement handicaps should be recognised and pension policy instruments that reflect this reality are to be introduced.
A policy instrument that takes into account parental responsibilities in relation to child bearing and child raising periods by providing for the phased crediting of the individual’s contributions as well as the payment of voluntary contributions under established conditions should be positively considered.
The introduction of family friendly measures to enable the balance of work and family life ensure not only increased participation but retention of the women in the labour force should also continue to be reinforced.
Measures need to be taken to remove those elements in the system that encourage periods of inactivity or activity within the informal economy when people need to be attracted to participate in the labour market even if on a part-time basis.
Implementing the proposed change
The proposed new pensions system is designed to, through the:
1. First Pillar, provide a decent standard of living commensurate with one’s contribution record.
2. Second Pillar, enhance one’s standard of living during retirement age.
3. Third Pillar, provide one with the opportunity to invest further to meet the expectations of a particular chosen lifestyle.
Current pensioners
Current pensioners and individuals who will retire prior to the implementation of the proposed changes will not be affected by the recommendations proposed.
Retirement age
The retirement age should be increased to 65 years of age for both men and women. To smoothen the impact of this change, it is proposed that this measure is introduced in a scaled manner, as follows:
a. In terms of women, the pension age will be 61 years of age with effect from 1 January 2007
b. The increase of pension age for all to the 65 years threshold will start from 1 January 2007. Persons holding the following years of age will retire as follows:
55 years of age and over on 1 January 2007: No change
52 years of age to 54 years of age: 62 years
49 years of age to 51 years of age: 63 years
48 years of age and below: 65 years.
First Pillar pension
The minimum pension guarantee should be annually adjusted to assure its value against inflation erosion. This recommendation should be implemented as from 1 January 2007.
The contribution period for the accumulation of the two-thirds First Pillar pension should be from 30 years to 40 years. This recommendation should be implemented as from 1 January 2007. It is further proposed that the measure be introduced in a scaled manner:
46 years of age on 1 January 2007: No change from current accumulation period
40 years of age to 45 years of age: 35 years
39 years of age and below: 40 years.
The base-line for the calculation of the two-thirds First Pillar pension should be changed from the best consecutive three years from the last ten years for employees and from the average of the last 10 years net income for self-employed persons to the average of the 40 year contributions accumulation history for both employees and self-employed. This recommendation should be implemented by 1 January 2007.
A strong compliance regime is put into place in order to safeguard honest and hard working persons as well as to deter abuse, fraud and misuse.
Second Pillar pension
The Second Pillar Pensions Scheme should be mandatory. Nevertheless it should be introduced in a transitional manner with the Second Pillar introduced on a voluntary basis from 1 January 2006.
MFSA and government should work with the private sector financial firms to encourage them to introduce a scheme that will allow owners of life endowment and similar policies to convert such policies into the Second Pillar pension.
Third Pillar pension scheme
The new pensions system should also provide for a Third Pillar, which shall be a voluntary option directed to complement pensions income.
The Third Pillar Pension Scheme should be introduced as from 1 January 2006.
Periodic review
The new pension structure once introduced cannot be considered as etched in stone, immutable to review and change. The pensions structure must be continuously under review so that parameterisation, calibration and changes are undertaken in increments and in an evolutionary manner.
The first periodic structured review of the pensions system should be carried out in 2009.