Today, after years of continuous reform going back to 2004, Malta’s state pension system is stronger than ever in terms of its sustainability, but there is still work to be done, especially in terms of financial adequacy, said the former chairman and current member of the government’s Pensions Working Group, David Spiteri Gingell.

Interviewed by The Malta Independent on Sunday on the subject of pensions, Spiteri Gingell explained that in 2004, when the Pensions Working Group began work on reforming it, the scheme was on course to collapse.

This was due to a 27 year period of “abandonment” and “maladministration” between 1979 and 2004.  He explained that, during this period, the pension system remained the same while the demographic face of the island changed around it. Furthermore, said Spiteri Gingell, in that period the maximum pensionable income – which is what defines the adequacy level of Malta’s pension system – only increased once, from Lm6,000 to Lm6,750. 

The government was pushed into initiating a pension reform process when the World Bank reported in 2004 that, without reform, the system would essentially collapse to an adequacy level of around 18 per cent – a far cry from the 66 per cent that Dom Mintoff’s 1979 pension reform had intended. As things happened, the relationship between maximum pensionable income and the average wage was broken when the former was never adjusted to reflect the development of the latter.

Today, that relationship stands at around 52 per cent – an improvement, but still an issue.  Spiteri Gingell says that addressing the adequacy issue is one of the prime points on the Pensions Working Group’s agenda, adding that work had already started through helping those who are most vulnerable.

It has been 15 years since those initial reforms began and the significant question that still stands, on the face of it at least, is quite simple; how sustainable is Malta’s pension system?

Malta’s system is what is called “pay as you go”, meaning that each generation’s pension is paid by the subsequent generation. “This means that you have a very tight relationship between the populations over time”, Spiteri Gingell explains.

Demographically speaking, the country has developed much like many other countries – and the population is, as Spiteri Gingell puts it, no longer sustainable.  National Statistics Office data shows an ageing population whilst the fertility rate is down to 1.4 per cent – a third less than the 2.1 per cent fertility rate needed for a sustainable demography.

The Pensions Working Group found itself in a situation where the population base in employment had to be increased in order to inject more contributions into the pension system.  Spiteri Gingell explains that the ways of doing this are four-fold: extend the number of people remaining in employment after reaching retirement age; increase female employment; extend the number of working years; and promote immigration to strengthen the economy.

For the first means, one of the earliest of the group’s reports recommended that those who reached the retirement age of  61 and wanted to continue working could do so without losing their pension. In terms of female participation, Spiteri Gingell says that, given the cultural standing of the woman as the person who has to take care of the family, a support structure that includes childcare centres and pre-school care had to be created.

Meanwhile, the retirement age has been increased from 61 to 65 years of age for those born after 1962, with those born between 1952 and 1961 (who were between 54 and 46 years of age at the time) being part of a transition phase.  Immigration was the final piece of this puzzle, and Spiteri Gingell explains that he was, and still is, a strong believer in the need to import foreign talent.

“You need to bring in talent – be it in IT, gaming, blockchain, AI or construction – and we said that we have to be clever in exploiting and securing good talent to help develop new sectors until we are in a position to build our own skills and get off the ground”, he said.

What has been the effect of these reforms? Spiteri Gingell describes the impact of initiatives to encourage people to work beyond their retirement age as “pervasive”, saying that this figure had risen from the hundreds to nearly 10,000.  He says that there were also incredibly rapid rates – so rapid that it surprised even him – in female participation, from 28 per cent in 2004 to around 55 per cent today.

Immigration has also increased at a faster than expected rate, to the point that 16 per cent of Malta’s workforce is now foreign.  This does strengthen the pension baseline, Spiteri Gingell explains, namely due to third country nationals.  To qualify for a pension, these third country nationals must – like any local – have 12 years of contributions – ie work for 12 years. The possibility is, however, that many of these foreigners will not spend a full 12 years on the island, meaning that a surplus will accrue, he continues.  Spiteri Gingell notes that it cannot  be said that these people were being cheated to fund the system: after all, they are eligible for free medical care during their stay in Malta. “There is no discrimination, but the likelihood is simply that a lot of people will be transient”, he says.

All in all, this has meant that the revenue that is being earned from National Insurance or social security contributions has increased significantly – by around 30 to 35 per cent. The question is, however, is this sustainable?

Spiteri Gingell says that what is certain is that the system is much stronger than it was in 2004, possibly even stronger than it has ever been before, but he will not be drawn on speculating whether or not it will be sustainable in the long-term.

He explains that he was, in fact, one of the people who had strongly advocated not planning for 50 years into the future, saying that it was much too difficult to ascertain what could happen by then. Instead, he had argued that, every five years, the Pensions Working Group should take stock of the situation, identify what had worked and what had not, look at the reasons behind that and then take a holistic approach and fine-tune things from there.

“If we continue to carry out incremental changes through this intelligent governance, I think that the system will only strengthen”, he says.  “Will it go the full hog? I do not know.  What I do know is that it will start to weaken again the moment we stop and say that we are feeling good, because circumstances can change – and they can change fast”, he concludes.

 

The Gender Pension Gap, the retirement age, understanding the pension, and planning for the future

Sustainability is not the only issue up for discussion in the pensions sector. In fact, earlier this week Equality Minister Helena Dalli and NAPE Commissioner Renee Laiviera touched upon one facet of the pension topic, saying that the gender wage gap would, in the end, result in a gender pension gap that would leave more women at risk of poverty.

“De facto, our pay-as-you-go system is gender discriminatory because the system is based on the social model that there is one person who works uninterruptedly”, says Spiteri Gingell when asked about the potential of this gender pension gap. To attain the full pension, one needs to have 40 years of contributory history which, given woman’s tradition role of raising the family, makes it gender discriminatory, he says.

While the gender pay gap may be more evident in some sectors than others it is, for instance, nearly impossible to have a gender pay gap in the case of a public sector operating with a collective agreement: there are differentiations in how more women than men move onto part-time jobs, Spiteri Gingell says.

This will have an impact on pensions because a part-time job simply pays less, making for a lower contribution and hence a lower pension.

Spiteri Gingell explains that a number of measures have been introduced in this regard, but the biggest one is for child-rearing. Here, women are awarded a four-year credit, by which the government pays the pension contribution on behalf of the individual for every child up to the third one, after which the credit is reduced to two years based on the obligation that the woman returns to the labour market.

A human capital credit – or education credit – has also been introduced, says Spiteri Gingell, which ensures that people who invest in their studies do not receive a lower contributory history because they may enter the labour market later than others. This particularly applies to this topic especially because, statistically, more women graduate from higher education than men.

Another topic worthy of discussion is how much people actually understand the whole pension system and how it works. One thing that people do forget, Spiteri Gingell explains, is that “the pension is designed to give an adequate level of disposable income, but is not designed to give the same level of income as employment.

“What we find is that a lot of people do not know how the pension system works, and thus make wrong decisions during their lifetime that eventually affect their pension income”, he continues. 

One group that Spiteri Gingell singles out as an example of this are the self-employed.  He explains that the contribution of those who are self-employed is taken from their earnings rather than their wage, which means that there is a tendency for the contribution to be seen as some sort of tax. As a result, he continues, many people end up under-declaring their income in order to pay a lower contribution. It is only once these people retire that they realise what has happened, and by then it is too late.

Spiteri Gingell is, however, hopeful that this will change. He says that there is a movement to begin introducing more education on financial literacy and capability and, while this will take time, he can foresee the younger generations beginning to move more towards private investment specifically for their retirement.

This leads on to the final matter: private pensions. What part do these play in the scene? Spiteri Gingell points out that the state pension is not there to replicate people’s pre-retirement lifestyle and earnings. If people want to replicate that, he says, then it is their own responsibility to do so, and private pensions are one important way to go about it.

Legislation on private pensions was only passed recently, and Spiteri Gingell expresses his frustration at this. He says that the system for such legislation had been designed by the working group in his time as Chairman in 2005 and 2006 in tandem with the MFSA – but the government had never adopted it. He laments that eight years have been lost and that the decisions taken back then had left a generation without the golden opportunity to save for their future.

The system currently in place, which allows investors to withdraw 30 per cent  as a lump sum and tax-free whilst then stipulating how the remaining 70 per cent can be withdrawn, is there to incentivise people to saving. That saved 70 per cent will then be used to genuinely boost the person once he/she retires – the true point of having a pension system, Spiteri Gingell concludes.