Final pension reform report contains revised proposals

The Pensions Working Group has presented calculations on the level of adequacy of the current pension scheme and showed that for those aged over 45 the pension would fall - but not alarmingly so - if there were no reform at all.

However, for those aged 45 or under, the scenario is quite different. They would be getting only 14.1 per cent of their wage by 2050, a figure that is boosted to 38.6 per cent by the revised recommendations presented yesterday by the Working Group, considerably closer to the World Bank target of 40 per cent.

The Pensions Working Group has revised many of the original proposals made last year in the White Paper, taking into consideration much of the feedback received over the past 12 months. However, it stood firm on a number of basic principles, such as the increase of the retirement age to 65 for both genders, albeit with a 61-year option for manual workers.

The government has not yet taken any stand on the proposals.

It has also staggered the entry into the new schemes, into smaller incremental age gaps than those in the White Paper. Those aged 55 or older as at January 1, 2007 will not be affected by any reform, but those who are below that age will fall into different categories, so that only those 45 or younger as at January 1, 2007 will retire at age 65.

They are proposing heavy disincentives for those who wish to retire earlier, although they will be able to do so, as long as they are willing to forfeit six per cent less for each year opted out.

The Working Group did not budge on the principle that people would have to work for 40 years in order to qualify for the two-thirds pension (which would also be phased in according to a person's age as at January 1, 2007). It did back down on the White Paper proposal that the pension would be based on the earnings over the full 40-year working life. It is now proposed that the pension will be based on the basic salary for the best 10 years of the last 20.

It has also raised the Lm6,750 ceiling to Lm9,000 (only for those aged 45 or under) and also established a minimum pension guarantee of Lm2,421. However, the two-thirds pension would no longer be linked to the cost of living index alone but would be weighted - 70 per cent towards a wage index and 30 per cent to the cost of living - to reduce the widening gap between pensioners' income and the income of those still working.

Parents have been given a number of incentives: a two-year credit for each child born. The Working Group is also seeking to incentivise more people to work, especially part-timers, by removing the minimum national insurance contribution, after a cost-benefit assessment.

The Working Group stuck to its proposal to have a mandatory second pillar pension, although no information has yet been presented on fiscal incentives. It is being proposed that once the second pillar fund matures, a maximum of 20 per cent can be taken as a lump sum and 80 per cent minimum as a monthly annuity.

It has proposed that the contribution to the second pillar should be taken from the existing 10 per cent social security contributions currently paid by the employer and by the employee. At the beginning one per cent from each would be taken from this to be put into the Second Pillar Scheme, rising to four per cent by 2025.

Those with life insurances or unit-based savings schemes would be able to "lock" them and have the premiums recognised as payments towards the second pillar, making up for any shortfall in contributions.