Three pillars in Europe

While waiting for confirmation of changes to the pension system in Malta, it is useful to look at what action has been taken throughout Europe.

When governments talk about pensions they invariably refer to three pillars, that is:

i) First Pillar - the State pension provided by governments to all qualifying citizens and paid for from National Insurance contributions;

ii) Second Pillar - typically provided via the employer, normally with mandatory contributions, by redirecting part of the National Insurance contribution, but also allowing voluntary contributions; and

iii) Third Pillar - private voluntary arrangements with added tax incentives.

In Malta we are awaiting confirmation about changes to the First Pillar, proposed to be effective from January 1, 2007. The rules to enable the changes were approved by Parliament on September 27, but the Bills Committee needs to agree the finer details before they may be enforced.

Once this happens, we will provide a full summary of the changes, including an analysis of what the changes will mean to you.

The legislation confirming the changes to the First Pillar also includes the option for the Government to introduce Second and Third Pillar legislation at some point in the future.

We are encouraging the Government to introduce this legislation as soon as practically possible, since individuals must have the appropriate facilities in which to save for whatever level of income they would like in retirement.

Throughout Europe, many governments have already been through this process but are already looking to make further changes. Joaquin Almunia, the EU's Economic and Monetary Affairs Commissioner, recently commented:

"Unless most member states do something serious about deffusing the pension time- bomb, it will go off in the hands of our children and grandchildren, presenting them with a burden that is simply not sustainable.

"This is a problem that needs to be tackled through both a reduction of public deficits and debt, and further reforms of pension, healthcare and long-term care systems."

Note that he refers to 'further' reforms. Many EU members have made changes to their pension system by changing the First Pillar and introducing Second and Third Pillar pensions, but they are already realising that they need to further improve on the work they have started.

Countries such as the UK, Ireland, Denmark and Sweden already have sophisticated and well-established systems, but many newer member states have made great inroads by introducing mandatory Second Pillar pensions (Estonia in 2002, Latvia in 2001, Lithuania in 2004, Hungary in 1997, Poland in 1997 and Slovakia in 2005).

These countries have all established Second Pillar systems by allowing a proportion of the National Insurance contributions to be redirected to an invested pension fund (the amount redirected varies from 2.5 per cent in Sweden to up to 10 per cent in Latvia).

The cost to the individual is therefore neutral, but they can elect to make additional voluntary contributions if they want. This enables individuals the freedom to save and invest for their retirement, appreciating that the state can do nothing more than provide for a basic standard of living for pensioners.

Pension reform will always be unpopular politically but the longer it is delayed the worse the problem becomes.

In our next article we hope to be able to provide you with details of how the changes to the state pension will affect you. If you have a pensions-related question please e-mail us at pensions@middlesea.com.

Mr Fairbairn is a pensions consultant with Middlesea Valletta Life Assurance Company Ltd (MSV), which is authorised to carry on long-term business under the Insurance Business Act 1998 and licensed to provide investment services in terms of the Investment Services Act, 1994, in relation to linked, long-term contracts of insurance. The last article appeared on October 15.