Fenech explains reasoning on second, third pillar pension options

The Bill on pensions reform was approved in committee by the House of Representatives yesterday after the opposition voted against the clauses raising the retirement age to 65 and the contribution period of National Insurance to 40 years.

During yesterday morning's sitting, Parliamentary Secretary Tonio Fenech said that the government had considered ways how it could introduce second pillar pension schemes with immediate effect before eventually deciding to put them off to a later date.

He said that the government felt second pillar pensions should not be introduced now so as not to increase cost burdens on industry and workers at a time when Malta was trying to improve its competitiveness.

The government had also considered starting off second pillar pensions by investing one per cent of revenue from national insurance contributions made by employers and workers but that would have meant a Lm20 million impact on public finances, which was higher than what the government could afford.

The decision was therefore taken for the issue to be put off until the first review of pensions legislation was made.

Mr Fenech observed that some had asked why the government had not introduced voluntary third pillar pensions, and the associated tax benefits, immediately.

This too was studied by experts, he said, but their advice was that this would not be wise. The argument was that many people may end up committing themselves to third pillar pensions and then would find it difficult to shoulder the burdens of mandatory second pillar schemes once they were introduced.

Therefore second and third pillar pension schemes would be introduced together.

Mr Fenech also referred to workings by Labour MP Karl Chircop who had argued on Tuesday that the pensions reform was socially unfair. He had used examples to show that low and middle income workers in percentage terms would have a small increase in pensions whereas those with a high income would have a more generous increase.

Mr Fenech said that whoever worked out the sums for Dr Chircop did not know the proper formula. Pensions would not be worked out on the basis of the salary declared in the FSS form but to a large extent on the median income calculated across the whole working life, indexed with the cost of living. That meant a higher pensionable income and a higher pension. Thus, the small and middle income individuals who Dr Chircop had used as an example would actually have a pension that was 50 per cent higher in the case of the former and 33 per cent higher for the latter. The high income worker mentioned by Dr Chircop would see his pension rise by 16 per cent.

The reform was therefore clearly socially fair and would bring about sustainability and adequacy, Mr Fenech said.

Furthermore the opposition was trying to make an issue of the fact that one would need to make national insurance contributions for a minimum of 40 years to be eligible for a full pension, rather than 30 years as at present. Yet this was not a problem for most workers because they already worked for more than 40 years, even when the retirement age was 61. It was true that those who started working late, such as students, may not have worked for 40 years before retiring at 61 but these were the sort of people who usually wanted to work on beyond retirement age.

Dr Chircop said the workings he presented on Tuesday had taken into account the arguments made by Mr Fenech. But Mr Fenech had forgotten to take into consideration that the workers would be losing four years of pension because the retirement age was being raised from 61 to 65 and that the workers would be paying National Insurance for 10 more years. So it was not true that the lowest income earner would be getting the highest pension increase.

During the afternoon sitting Solidarity Minister Dolores Cristina said that although the retirement age was being raised to 65 for those workers born on or after 1962, such workers would still be able to retire at 61 if they would have paid national insurance contributions for 40 years (2,080 NI contributions). Those born between 1952 and 1961 were having their retirement age raised gradually but they too would also still be able to opt for retirement at 61. In their case they would have had to pay 1,820 NI contributions (35 years).

People who opted to retire at 61 rather than on the new retirement age would receive their full pension (as long as they paid an adequate number of NI contributions) but they would not be able to have a gainful occupation until they turned 65.

Those born before 1952 would have no change from the current position (retirement at 61 with a minimum of 30 years' NI contributions). No one could retire before 61 with a pension unless there were exceptional reasons, such as invalidity.

Turning to the calculation period for the establishment of the pension rate, Mrs Cristina said that at present the best three consecutive years in the last 10 years were calculated and this system would remain for those born on or before 1951.

For employees born between 1952 and 1955 the calculation would be based on the average of their basic pay in the best three consecutive years in the last 11 years. That would rise to 12 years for those born between 1956 and 1958 and 13 years for those born between 1959 and 1961.

For the self-employed born on or before 1951 there would also be no change from the current system whereas for the transitional age groups the calculation period would also rise to 11, 12 and 13 years.

As for those born on or after 1962 the distinction between employees, self-employed or self-occupied would be removed and in every case the calculation was to be made on the best 10 calendar years, not necessarily consecutive, in the last 40 years of their employment.

Mrs Cristina said the cap on the maximum pensionable income started being raised two years ago when it was linked to the cost of living, and it would continue to rise. For those born on or before 1951 the capping would rise up to a maximum of Lm7,500.

In the case of the transitional group (born between 1952 and 1961), the capping would rise according to the cost of living up to a maximum Lm9,000.

For those born on or after 1962 the capping would rise in terms of the cost of living every year up to 2010 and then up to 2013 it would rise annually by a third of the difference to reach a maximum of Lm9,000. From 2014 the capping would rise on the basis of a new formula based 70 per cent on salaries and 30 per cent on inflation.

Dr Chircop said the opposition agreed with the raising of the capping but had not been given any assurance that National Insurance contributions would not rise.

Dr Galea said that at present the maximum NI contribution was 10 per cent of the maximum pensionable income even if the worker involved had a higher salary. The contribution would eventually be adjusted as the maximum pensionable income rose.

Dr Chircop said there could be workers who would pay more NI as an absolute amount.

Dr Galea said that those who now had a salary which was higher than the national pensionable income paid the highest NI contributions but they also got the highest pensions even though they were not two-thirds of their salary. As the maximum pensionable income rose at an accelerated rate the NI rate would move accordingly. While a contribution of 10 per cent of Lm7,000 was Lm700, 10 per cent of 9,000 was Lm900. But a two-thirds pension of Lm9,000 was more than two-thirds of Lm7,000.

The House also approved an amendment giving women born on or before 1951 the option to continue to work up to 61 instead of 60. At the end of the sitting the House also approved with unanimity an amendment extending eligibility for the Caring Allowance to men who stop working in order to care for a relative at home. This allowance had to date only been available to women.

The Bill was then approved in committee after a division.