Pension reform: The next stage

The debate about the pension reform has been going on for years and finally we seem to be reaching the end as the reform finds its place in the country's statute books. However, this is an end to the first part of the reform. The next question is: When will the reform really kick off?

My concern is that the real essence of the reform is being completely ignored. The success of the reform purely depends on increased contributions by the prospective pensioner and/or his employer. Our current pension system is not a funded system. All NI contributions are simply put into one pot from which all welfare payments (including pension hand-outs) are effected. It is therefore quite easy to understand that as the ratio of pensioners/workers tends to increase, the demand of pensions plus other welfare needs cannot, in the long term, be considered as being sustainable if supported by NI payments.

The reform endorses the government's commitment of maintaining a level of a minimum pension, better known as Pillar 1. According to the new rules, the minimum amount of pension paid by the government will address two segments - those above 45 years, who will have their pension pegged to a certain amount, and those younger than 45 years, whose pension would be pegged to a higher amount.

The main novelty of the reform is the introduction of the two supporting pillars (better known as Pillar 2 & Pillar 3).

Pillar 2 will be compulsory and will take the form of contributions by both employer and employee. The difference here (from what we know today) is that under such schemes the contributions would be identifiable and belong to the employer in such a way that, upon reaching pensionable age, the "personal" fund accumulated can then be used as an annuity that gives a stream of regular income over and above the pension received from Pillar 1.

No indication has yet been given on when the Pillar 2 would be introduced. Obviously, the main adverse effect is that on the part of the employer this may mean added costs while on the part of the employee this will result in higher contributions and a reduction in the net pay cheque. This is the real pain we have to accept if we really believe we need to sustain our pensions.

One suggestion that is being put forward is that, rather than initially increasing payments by both employer and employee, an agreed percentage from NI contributions would be directed to the new Pillar 2. The argument is that this would have a neutral effect on both contributors.

At first glance such a proposal seems to be quite appealing but in reality this means that the government will simply have a shortfall in its revenue since Pillar 2 contributions are to be distinctively set aside for the benefit of future pensioners. Such a measure will make a dent in the Exchequer's coffers and the shortfall can only be made good via higher taxes, unless supported by increased economic activity.

It is known that the government is actively studying how and when Pillar 2 could be introduced in such a way that this would have the least negative impact on both employer and employee. The longer it takes for Pillar 2 reform to start off, the smaller the fund for the future pensioner. A person who today is in the late 40s or early 50s age bracket should be very eager for an early start of this part of the pension scheme.

This brings us to the next argument of Pillar 3. This is a completely voluntary scheme under which the employee would be able to make his/her own pension arrangement in an approved scheme so that, upon reaching retirement age, the new pensioner will use the funds accumulated to generate regular annuity payments. In a recent seminar, the Parliamentary Secretary at the Finance Ministry, Tonio Fenech said that there is no intention to start Pillar 3 before Pillar 2 comes into force. My appeal is that the Pillar 3 pension scheme should be introduced without further delay - at least at a capping level of a percentage of the salary. This would immediately allow the prospective pensioner the opportunity to start planning for his/her eventual retirement.

Now that stage one of the reform is complete we must move swiftly to the next stage.

I have a feeling that the arena of stage two of the pension reform will be around the table of the Malta Council for Economic and Social Development. I hope all people sitting at that table would be able to read a simple message: No pain, no gain.