Pensions: Pacing the Reform

In a White Paper released last week, the European Commission made some worthy recommendations with respect to Malta’s pension reform. At the same time, it insisted that Malta steps up the pace of its reforms.

It was encouraging to note that the government has since welcomed the Commission’s White Paper.

In fairness, we openly acknowledged recent measures aimed at reforming our pension system. These were implemented by means of the new Social Security Act, published in 2006, by virtue of which the retirement age was systematically increased to 65. This was a bold step and one which was much needed in terms of the sustainability of our system. In fact, Malta managed to implement this step seamlessly as opposed to other European countries where similar measures were met with violent protests.

The new law provided for other less radical measures that took the form of “parametric changes” to the pay-as-you-go system. The most significant of these kicked in on January 1, 2011 with an annual increase in the maximum pensionable income.

The Malta Chamber has always been at the forefront of national consultation on this matter where, given the sensitivities involved, it has always promoted the national interest. In fact, in the 1990s it published two separate technical studies and has since adopted a pragmatic approach to pension reform. It has done so in recognition of the need and the urgency for reform. It has certainly never stood in the way of the authorities to devise and implement the needed measures.

Within this context, it has consistently emphasised that the authorities prioritise those measures that are neutral to the country’s competitiveness because unless the economy is competitive it cannot grow and if it does not grow we cannot solve our pension dilemma. Besides, if part of the solution to the pensions dilemma is to encourage more women to work, we need to generate more work for women.

As we stated in our 1993 study: “A growing population which is envisaged to live longer and expecting to live well demands a large flow of resources which have to be generated before they can be consumed.”

The issues mentioned in our past studies are still valid to this day and should be seriously considered in the light of the present reform. What the European Commission said in its recent White Paper is, in fact, very much in line with what our Chamber has been insisting for all along.

Among other recommendations, the European Commission said that Malta: should encourage private pensions schemes; complement them with optimised tax and other incentive schemes and stop promoting “early retirement schemes”.

Our Chamber published a concise and direct position paper in reaction to the 2010 Pensions Working Group report last July. Here, the Malta Chamber acknowledged that, as things stand, the numbers do not add up and that the way forward is about continued economic growth and the development of the third pillar.

We also urged the immediate introduction of voluntary (third-pillar) pensions to supplement the present system. We called for fiscal incentives and a sound regulatory system to ensure maximum take-up.

At the same time, we were unable to take a stand with re-gard to the compulsory second pillar because no details have been made known on its pos-sible implementation.

In line with the above-mentioned stand, it is hoped that the implementation of the voluntary third pillar scheme would be successful enough to postpone the need for the compulsory measure that could have serious social and economic implications.

At the time, I also went on record to state that “whilst the reform is underway, conflicting decisions, such as policies facilitating early retirement in the public sector, must at all costs be avoided”. These increase the financial burden on the state and diminish the number of social security contributors.

The Malta Chamber is by no means seeking vindication for the researched advice it has consistently given in the national interest. Neither is it seeking to be critical. As a realistic and responsible organisation, the Malta Chamber is mindful of the urgency of the situation and the grave repercussions of the delay in implementing further reform.

To this end, the Malta Chamber looks forward to the announced Pensions Working Group’s post-consultation report to the government and subsequent decisions. As a key stakeholder, the Malta Chamber awaits a blueprint with clear time-frames and other relevant information in order to ensure that business is in a position to plan adequately.

Among other measures, in the blueprint the Malta Chamber expects an announcement on the third-tier pensions that make voluntary pension schemes possible with attractive fiscal incentives. This is rather straightforward to implement. Besides, they have been repeatedly suggested by the Malta Chamber, the World Bank, the European Commission and the economic and demographic realities we are facing.

The author is president of the Malta Chamber of Commerce, Enterprise and Industry