Measures to safeguard tomorrow’s pensioners

The Pensions Working Group notes the editorial of The Times (February 24) on pension reform in Malta (and not other issues raised in the said editorial that are not within the group’s remit) within the context of the recently-launched White Paper by the European Commission.

The White Paper, titled An Agenda For Adequate, Safe And Sustainable Pensions, underlines the importance that, unless Europe delivers on decent pensions now and in the future, millions in Europe will face poverty in old age given that Europe is ageing as people live longer and have fewer children.

The White Paper proposes a number of instruments that EU member states should assess to assure and secure adequate pensions for the future including the creation of better opportunities for older works, development of complementary private retirement schemes, the safety of supplementary pension schemes, et al.

The White Paper is correct in identifying that the above issues, together with longevity growth and the transition into retirement of the baby-boomers, will have far-reaching effects on the adequacy and sustainability of the pension systems of EU member states, including Malta.

The issues underlined in the Commission’s White Paper are not new to the Pension Working Group or, for the matter, to those who study Malta’s pension system.

In the report of the Pensions Working Group, which the government issued as a White Paper in November 2004, the group stated that the framework for the provision of adequate and sustainable pensions required review and strengthening to address clear emerging challenges, ranging from multiple demographic factors, for example, population aging and low fertility with their implications for the labour market to the ensuing public finance pressures.

The White Paper, which was followed by a broad consultation process that led to the submission of the final report in June 2005, presented a comprehensive review of the pensions system and recommendations thereof.

On the basis of the final report, the government undertook the most far-ranging reform of the first pension system, that is the pay-as-you-go (PAYG) national contributory insurance retirement pension, since its introduction in 1979. The reform process was directed towards both the strengthening of the PAYG pension through parametric changes as well as the proposing of policy measures aimed at incentivising increased active participation in the labour market.

Parametric changes to the PAYG pension consisted of comprehensive reform with regard to the so-called switchers group, that is persons who were 45 years of age and under as at January 1, 2007 (and transitional reforms for persons who were aged between 46 years and 54 years as at January 1, 2007).

These included: (i) raising the official retirement age to 65 years of age; (ii) increasing the contributory pension period from 30 years to 40 years; and (iii) establishing the pension calculation mechanism as the best 10 years from the contributory history as against the best three consecutive years from the last 10 years.

These reforms were directed to enhance the sustainability and adequacy of the pension of future generations, resulting in a projected average replacement rate for the PAYG pension of 45 per cent in 2060 against the 18 per cent it would have otherwise been if the 2007 reforms were not adopted.

Policy measures directed to increase active participation included the removal of the cap on income earned for persons who were officially retired but sought continued active participation in the labour market nonetheless; a review of the invalidity pension framework to curb potential abuse; the introduction of pension credits for child rearing; the introduction of tax incentives for women to return to the labour market and an increase in supporting infrastructure such as child centres that are key to facilitating a parent’s continued participation in the labour market.

These measures, a direct outcome of the 2004 pension reform, are starting to render positive results. Over the past years, we have seen an increase in the number of people continuing to work beyond the official retirement age, an increase in the active participation rate of women and a decrease in new claimants for the invalidity pension.

These were no small reforms; reforms that were carried out in a relatively short time from when the White Paper was launched in November 2004 and enacted in the House of Representatives in December 2006.

The far-reaching consultation process underlined its sincerity as the final report presented by the group to the government in July 2005 embraced recommendations made by constituted bodies and civil society. Indeed, the consultation process, as stated by the president of the Malta Chamber of Commerce, Enterprise and Industry in his article Pensions: Pacing The Reform (February 24), established the basis for 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”.

One other very important reform introduced in 2007 was the entrenchment in the Social Security Act of a trigger that would carry out a health check on the adequacy, sustainability and social solidarity of the pensions system every five years. The first trigger was the end of 2010. Indeed, the Pensions Working Group presented to the responsible minister a strategic review that was tabled in the House on December 14, 2010.

The parametric changes to the PAYG pension introduced in 2007 braked what would have turned out to be an accelerated degeneration of the average pension replacement rate to the detriment of pensioners.

Positive as these results have been, the Working Group, in the strategic review, recognised “that the pension system, despite the parametric reforms to the first pension in 2007, will fall short of securing over time an average pension replacement rate that will bridge to the degree possible the quality of life to be enjoyed by a pensioner as compared to that enjoyed during his or her employment – a cardinal objective that a 45 per cent replacement rate to the average wage will not secure even if one had to consider the fact that a pension is complemented by other health care or social security pensioner directed benefits”.

The Working Group concluded that “the risk of demographics will continue to place pressure on the first pension and short-term pro-natal policy action is unlikely to reverse this trend… the participation rate in the labour market in 2010 – which stands at 59 per cent – continues to remain low”.

The strategic review presented recommendations for the consideration of the government with regard to further measures required to strengthen the pensions system.

In March 2011, the Pensions Working Group was tasked to consult with constituted bodies, civil society and the public. The consultation process was completed in August of the same year and the Pensions Working Group will submit a post consultation report to the government next month.

It is the considered view of the group that the feedback and reactions to the strategic review report from all stakeholders presented during the consultation process with regard to continued urgency and focus on the reform of the pension system seem to indicate a convergence of opinions. This does not mean that there is agreement on all of the principles that are to underpin continued reform, let alone the details behind individual reform decisions.

Indeed, the group is aware that in the positions it will present in the post-consultation report it is unlikely that these will be unanimously accepted by all stakeholders, including the government.

The pension system reflects society: young and old; current and future pensioners, employers and employees, etc.

Each of these populations has issues and considerations that are unique to them and which, from their singular perspective, make sense.

The state of play is further compounded by the reality of the times we live in – the continued and sustained global and European economic and financial turmoil and the subsequent ripple effects on Malta’s economy – which have resulted in the delay of reforms proposed by the group. The timing as well as the incremental design and phasing of difficult yet required reforms is of paramount significance so that they do not shock both society and the economy and lead to their respective destabilisation.

A reform of a pension system requires inter- and intra-generational agreement on the trade-offs and compromises that must be embarked upon both with regard to the actual reforms that are to be adopted and also to when and how they will be implemented, together with sustained focus on the implementation of reforms over generations

The Pensions Working Group hopes that its post-consultation report and the resulting important discussion in the media will act as the catalyst that sees key stakeholders – the political parties and civil society – seek and achieve bipartisan and employer-employee common ground on a blueprint for the next steps required in securing the well-being of tomorrow’s pensioners.

The author is chairman of the Pensions Working Group.