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Pension ‘trap’ for over-37s

2007 reform ‘did not go far enough’

Workers aged 38 and over are likely to be stuck in a pension trap and should be encouraged to invest in existing private retirement schemes, a government-appointed pensions working group has warned.

Pensions take up 21.5% of GDP

The group, in its final report reviewing Malta’s pension system, echoes European Commission fears that it is unsustainable.

It stressed the need for Malta to move away from its reliance on a pay-as-you-go state pension system and begin introducing private pension mechanisms, noting the 2007 pension reform “did not go far enough”.

But it also warned that introducing a mandatory private pension – or second pillar pension – in the current economic climate would create “considerable” social and economic shocks.

A second pillar pensionwould require mandatorycontributions of both employers and employees.

The report suggests a decision on second-pillar pensions be made by the end of the year, followed by an eight-year transition period and the introduction of such a system in 2020.

Although presented to the government last March, the working group report was published yesterday, one day after a Commission report warning that Malta faced dire consequences unless it accelerated pension reform.

In a statement released yesterday, the Justice Ministry assured stakeholders that it would not be implementing any of the working group’s recommendations before consulting with them. The working group report, drawn up after consultation with stakeholders, criticised the government for its failure to establish a voluntary third pillar pension structure.

“The group fails to understand why to date – quasi eight years since the launch of the pension reform White Paper – Malta is yet to introduce a Third Pension supported by a strong fiscal framework,” the report noted.

A third pillar pension is essentially a private pension framework backed by fiscal incentives which an individual can opt to contribute to.

The report argued that a well-thought-out third pillar structure would pave the way for the eventual introduction of a second pillar pension and allow people to eventually migrate to secondpillar structures.

It would also allow individuals currently investing in life insurance and other saving policiesto transfer their savings to athird pillar.

A proposed third pillar pension would lock savings until a person’s retirement date and allow an individual to draw down up to 30 per cent as a lump sum, the report says.

It suggested making third pillar pension contributions and lump sum withdrawals tax-free, thereby spurring people to invest in such a scheme.

Several stakeholders, wary of second- and third-pillar pensions, have argued that pension reform should first seek to maximise workforce participation before introducing private pension mechanisms.

Malta has the EU’s lowest percentage of working women, although it has increased significantly over recent years.

But the working group report has dismissed suggestions that aggressive policies aimed at increasing workforce participation would suffice, saying the existing pension system would still “remain unsustainable”.

The working group has also suggested doing away with the mandatory retirement age, thereby encouraging elderly people to continue to work into old age while allowing them to retire at an established state pension age if they wish to do so.

Following pension reform undertaken in 2007, Malta’s official retirement age will gradually rise to 65 by 2026. But further rises are on the cards, the report warns.

It is categorical in this respect, arguing that expecting the pensionable age not to rise any further in the period to 2060 “is neither realistic nor credible” and suggests linking the pensionable age to a longevity index based on healthy life expectancy.

The report also cites research showing that every year added to the pensionable age leads to pension-related expenditure having one per cent less impact on GDP.

Pensions currently take up 21.5 per cent of Malta’s GDP, with that figure projected to rise by some 10 percentage points over the next 50 years.

Removing the statutory retirement age could be done by giving workers a choice between working longer and retiring earlier, the report suggests.

In such a system, those who opt to work longer could be rewarded with higher pensions to the detriment of those opting to retire younger, who would then receive a pension below the pension value set at the official retirement age.

What if I’m over 38?

The news is fairly bleak. According to the report, you fall into a “vulnerable group” category and are likely to receive a lower pension than others.

This is because you’re caught between the 2007 reform process while at the same time unlikely to be given the opportunity to invest in a mandatory second pillar pension (which the working group suggests introducing in 2020).

The report suggests investing in existing retirement schemes or other long-term saving instruments.

Working group recommendations

The 131-page report comes with 51 recommendations. A number ofthese are reiterated from the working group’s original 2010 analysis of the pension system, while some arecompletely new.

Interested readers can access the report online. But here’s a brief rundown of the key recommendations:

• The report suggests establishing two task forces, two committees, one commission and no fewer than five inter-ministerial working groups.

• Amend the child-rearing credit introduced in 2007 to give it apro-natal bias.

• Establish a National Commission by July to look into introducing mandatory second pillar pensions by 2020

• Introduce a voluntary third pillar pension buttressed by significant tax incentives.

• Continue to phase out service pensions.

• Carry out a national skills audit to ascertain what sort of skilled workers are needed in Malta in the years to come.

• Redefine the legal definition of old-age pensions to close a ‘back door’ loophole allowing some to opt out of the labour market at age 60.

• Link pensionable age to a health-sensitive longevity index.

• Enact legal provisions to safeguard the pension rights of divorcing spouses and cohabiting partners.

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