Delays in introducing a mandatory private pension will widen the expanse of workers likely to struggle on an insufficient income in old age, the chairman of the pensions working group has cautioned.
The concern for those 38 or over is that they currently have no alternative to a first pension
A report by the working group has suggested the government should decide on the matter by the end of the year, with the aim of having members enrolled in such a second pillar pension structure by 2020.
That might still be too late for workers born before 1974, who would not have enough time left in their working career to benefit from such a private pension scheme. Such workers, the report suggests, should be incentivised to start saving for old age.
In such a scenario, those currently younger than 38 would have enough time to build up enough of a pension nest-egg to live off a decent income in old age.
But that does not mean younger workers should rest easy, working group chairman David Spiteri Gingell told The Times.
“The concern for those 38 or over is that they currently have no alternative to a first pension: there is no incentivised third pension that could complement their pay-as-you-go pension.
“If the introduction of a second pillar pension – or another such alternative – is deferred, younger generations also risk ending up with an insufficient pension.
“For every year there is a delay, the consequences will embrace younger generations – especially if we don’t incentivise people to start saving for old age or introduce a basic voluntary private pension structure,” Mr Spiteri Gingell said.
Those opposed to a second pillar structure argue that it will have a detrimental impact on industry competitiveness as well as workers’ disposable income.
The working group recognised the legitimacy of such concerns, Mr Spiteri Gingell said.
“Because of the challenges inherent in introducing such a structure, the report suggests a national discussion on the issue, with any decisions concerning a second pillar pension being bi-partisan and in accordance with civil society.”
The government has made it clear that it will discuss and seek consensus among all social partners before implementing any of the report’s recommendations.
Released into the public domain two weeks ago, but only communicated to the media last Monday – a day after the European Commission warned Malta its current pension system was unsustainable – the report makes over 40 recommendations to the government.
The Times is informed that two of those recommendations have been given a seal of approval by social partners at the Malta Council for Economic and Social Development as well as Cabinet. They will shortly come into effect.
A pensions strategy unit is being set up within the department of social security, while the next few weeks will see the government launch a financial literacy project – an initiative Mr Spiteri Gingell hoped would “build a culture of savings”.
Economic analyst John Cassar White echoed the working group’s concerns that a mandatory private pension, while necessary, would be a tough economic pill for employers and workers to swallow.
“There is undoubtedly the need for a so-called second pillar structure, but this might not be the right time. The government may find it hard to add financial burdens in the current economic climate.”
But Mr Cassar White felt politicians were failing to grasp the bull by its horns.
“Our political class needs to show leadership, stop debating, understand the urgency of this issue and set a target date for the introduction of a second pillar,” he said.
He also failed to understand why the government had so far failed to introduce a voluntary third pillar structure. It was something that also perplexed the working group, which scolded the government for its procrastination on the matter.
Malta Employers Association director-general Joe Farrugia was concerned by the financial strain a mandatory private pension would cause.
“It would make more sense for Malta to strengthen its existing pension system – by for example increasing the number of working women or pensioners – and incentivising the use of a third pillar.”
The MEA’s position is unlikely to wash with the working group, which in its report categorically stated that while increasing workforce participation was desirable, it alone would not suffice.
National Association of Pensioners president Moses Azzopardi warned against blind acceptance of private pension proposals.
He pointed out that in several countries, second pillar pensions – often linked to stock market performance – had left many people penniless following market crashes.
“If we get a second pillar structure, any capital invested in such a pension must be guaranteed,” Mr Azzopardi said.
Malta’s ageing population is increasingly straining the existing pension system, as the balance between workers and pensioners tips precariously in favour of the latter.
The current working population of 286,000 is expected to shrink by 25 per cent over the next half a century, while the number of pensioners is likely to increase by a massive 50 per cent, reaching 128,000 in 2060.
Concerns about the sustainability of Malta’s pension system have been repeatedly flagged for the past 15 years.
A somewhat prescient 1998 report produced by an international consultancy firm had called for the retirement age tobe raised and a second pillar structure to be introduced.
Since then, innumerable reports – from international institutions such as the EU to rating agencies – have argued that Malta’s pension system needed an overhaul.
The first such step was taken in 2006, when a first stage in pension reform was rolled out.
This saw amendments to the way pensions were calculated as well as the gradual raising of the pensionable age to 65.
bborg@timesofmalta.com