Despite “not having been comprehensive”, public feedback on pension reform is currently being analysed to be handed over to the authorities for their decision-making, Pensions Working Group chairman David Spiteri Gingell told a breakfast event on Tuesday.
People would be able to pay themselves better pensions if the economy experienced growth
Addressing a Malta Institute of Management gathering themed ‘The future of pensions’ at the Westin Dragonara Resort, he said: “It is very sad to see that our society has not responded aggressively on an issue that concerns everyone. The working group will be putting its analysis of the feedback to the government, and it is then in the government’s hands to take it forward.”
The participants, who included representatives of banks, wealth managers, insurance managers, retirement home firms, overseas pension scheme operators, and legal advisors, heard a detailed presentation on the study and recommendations made by the Pensions Working Group in the report concluded last December. The consultation period ended in August.
A panel of experts later discussed the wider pensions issue.
Mr Spiteri Gingell, chairman of the working group on pension reform between 2004 and 2007 and leader of the sustainability review mandated by the Social Security Act presented to Parliament last year, insisted the entire debate was necessarily anchored in sustainability and adequacy.
He explained how reforms implemented in 2007 broke the cycle of “collapse” of the pensions system. He outlined policy-makers’ limitations as they examined the future of the first pension, the state’s inability to finance a notional defined contribution system, and warned of potential pitfalls as authorities design frameworks for private pensions.
Mr Spiteri Gingell highlighted the inadequacy of the two-tier pension system which resulted in payments of €11,300 – more than €3,000 lower than an average wage – for people paying their maximum contributions.
He also stressed how work carried out between 2004 and 2008 was primarily directed at “breaking the collapse” of the pensions system. Had the 2007 reform not been implemented, financing would have cause the economy a deficit of six per cent. After the mid-2030s, the system would have collapsed under the population’s shrinkage.
“Were they enough?” Mr Spiteri Gingell asked rhetorically about the parametric changes introduced in 2007. “No. The politicians chose part of the recommendations that were put forward to them by the independent working group and enacted only those changes – not necessarily as proposed by the group – relating to the ‘pay as you go’ pension. The recommendations that were put forward as regards the second pension were not adopted and as we stand today, we are still without a third pension framework.”
The working group has called for a radical shift in thinking to that adopted by different administrations over the past 30 years when a string of reports on pension reform had been commissioned.
This latest report has already scored some success as its proposals have been adopted and enshrined in legislation. Among the proposals is a commitment to an incremental process under which the health of the pension system is checked every five years in the context of new realities.
The report’s departure is stemmed in the examination of proposals made in 2007 under the new light of today’s scenario.
Among the key issues was the inadequacy of the first pension. Current contributions to the ‘pay as you go’ solidarity pension only serve to finance the pensions of the previous generation. The financing of pensions for the current working population depended on generations who had yet to enter the labour market.
“The first pension is intrinsically linked to demographics,” Mr Spiteri Gingell explained. “As Malta’s population starts to shrink post-2035, then there can never be a solution that is based on the ‘pay as you go’ pension. It is simple mathematics. If trends like fertility and migrants’ contribution remain the same, then for every pensioner there will be 1.5 workers. You cannot dispute that – it is simple mathematics.
“Can we increase fertility? Do we reconsider our immigration policy? How do we engage women and the elderly in the labour market? There is no solution that is easily forthcoming. Assuming that we remain an aging population, and assuming that we will not be able to reverse our demographics, then one has to consider an option to complement the first pension.”
Mr Spiteri Gingell conceded the options open to policy-makers were very limited and challenging.
The transformation of the ‘pay as you go’ system into a notional defined contribution framework required considerable study and additional expertise. Arising issues included the ability to finance the migration – in the absence of a ring-fenced pension structure, the surpluses that would have been accumulated between 1979 and 2009 are simply not there.
Additionally, today’s contributions go into a consolidated fund that is a considerable source of revenue for the government. How would government be able to make up for that loss of available revenue when contributions begin to be directed to a ring-fenced fund?
Mr Spiteri Gingell pointed out that as the notional defined contribution pension appeared unaffordable the only other alternative was a private pension framework. The recommendations made in 2004, the final report of the Pensions Working Group in 2005, and the report submitted to the authorities last December had revealed there were “important” shifts in the thinking on the management of pension private funds.
“Since 2008, experiences have shown that it is untrue that financial institutions operate on the principle that they will leverage the wealth of a person for his long-term gain. We dispute that. There is considerable literature that comes to that conclusion as well,” Mr Spiteri Gingell said.
Mr Spiteri Gingell insisted the government should retain the responsibility to set up investment principles outside the IOPS Directive. Parameters for protection should be established under the Social Security Act so that people are provided with choices.
A default fund could be introduced as an added alternative to instruments available on the market. Importantly, financial institutions should be obliged to bring this default fund to the attention of customers.
He explained how default funds have been introduced in other countries and the working group had examined Sweden’s structure which had shown some trends. In Sweden, 90 per cent of people joining the labour market and making their first choice of pension fund opted for the default fund. Within five or six years, only about 20 to 30 per cent remained as the rest moved into other instruments presented by the market.
Reiterating his disappointment at the long-drawn debate on the establishment of a third pillar pensions structure, Mr Spiteri Gingell said people were being denied the right of choice to make an investment in their pension. He insisted that whatever the final design of the pension instrument, it had to allow contributors to migrate payments into a second pension seamlessly.
The pensions working group recommended other options to the authorities to complement people’s savings beyond the first and second pension.
Wide-ranging discussions had revealed there were considerable holders of life insurance policies and other insurance contracts. Mr Spiteri Gingell said one of the local insurers will have around €200 million worth of policies maturing by 2015. One of the local banks will have €300 million maturing by the end of the decade. There existed “an excellent opportunity” to fast-track savings for retirement by incentivising people to lock part or all of income from matured life assurance policies.
Not all members of the working group agreed on another option – home equity release. With home ownership standing at 75 per cent savings deposits falling, and mortgages increasing, experts could assume that mortgages were savings in themselves. People at pensionable age risked being illiquid and it was imperative that a regulatory framework was designed to govern the liquidity of capital in property for pensions, particularly to mitigate risks of negative equity.
Mortgages were savings in themselves and people risked being illiquid
The ensuing panel discussion raised some interesting issues, among them a suggestion to make a clear separation between the pensionable age and retirement.
Economist Gordon Cordina stressed the need to discuss the system’s resilience, particularly as in the current economic scenario even literature just five years old risked being irrelevant. He suggested mechanisms be designed to take economic shocks into account.
Dr Cordina also questioned the need for a specific retirement age, arguing people could still work beyond pensionable age, receive their pension while continuing to contribute to the economy. He argued people would be able to pay themselves better pensions if the economy experienced growth.
Matthew Brincat, secretary general of the Malta Association of Scheme Practitioners, said the authorities were receptive to recent conclusions reached by a Finance Malta group on pensions.
Stuart Fairbairn, chief officer, sales management, at MSV Life plc, explained the financial services provider community was aware of the administrative headache feared by the private sector. He said the community was keen to assure employers that the administrative burden would be shouldered by service providers so that firms were able to focus on their business.
Mr Spiteri Gingell highlighted how unless there were real support structures for women to enter or return to the labour market, the numbers would not increase. There were shortcomings in after-school care, particularly operating hours. Additionally, although companies appeared to offer female staff flexibility, difficulties often arose in practice.
Malta Employers’ Association director general Joe Farrugia expressed concern on the potential additional costs to be faced by employers and the portability of pensions when people changed jobs.
Malta Union of Bank Employees council member Felix Galea stressed care had to be taken so that there was a difference between encouraging people to work after turning 65 and forcing them to work beyond that age. People should be given the option to work reduced hours and still receive a pension, he said.