Published on the Business Today, issue Wednesday, 21 July 2010
Last Monday PKF Malta hosted the seminar “EU...Urging a Pension Reform” which focused on various topics. The seminar brought the main stakeholders together to discuss and analyse the current situation, to objectively assess pension reform and examine the options that are open to government, unions, and the private sector alike. The event was opened by Hon. Dr Spiteri on behalf of Hon. Dolores Cristina.
David Spiteri Gingell, who was chairman of the Pensions Working Group between 2004 and 2007, described the changes in demographics which will pervasively impact a PAYG Pensions System. He emphasized that Malta’s population is dying because people are living longer and birthrates are declining. According to his presentation based on EU figures the fertility rates declined from 3.5 in 1960 to 1.5 children born per woman in 2008. In contrast the life expectancy was at 80 years in 2008. In 2050, 33% of the females and 31% of the males will be above 60. The AWG total population scenario, which results from assumptions pertaining fertility rates, life expectancy and net immigration shows a decline to 405,000 in 2060. Dependency Ratio falls from 1:4 in 2005 to 1:1.5 in 2050. According to him Malta need to start taking into account the following options: more births, more female participation, immigration, increase retirement age, link retirement age with a longevity index, mitigate demographic risk by complementing the PAYG with a 2nd Pillar.
The Head of the Economics Department of the University of Malta, Dr. Gordon Cordina, was more optimistic and argued that a higher life expectancy, a strong health as well as woman who prefer a career instead of having a child should not be seen as something negative. According to him on balance, the system has not become any more or less affordable, but the risks have increased. At this stage, the emphasis should be on increasing the robustness of the pension system to risks. He suggested the following three possible methods to increase the robustness of the PAYG system: The retirement age should be indexed to life expectancy. Furthermore, increases in pension rates should keep the change in pension expenditure equal to that in contributions, subject to there being no reduction in the purchasing power of pensions. Altering contribution rates, with a possible significant rise in the share of pension expenditure in the economy, is ultimately counterproductive to economic growth and the sustainability of the PAYG system itself. All in all he took the view that the present system should remain but has to be constantly sustained through economic growth and a stronger participation of people in the working life. However, he also outlined that a funded pension system may improve adequacy of the pension system, because a funded system is long-term as it is based on the capital market.
Charles Mangion, MLP Shadow Minister of Finance and Economic Affairs, claimed that there were no substantive changes introduced except for the determining of the minimum pension to 60% of median income, which incidentally is the threshold that demarcates the risk of poverty. After Lehman bankruptcy and the financial crisis the government decided that it would not be wise to introduce a second pillar of the pension, as recommended by the Pensions Working Group. He highlighted that a comprehensive pension reform to improve sustainability and adequacy of the pension system is an urgent matter and cannot be any longer postponed.
Carmel Mallia, speaking for the National Association of Pensioners, complained that in the reform the adequacy of pensions was not addressed. He emphasized that the gap between income from employment and pensions is becoming larger. He outlined that changes in pension systems must be handled with care and that Europe must help to address the growing citizens concerns about the safety of future pensions. A strategy can be defined to put pensions on an adequate and sustainable base including through better use of EU level instruments.
The conference was also attended by representatives of constitutes bodies. Gejtu Vella (UHM) reminded that the reform has an impact on human beings rather than numbers. Victor Carachi (GWU) highlighted that it is difficult for people over 50 to find a job and that consequently those people are pushed to early retirement. Joe Farrugia (MEA) took the view that that a first pillar is not enough to ensure sustainability, but he challenged whether a second pillar is required.
Helga Ellul (Chamber of Commerce, Enterprise and Industry) argued in her presentation “EU Green Paper on retirement age and the local context” that any new system or change to the current Pay-As-You-Go (PAYG) model needs to set in. Local Business community needs to plan ahead and the Malta Chamber would like this matter to be discussed at MCESD level. Accordingly, Ellul linked the discussion in Malta to that launched by the EU with its recent Green Paper. This Paper reviews the European pension framework and focuses on areas like pension mobility across the EU and longer working lives. The main aims are
• ensure adequate incomes in retirement through long-term sustainable pension systems, • achieve the right balance between work and retirement, • facilitate a longer active life, • removal of obstacles to EU-wide employment and to the internal market for retirement products, • ensure transparency, and • safer pensions.
According to Ellul the Malta Chamber agrees with the guiding principles of the Green Paper But details of such a debate should be left to local and national stakeholders. Furthermore, she suggested to encourage immigrants, women, unemployed youths and the elderly to work through flexible work options
David Curmi, from Middlesea Valetta Life Assurance, addressed the third pillar, which is voluntary private pension schemes. According to him there are different ways how the government can help encourage people to save money. The life insurance industry in Malta grew rapidly during the last years: €193 million were collected in 2009, while payouts amounted to €70 million. There are 130,000 saving contracts and total investments amounts to €1,385 million of which 62 per cent are invested in Malta.
Finally, the closure of the event was done by Parliamentary Secretary Chris Said on behalf of the Prime Minister, Lawrence Gonzi.
Julia Otto Law and Finance researcher