Published on the Business Today, issue Wednesday, 23 June 2010
It was seven years ago that PKF organized a morning seminar entitled ‘Pensions Reform’. The problem then, was amply discussed by a wide forum of speakers ranging from employers, trade unions, pensioners, the social affairs minister and his opposition shadow. Has anything changed since then? Not much as the shortfall in fact has deteriorated as evidenced by a warning shot from Brussels.
The Finance Minister is in denial about the “painful reforms” requested by Brussels to reign in our deficit and sort out the pension time bomb. The minister condescends that “These comments have appeared regularly in every report on Malta”. It is true to say that the long awaited pension reform resulted in the gradual increase of the retirement age to 65. But will this alone solve the problem? Speaking during a press conference at the end of an EU Summit in Brussels, Dr Gonzi admitted there was still a lot to do for Malta’s public finances to become sustainable over the long-term but emphasised that the government was on the right track to tackle the deficit and debt issues. Still it is not surprising to hear that Malta has been saddled in the same group as Spain, Ireland and Greece but life goes on and the impasse to manage the pension and welfare gap looms relentlessly ahead . So what happens if we ignore the waning signs that our welfare system is not sustainable? Pensioners lament that if we fail to do this now, Malta would pay the price for its disregard of the warning later and much of the blame for this would be placed on the politicians for failing take the bull by its horns .It will not be easy and requires political courage from both political parties to do the right thing. The situation cannot be solved by a patch-work or cosmetic approach. One way or another, the system will break down under its weight.
Data revealed in The Times shows how the cost of retirement pensions last year increased by €25.5 million over 2008 and, according to National Statistics Office figures, they made up 5.6 per cent of GDP, up from the 4.8 per cent two years earlier. All this gloom follows an estimate by a Study group which revealed a shortfall of euro 192 million is needed to prop up the system. But what can a minister of finance do when the State debt touches euro 4 billion and the struggle to trim the annual deficit may mean cutting down on public expenditure and possibly welfare. Miracles can wait but the impossible we shall be tackling today. Still the defiant minister of finance boldly expresses the need for restrain and rectitude. In his words the reforms the Commission is seeking are unlikely to happen in the near future but he pointed out that, when enacting the first part of pension reform, the government had also made a commitment to review pension changes every five years. He confidently tells pensioners that the matter is under control. Is it a sweet consolation that the government is conducting a new study? This covers the introduction of private retirement schemes funded by employers and employees to supplement the present state pension, a measure known as pillar 2 of the pension reform.
Again skeptics will retort that there is no given solution to the missing millions which have been ploughed in various hair brained projects in the past such as the loss making White Elephants and particularly the low balling in the disposal of some of the State assets via the privatization programme. Massive capital expenditure over-runs experienced of late again do not placate pensioners that a wait and see solution is a convincing alternative. Can a partial solution be a levy on super profits earned by Banks as suggested by the Commission?. Who knows in Malta banks have been cushioned from the evil winds of overseas sub-prime crises and by a blanket cover by the Government to depositors . Do they fit as an easy prey to contribute for the pension gap. Prime Minister Lawrence Gonzi said Malta agreed with the levy proposal in principle “as long as it is introduced on a global level.” But this is still a stop/gap solution and will not garner the €192 million needed to plug the hole. Try saving diligently all your working life only to find you have to struggle to live on less than a third of your final salary.
Depressing figures from recent press announcements revealed recently that this is the likely future facing today’s young savers. For the typical young worker at 35 years of age retiring in 2033 the figures are even gloomier. The combined impact of lost earnings and pension contributions from taking career breaks to have children, plus lower salaries on returning to work, mean their pension is likely to be as low as inflation will eat in the present capping system based on the two-thirds scheme. Pensioner’s association states that the real problem is not just pensions but all the government’s expenditure. It regularly calls on government to instill the necessary efficiency, personal accountability and transparency . In short cut waste. How true does his heading sound when considering the austerity measures taken by PIIGS countries. Critics would ask that since the introduction of a compulsory national social scheme in 1979, there has been no dedicated pension reserve funds to buttress any swings in the demographic patterns of workers. This is not a home grown malaise but is also prevalent in Europe. There is a mounting crisis in European pension provision by employers. Critics point out that this calls for a positive response from trade unions, employers and the Government. This crisis has been precipitated by the fact that the contribution cost of providing pensions is rising due to increasing life expectancy and lower expected investment returns.
In Europe, due to the recession pressures many employers are seeking to reduce or at least limit their contributions to pension schemes to maintain competitiveness and this can only mean reduced benefits. Young people may not be able dramatically increase their retirement prospects by making relatively modest additional pension contributions.
State provision has always been limited and is set to become more so as the Government seeks to shift the balance between public and private provision by encouraging employers to start contributing to an occupational or personal pension. This of course is not an ideal time to embark on extra costs when employers are facing a drop in orders. Locally this may have been the underlying reason to delay reforms due to a strong lobby from employers. To conclude an alternative to second pillar schemes may be the introduction of future stakeholders pensions.
These carry simple, low charges (maximum 1% of fund per annum) with additional flexibility for participants to vary contributions or move between schemes without financial penalty alongside attractive tax concessions. In Britain employers with 5 or more employees are obliged to offer access to workers of a stakeholder pension, unless they have their own occupational scheme in force.
Many ask whether in Malta we ought to introduce stakeholder’s pensions for workers who either cannot afford a occupational pension and for whom existing State 2/3rd pension which is currently capped is not adequate for the desired standard of living?
On their part trade unions reply by saying that no efforts should be spared to creat a pension reserve fund backed by solid investments. Another recommendation is that proposed by former finance Minister John Dalli.
This consisted of divorcing contributions collected under the FSS scheme to a separate pool away from expenditure currently allocated to health and welfare. Union activists criticize politicians saying that given the size of the national deficit they should stop financing welfare benefits from contributions intended for pensions. Considering the economic constraints of the state of the Maltese economy one may ask is there what could be the ideal solution. Perhaps PKF ought to organize another Pensions reform seminar?
George Mangion Partner PKF Malta an audit and business advisory firm gmm@pkfmalta.com