15 October 2003

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Pension reform needs to include private funding - Dalli

- adjustments to retirement age, payable pension and contributions in future pension changes

By Matthew Vella
The seminar on Promoting Adequate and Sustainable Pensions yesterday closed off with speeches by the two ministers spearheading the yet-to-happen pension reform. There were brave words from both Social Minister Lawrence Gonzi, whose ministry organised the seminar in conjunction with the European Commission, and Finance Minister John Dalli, both ministers being tagged as future runners for the PN’s top job once Eddie Fenech Adami takes his leave.
The air of co-operation and news of a report containing proposals on pension reform certainly filled the lull that had previously occupied the hampered progress of the Welfare Commission, set up four years ago by Gonzi to address national welfare issues. Last Saturday, a report with proposals for a wide-ranging reform in pensions and the national health system was presented to the social partners of the commission and government.
Expenditure on pensions in Malta 2002 increased to 4.8 per cent of GDP, still well below to the EU average of 12.7 per cent (as at 1999). Projections see the amount of workers per pensioner decreasing from five to three by the year 2025.
Gonzi yesterday said that within the next three weeks government and the social partners will be presenting their official reaction to the proposals. "Obviously, there will be areas of agreement as well as areas of disagreement. There will be points that will have to be substantiated by actuarial exercises and areas that will not need to be delved into. Generally speaking, it will be an exercise that will provide us with a blueprint of what needs to be done."
Whilst Gonzi believes that pension reform right now is "exciting," as the Nationalist government prepares to pioneer one of the most vast-ranging social reforms in years, "making life easier for future generations", Dalli’s speech, in pointedly read-out fashion, splashed out the indicators of what the public can expect for the future:
"The solutions have to be a hybrid between the present pay-as-you-go system and a funded scheme, with government maintaining a pay-as-you-go safety net covering all Maltese citizens, funded by compulsory contributions."
Dalli said key parameters of the present system would have to be adjusted to render the system "sensible and viable":
"These key parameters are the retirement age, in terms of the length of working life determining the amount of contributions, and the length of pensionable age, and therefore the level of the pension liability." Another key parameter was the calculation of actual pension paid annually, determined by the income taken into account, the level of income and contribution cap, and the number of years used to work out the average on which the income base is then determined. Dalli also gave indications in his speech that as a result of these adjustments, the level of contribution by workers will also be one of the variable adjustments in pension reform.
He has ruled out the "ideally" favourable proposal that pension structures should be based on a funded concept. This option is extremely costly, he maintains, resulting in a diversion of revenue through social security contributions away from the government budget, at the same time retaining the full burden of pension outflow.
Dalli said that in addition to the government safety net, there should also be funded private pensions, which could be written as service pensions by employers in conjunction with their employees, and private pensions drawn by individuals in their personal capacity.
"If this is implemented, we will be turning the concept of the 1979 pensions regime on its head. We will be doing away with the principle that the national insurance pensions should be the maximum if not only pension that one could have. We will be facilitating the practice of individuals to enjoy multi-tier pension flows that will accumulate into a good income."
Both Dalli and Gonzi said the government is fully committed to retain the social safety net, a "commitment that translates itself into a commitment to make the system financially sustainable for the benefit of our future generations", Gonzi said.
"Our reform has to prevent poverty and social exclusion, make sure everyone has the possibility to maintain one’s living standards after retirement, and promote solidarity both within and between generations by making sure that the system adopted are built on principles of social justice."

Copyright © Newsworks Ltd. Malta.
Editor: Saviour Balzan
The Malta Financial & Business Times, Newsworks Ltd, Vjal ir-Rihan, San Gwann
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