25 November 2004

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Pensions White Paper – Adequate and Sustainable

The White Paper published yesterday dubbed Pensions - Adequate and Sustainable, proposes the setting up of three pillars of pension schemes.
Drawn up by the Pensions Working Group set up by the Prime Minister, the White Paper says the first pillar should be a safety net aimed at guaranteeing a minimum pension, accompanied by a second pillar aimed at increasing one’s pension income to enhance the standard of living, and a third pension scheme which shall be a voluntary option.
Retirement age for both men and women will be raised to 65, according to the White Paper, which suggests that government start implementing the measure gradually from 1 January, 2007.
The pensions working group stated that with the current population standing at around 389,000, government predicts that there will be a peak in 2015, when population reaches 394,600, and then decrease back to the current level in 2025. After that, population shall fall to 369,900 and 333,800 in 2035 and 2050 respectively. With the population increasingly ageing as it decreases in number, the number of workers supporting stock of pensioners will go down drastically.
The contribution period for the accumulation of the first pillar two-thirds pension will be raised from 30 to 40 years in a scaled manner as from 1 January, 2007.
The two-thirds pension shall no longer be calculated over the best three years of the last decade worked in the case of employees, or from the average of the last ten years’ net income for self-employed.
Instead, the average of 40 year contributions accumulated for both employee and self-employed shall be used to calculated the final pension.
The first pillar post-retirement pension income will be annually built up for all pensioners on the annual Retail Price Index.
The proposals allow individuals to continue to work beyond the 65-year retirement age while enjoying the two-thirds first pillar and second pillar pensions with no capping on income earned subject to the payment of the First Pillar contribution.
The ceiling of the first pillar’s maximum pensionable income should be the current maximum pensionable income adjusted annually to reflect inflation.
Eligibility criteria for the current invalidity pensions scheme shall be tightened and the principle of ‘rehabilitation or alternative work before pension’ shall be introduced.
The White Paper notes that in 2002 the number of beneficiaries in respect to invalidity pensions stood at 7,560 – a 12.8 per cent increase on 2001, and a 30.8 per cent increase on 1998.
Part of the social security contributions should finance health services by next year, while non-contributory benefits should be financed through the Consolidated Fund by 2007.
A second pillar pension scheme to increase one’s pension income and enhance one’s standard of living will be mandatory for employees and self-employed. The annual contributions to this scheme will not be taxed on an annual basis but a maximum tax, established at a fixed percentage rate, should be paid upon the maturity of the scheme.
The second pillar scheme shall be introduced in a transitional manner, at first voluntarily from 1 January 2006, the White Paper proposes.
Government commits itself to work with MFSA and the private sector financial firms to encourage them to introduce a scheme that will allow owners of life endowment and similar policies to convert such policies into the second pillar pensions scheme.
The second pillar pension scheme should be in place by 2010. In the meantime government will commission MFSA to set the parameters of the proposed scheme.
The White Paper calls for a debate to determine the elements that are to be taken into consideration when setting the value of the minimum pension against inflation.
“The primary mechanism to increase one’s pension income should be through the introduction of a Second Pillar Pensions Scheme”
Employees will have the right to choose the private provider of the secondary scheme, while self-employed can choose the pension provider or joining up with other self-employed or self-employed associations.
The second scheme contributions paid by the employer must be strictly separated from the said employer; with the pension fund established as an autonomous ‘ring-fenced’ asset.
Individuals will be able to change the provider of their second pension scheme but they will not be able to liquidate the fund.
Annual contributions to a second pension scheme should not be taxed on an annual basis. Instead, a maximum tax established at a fixed percentage rate, should be paid upon the maturity of the scheme.
Upon retirement, an individual may take a lump sum from the second pension scheme, with the bulk of the matured pension fund paced as an annuity to provide for a steady annual pension income over the lifetime of the pensioner.
The White Paper says that a period of voluntary application of the second pension scheme will provide contributors with the appropriate time to gain confidence in the scheme and the regulatory regime established to govern it.
The second pension scheme will be funded by contributions made by both employers and employees.
The mandatory savings contribution will impact disposable income as this will be channelled from savings or consumption today to savings and investment for retirement, the White Paper argues.
The paper argues that to partially mitigate this income on disposable income, MFSA and government should work with private insurance firms to introduce a scheme that will allow holders of life endowment and similar policies to convert them into a second pension scheme. The paper estimates that this policy measure would impact 79,315 holders of life endowment and profits related policies.
The mandatory second pension scheme will also impact the cost of labour, although the increased cost of contribution will be tax deductible given that contributions are a profit and loss item.
A third pillar pensions scheme will be a voluntary option. Contributions to this scheme shall be non-taxable up to a capped limit. Income derived on the maturity of the scheme should be subjected to income tax based on the individuals’ PAYE rate.
“The individual ought to be able to go beyond the restrictions placed by the current pensions system which determines the quantum of the pension received and thus be free to choose to invest to attain a pension that is beyond the statutory entitlement,” the White Paper argues.
The White Paper insists that there should be a regulatory regime that needs to be in place in order to ensure the good governance of the second and third pensions schemes.
The government will either establish a Pensions Authority that would oversee the running of the second and third pension schemes or else regulate the two schemes through MFSA.
The pensions working group behind the pensions reform document was chaired by David Spiteri Gingell, a manager on the Cabinet Committees’ Support Unit at the Prime Minister’s Office, and members Joe Ebejer, Permanent Secretary, and Edward Gatt, Director General at the at the Ministry for Family Affairs and Social Solidarity; and Leonard Callus, policy co-ordinator at the Prime Minister’s Office.

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