Unravelling the intricacies of Strategic Group proposals

Walking along the convoluted path of pension reform, one gets the feeling after reading the impressive 131-page report published by the Strategic Group that we are again tinkering at the edges. The present administration took early cognizance of the underlying problem by setting a Strategy Group barely two months following its election last March 2013.

Quoting from the media one reads that the formation of a Strategy Group was composed of a multi-disciplinary team constituted of technical persons within the government as well as yet unnamed persons external to it declaring that it preferred to have continuity with two major reports prepared by previous administration in 2004 and 2010 respectively. It also invited previous members, including the chair, of these working groups. 

The pension’s conundrum continues to haunt us when we recall how the conclusions of the 2004 Pension Group pleaded with the previous Nationalist administration to heed its 51 recommendations including various measures such as establishing two task forces, two committees, one commission and no fewer than five inter-ministerial working groups. 

It also suggested the creation of a National Commission to look into introducing mandatory second pillar pensions by 2020, but this was never set up. 

The previous administration recommended a permanent Commission on Financial Literacy and Retirement Income directed to inculcate such a culture of saving for retirement and to strengthen financial literacy within society. The Commission was tasked to complete by the end of 2012 a survey to assess the level of financial literacy in Malta and which assessment should act as a baseline study and a National Strategy for Financial Literacy and Retirement Income.

This Commission was set up in 2012 with the terms of reference to help create a financially educated population. Regrettably, the Commission did not complete these tasks and the Group observed that following the change in government in 2013, this Commission was not reconstituted. The present report is equally boisterous and states inter alia that the 2010 Strategic Review showed that by 2060 the average pension replacement rate (APRR), that is the average level of adequacy, when compared to the average wage, would fall to 45%. So something needs to be done and palliatives will not succeed to stem the seepage in the dyke. 

The latest report reveals how the composition of the population is projected to alter considerably over the period covering 2013-2060 partly due to new trends in fertility rates, life expectancy and migration. The shocking news is that persons of working age 15-64 are projected to decrease from 68% in 2013 to about 56% in 2060. 

So a lower working cohort is expected to be burdened by a larger proportion of the population in retirement age 65+. This is projected to increase from 17.5% in 2013 to 28.5% in 2060 (close to double). One can ponder on the seriousness of the aging population when in about 45 years this is projected to almost double. It is pertinent to observe a cohort of 57,668 pensioners in 2013, received a total of €409 million which reflects a weekly state pension of €118.30 for single and €137.57 for married persons, excluding bonuses and part of the cost of living adjustment. It may come as a surprise that there are currently 22,221 pensioners who receive less than €500 a month, and naturally some pressure has been mounting on the government to make the system more sustainable and for elderly to have a decent pension. The disclosure of the Strategic Group proposals do not come a moment too soon as the prime minister has indicated that the private sector may be invited to participate in the provision of pensions while calming the Employers Association that retirement age and social security contributions will not be raised. This policy has received the acclamation of the vice president of the European Commission, Valdis Dombrovkis who nevertheless reiterated that Malta still needs to address certain challenges such as the long-term sustainability of its pensions system and health care.

The underlying facts of the present system cannot be continuously swept under the proverbial carpet as statistics clearly show that within the EU we have the highest rate of early school-leavers set at 36.8% in 2009 - compared to an EU average of 14.4% - although improvements were registered it still reflects a smaller number of students aged 30-34 with a tertiary level of education or equivalent when compared to the EU average.

Perhaps we have been hoodwinked that the solution is the mandating of the second pillar with a voluntary introduction of a third pillar buttressed with significant tax incentives but alas this has not been announced in the 27 proposals in the Strategic Group plan.

Many hoped that the Study implements a higher statutory retirement age with a comprehensive active ageing strategy and more important to discourage the use of early retirement schemes by government controlled agencies. 

As can be expected the study merely encourages private pension savings. What about the idea to improve  productivity levels attained by government workers now increased by 3000 new recruits. Many attempts were tried in the past to set up service charters but so far no government had the courage to bite the bullet to conduct an independent national skills audit to ascertain what type of skilled workers are needed in the digital years to come (a Simplification Czar has been appointed full time last year with no ripples as yet seen on the surface).

Having briefly reviewed the background statistics of the pension time bomb one cannot reach any conclusion without giving credit to a number of new proposals in the latest report which I found to be innovative. 

To start with, the report recommends that the Government should consider studying the possibility of setting up a Home Equity Bank, financed either through European Union funds or borrowing from multilateral institutions, such as the European Investment Fund. 

Why not trying to speed the introduction of a National Development Bank? More basic education at Local Council levels can be given to savers about financial market instruments improving current low financial literacy and better regulatory control by MFSA over dubious investment schemes that in the past has left pensioners with a burning hole in their investments. 

The much-discussed topic of low percentage of female participation in the job market (51% compared to a EU average of 65%) needs serious consideration. Perhaps more incentives to females are a must to encourage a higher participation so true to form, the Strategy Group recommends that the surviving spouse gets the deceased spouse’s full pension as opposed to the current 5/6th.

The next interesting topic is migration for which the Strategy Group recommends a robust Economic Migration Policy so that action be taken to regularise the status of current immigrants so that these are in a position to positively contribute to Malta’s economy. 

The Group concludes that the Social Security Act is anachronistic with regard to atypical employment practices and it proposes that the necessary reforms are introduced in this regard. No pension reform discussion can be complete without the hobby subject of reducing the black economy. The Group remarks that a faster transition of workers from the shadow to the formal economy has two strategic imperatives with regard to pension reform. The direct benefit is that it increases employment participation rates and, thus, strengthens the sustainability of the pension system. Another contribution is that it reduces the ‘social protection deficit’ that persons in the shadow economy are exposed to and hence renders them eligible for contributory pension support; and, thus, improve adequacy.

To conclude, one tries to pose a solution to the million dollar question on how best to locate and encourage pockets of labour cocooned in the shadow economy and for this task to succeed the Group recommends that  the government establishes, at the earliest possible, a multi-disciplinary team to draw up a holistic strategy. Finally, the journey to reform the pension system is long and arduous but no effort is to be spared by our political leaders to bite the bullet and effectively implement some if not all of the 27 recommendations of the Strategic Group report.