Arnold Cassola and a subsequent Times of Malta editorial argued that the difference in pension income based on different Maximum Pensionable Incomes (MPI) between pensioners born on and before 1961 (‘transitional’) and those born in and after 1962 (‘switchers’) constitute an anomaly.
This is not correct. As the chair of the reform group between 2004-2007, which recommended the referenced reforms to the government, I wish this discussion was based on facts.
In March 2004, the government received a dire report from the World Bank on the adequacy and sustainability of the pension system: the adequacy pension replacement rate (APRR), the ratio between the average wage and the average pension income, of persons retiring by 2040, would be less than 20% by 2040, at a higher deficit as a % to GDP. The system would be bust without reform.
The terms of reference of the reform group were strictly related to future generations of pensioners. The policy was that changes to existing pensioners would be achieved through budget measures.
As a reform group, the minimum goal we set was that the pension entitlement for future generations would be an APRR of 54% ‒ equivalent to that of persons retiring between 2005-2020. As a minimum, we set that future pensioners would not be poorer than their counterparts retiring by 2020.
Parametric changes alone – changes in retirement age, pension calculation, qualifying contribution pension, etc. – did not bridge the gap between the World Bank’s 20% APRR for future pensioners and the 54% objective. These resulted in an APRR of approximately 35%.
We sought to bridge the gap between 35% and 54% APRR through an indexation mechanism that would increase the MPI and pension income annually. A balance between adequacy and sustainability of the system was seen to be an indexation of 70% wage inflation + 30% retail inflation. Still, we only achieved an APRR of 45%. Future generations would be poorer by 9% APRR compared to their counterparts retiring by 2020.
Yes, we recommended that pensioners be categorised into three cohorts: exempt – not affected negatively by the reforms; transitionals – affected negatively by varying degrees; and switchers (future pensioners) – affected by the full brunt. Our rationale was:
(a) We were against recommending the big bang approach proposed by the World Bank. We believed such an approach would result in social unrest. We further believed that, over 50 years, much could happen that would allow for measured incremental reforms to be introduced. We proposed a legislative innovation: a trigger in law mandating a systematic review of the pension system every five years.
(b) The pension system parametric reforms proposed were tough. Believing it would be immoral to introduce such reforms on people about to retire (à la Macron), we proposed that people who would be 55 years plus when the reforms were introduced would be exempt. Indeed, we proposed two positive measures for this cohort: [a] pension income increases by the full COLA; and [b] that the cap on working income earned post-retirement is removed to get their full pension and all income earned from employment.
[c] The definition of who constitutes a future generation (switcher) was based on how and over what period the referenced APRR 9% gap was to be bridged. Having exhausted all parametric reform change options, we proposed a mandatory second pension for future generations, made up of a social security contribution of 9%, a hiving off of 1% into a mandatory second pension fund from the 10% employee/employer contribution and a 3% contributory increase each by employers/employees. Switchers were to pay an additional 3% increase in their contribution phased over 10 years. Estimates projected that it would take approximately 20 years for the fund to bridge the 9% APRR gap. This 20-year period also provided a buffer for a fund to recover during an economic/financial crisis.
We were against recommending the big bang approach proposed by the World Bank
[d] Presenting our report in July 2005, the government published its decisions for pension reform on March 1, 2006, effective January 1, 2007. The 20-year reference period for accumulation of the mandatory pension fund was tied to the new retirement age of 65 years. Therefore, switchers were the cohort of persons who were 45 years of age as of 1962.
(c) We further proposed that, concerning transitionals, persons aged between 46 and 54 years when the reforms were introduced would be impacted depending on how close they were to these two poles: less so if closer to 55 and more so if closer to 45 years.
The government accepted some of the recommendations we presented. One recommendation it rejected was the introduction of a mandatory second pension.
The reforms introduced in 2007 do not constitute an anomaly. They will be an anomaly if, all things being constant, future generations have a better pension income than pensioners and transitionals.
This is not the case. Switchers must work till 65 years, accumulate at least 40 years of contributions and meet at least 10 years of contributions out of 40 years to qualify for a maximum pension. Those who earn above the MPI pay a higher contribution yearly. Switchers who always had a salary above the MPI, even adjusted upwards since 2011, in 2023 alone will pay an additional €1,100 in contributions compared to what they paid in 2011.
An anomaly would exist if persons born in and before 1961 were given the same pension income as those born in and after 1962. Current pensioners and transitionals seek the same value of pension income as switchers without experiencing the impacts of the severe reform conditions placed on the latter. This would be both immoral and discriminatory.
The reforms initiated in 2007 are not etched in stone. Indeed, three strategic reviews were carried out (2010, 2015, 2020).
The Musù-led 2020 Strategic Review, of which I was a member, recognising that “an inflation-wage indexation mechanism does have a socially equitable impact for current pensions”, recommended that the collective agreement-based re-assessment for current pensioners and transitionals be replaced by an indexation mechanism based on the following formula:
“Pension increases annually by a % (percentage) of a ratio of 70% wage growth: 30% inflation growth or the full COLA, whichever is the highest.”
I am informed that this recommendation is one of several measures the government included in the Malta Pension Action Plan covering 2021 to 2027.
The 2020 Strategic Review, or earlier ones, for that matter, did not recommend that the government remove the pension caps for permanent secretaries or any other category of workers. A permanent secretary’s contributory pension is similar to that of a transitional or switcher, depending on their birth date.
David Spiteri GingellDavid Spiteri Gingell was chair, pension working reform 2004/2012, and a member, pension strategy group 2013/2021.