Pension reform or national crisis

The Sunday Times talks to David Spiteri Gingell, who chaired the Pensions Working Group which produced the White Paper Pensions: Adequate & Sustainable

The Architect of the government's proposals on pension reform, David Spiteri Gingell, has warned that unless the country tackles welfare reform without further delay, the issue will sooner rather than later turn into a national crisis. He insisted that a position of no reform can have very serious repercussions.

Talking to The Sunday Times, Mr Spiteri Gingell, who chaired the pensions working group responsible for the White Paper on the reform of the pension system, said he believed the proposed reform was a major issue which cannot be postponed any further.

"We have a major issue in front of us. If the country does not tackle the problem now, the issue will turn into a national crisis sooner rather than later. On the other hand if the situation is managed, the situation may incrementally evolve into a far better state of play.

"I sincerely believe that both in terms of adequacy and in terms of sustainability, a position of no reform can have serious repercussions. In our work we tried to avoid radical solutions. We have worked hard to come up with measured proposals, which although they might not provide easy solutions, on the other hand they are not radical."

Mr Spiteri Gingell, who is also the chief executive of the Malta Information Technology and Training Services Ltd (MITTS), insisted that the status quo was not an option. "It will lead to a situation where revolutionary solutions will have to be implemented at some time," he remarked.

He said that the working group's position was that the continuation of the current pension system as a sole pension structure in Malta was not appropriate. "The present system has an important role to safeguard a decent retirement benefit for all but it cannot remain on its own. Our proposals look at the two-thirds pension as the key instrument to ensure the social inclusion of all future pensioners. At the same time we are saying that the provision for retirement should not be the sole responsibility of the State.

Individuals too are responsible to provide for their retirement, primarily through saving. Thus we are saying that the two-thirds pillar pension is supplemented by another pension instrument that directs people to save for their retirement."

The pensions working group has concluded that reforming the system was essential to safeguard the adequacy of pensions in future and also because changing demographics (declining working population, greater longevity, falling birth rate) are putting pressure on the sustainability of the present system.

The group has come up with a three-pillar system: the first pillar, which is the two-thirds government pension with several proposed changes; the second pillar, where people will be obliged to put some savings into a private pension scheme; and an optional third pillar proposing tax incentives to encourage people to save in other pension schemes;

The proposals include some fundamental changes, among them the gradual increase in the retirement age to 65 and that the contribution period for the accumulation of the first pillar pension to rise from 30 years to 40.

Mr Spiteri Gingell said the pensions working group has also commissioned two separate independent audits to examine their proposals.

"I can confirm that we have approached the International Social Security Association, a body that belongs to the International Labour Organisation, to carry out an audit of our recommendations. That audit is still being conducted and I expect it will form part of the consultation process to take place next year.

"We have also approached the Management Efficiency Unit, the government's consultancy arm, to carry out a social impact assessment of our recommendations. I believe that both conclusions should form part of the consultation process."

Mr Spiteri Gingell said he was hoping that the nation will conduct a serious debate on pensions: "Obviously one should definitely take into account the feedback from the public. Our recommendations are not a fait accompli."

Asked whether he believed his conclusions could end up being shelved along with various other reports prepared by other bodies and consultants over the past decade, Mr Spiteri Gingell replied: "There is a clear departure from previous reports.

"This one has been published. It is also being placed for national consultation and has been released as a White Paper. Whether one agrees or disagrees with the recommendations, one cannot run away from the fact that there has been a public statement highlighting certain issues which require urgent attention.

"While I cannot talk for the politicians, I do believe that there has been a departure here, namely that everything is being made public. The government is saying: let's have a serious discussion and agree on what should be the appropriate solutions."

Asked whether one should be able to opt out of the first pillar, Mr Spiteri Gingell said that option had been studied by the working group: "Some countries allow a choice to one's involvement in the first pillar. Personally I don't think that this is a socially equitable measure. The first pillar should ensure the social inclusion of all citizens. People who are well off or earn a decent salary have a responsibility to support less fortunate citizens. For this reason we have strongly recommended that the social contribution towards the first pillar should continue to be mandatory and people should not have an opt-out.

"Our philosophical thrust is that the first pillar must be the key element of the social guarantee between the state and the individual that everyone would be promised a decent standard of living."

Mr Spiteri Gingell also spoke about the proposed second pillar pension where the individual will be forced to invest in a private pension scheme over and above the two-thirds pension: "Statistics show that over the past 10 years personal savings as against consumption and disposable income have decreased dramatically.

"Our conclusion is that although bank deposits are on the increase, actual individual savings are decreasing and that most people are not saving. That is a major issue and we are of the opinion that the principle of social good demands that we should introduce the second pillar on the basis of compulsory savings."

The World Bank has recommended a contribution of two per cent by the employers and two per cent by the employee of the gross wage towards the second pillar pension scheme.

"We are not saying that these are our recommendations. I believe that the government will be formally asking the Malta Financial Services Authority to come up with various options on how the second pillar should work," Mr Spiteri Gingell said.

He urged the public, the employers' bodies and the trade unions to take an active role in the national debate on the future of pensions.