Pensions: Adequate & Sustainable

I am an engineer. In this profession, knowledge of management is becoming increasingly important. I understand that in order to improve my career I need to enhance my proficiency in this field and I intend to take a year off work to read for a full-time MBA. How will the reforms affect me?
The White Paper states that if Malta is serious in its intent to become a highly developed and competitive knowledge-based economy then it must introduce policy measures that would inculcate a culture of lifetime learning. In this regard the White Paper recommends that the government should introduce a policy instrument that accounts for the crediting of one's contribution record in the event that the person takes a break from his or her work for continuous development, re-skilling or re-training.

Will I have to pay more contributions as a result of the proposed reform changes?
If you are an employee the contribution you pay for your two-thirds pension falls under what is known as a Class I contribution. Under the Class I contribution category you pay a contribution of 10 per cent capped to the Maximum Pensionable Income (MPI) ceiling: which stands at Lm6,750. The employer pays a similar 10 per cent and there is a further state grant of 10 per cent.

If you are a self-employed or self-occupied person the contribution you pay for your two-thirds pension falls under what is known as a Class II contribution. Under the Class II contribution category you pay 15 per cent of the earned/annual income subject to an established minimum and maximum contribution. The contribution payable by the state is equivalent to 50 per cent of this contribution.

The White Paper recommends that the contributions made under the Class I and Class II contribution categories for the two-thirds pension remain unchanged. There is, however, one caveat to this. The White Paper recommends that the MPI increases annually by the rate of inflation. It further recommends that in tandem with such an increase the contributions paid will increase proportionally. The increase to the contribution you will pay here will be 10 per cent on the rate of inflation adjustment to the ceiling of the MPI.

Further to the recommendations on the two-thirds pension the White Paper proposes the introduction of a second pillar pensions scheme. The second pillar pensions scheme will be a new pension that will be directed to induce you to save for your retirement.

The White Paper recommends that the second pillar pensions scheme would be phased as follows: voluntary as from January 1, 2006 and subsequently mandatory as from January 1, 2010.

The White Paper, however, recommends that the final decision for the mandatory introduction of the second pillar pensions scheme should be taken by 2009 following the undertaking of the first strategic review of the pensions system.

The White Paper does not specify the contribution rates for the second pillar pensions scheme. The White Paper proposes that the government should get the MFSA to commission an independent firm to carry out the appropriate actuarial studies in order to identify what the second pillar pensions scheme contributions rates should be.

It is, however, pertinent to underline that the World Bank, in its March 2004 Report, recommended that the contribution to be paid on the second pillar pensions scheme should be two per cent on the basic wage by both the employee and the employer.