The government described the deal as providing teachers with their biggest-ever salary raises. Yet teachers were not happy with it, and the Malta Union of Teachers (MUT) has now put a vote on the collective deal on hold. 

The primary issue appears to be the non-impact that this package offers to teacher’s pensions.

To understand the causes of this dispute I will explain a few basic details on how our social security system works; the basis of pensions; and why the deal was structured the way it is, due to employment law.

Understanding social security

In Malta, social security contributions apply to all workers who work at least eight hours in a given week. Each week, 10% of the basic salary is due as a contribution by the employer and employee respectively. There is a minimum contribution of  €21.35 per week and a maximum of €106.46. 

The amount you pay in social security contributions directly relates to the pension that you would receive at retirement. For anyone born from January 1, 1962 onwards, the best “10” years out of the last 40 are taken as a reference for your pension. So if you pay class D contributions for 10 years, you would be entitled to the highest possible publicly provided pension.

Pension workings

Malta’s pension is worked out as 2/3rds of the gross income of the averaged best 10 years, for those born after 1962. To qualify for the full pension, one will also need to have contributed for at least 41 years.

Each year, the maximum pensionable income moves upwards on a set formula. This means if your income is not moving in alignment with this amount, you might end up with a pension that is misaligned with the lifestyle you have today, as the gap between your basic salary and the upper threshold widens.

Equal work for equal pay & public grades

Employment law also specifies that people doing equal work are to be paid equally. Based on the interpretations I was given by the Department of Industrial and Employment Relations (DIER) during a podcast, two people doing the same job, or one of equal grade should be paid an equal basic salary, regardless of their performance or experience.

This is because, according to them they are doing an exactly equal piece of work.

They then suggest that allowances, similar to those used with teachers in this agreement, are used to provide a higher income, to those who differentiate themselves based on experience, qualifications and productivity. 

Since this increase is not part of your basic salary, three things happen.

1. You appear to get more money in your pocket, and could save 10% on social security contribution
2. Your employer also saves this 10% contribution
3. The new raise, or salary difference is completely irrelevant to your pension.

As the current social security system is designed to ignore anything but your basic income, the system is designed to penalise hard-working people.

Overtime hours, extra duties, allowances given for extra qualifications, extra commission for additional sales, bonuses due to KPI or quarterly targets... all these things do not count towards your pension. 

When you’re talking about your public pension, also known as first-pillar pension, there is only one number that counts right now: your basic salary.

Do we expect the system to change?

The current Social Security System has been in place for too long to expect any drastic changes anytime soon.

Any change may also cause a shock amongst the population, with employees seeing a 10% reduction of net income on those allowances, whilst employers see a 10% hike in costs. That is not something one wants to do at a time where inflation is starting to get back to normal values.

There has, however, been a drive towards the possibility of introducing quasi-mandatory workplace pensions. Also known as occupational pensions, these are referred to as pillar 2 pensions, whereby contributions to a private pension are taken right at employment. One would expect an amount to be contributed by both the employer and the employee.

The impact of Pilar 2 pensions and Auto-Enrolment, as these systems are called, was discussed last week during a Networking event organised by FHRD, featuring APS Bank’s Mark Lamb and myself.

What can we do about it?

If you’re an employee and your monthly pay is quite heavy on allowances, you should lobby your employer to start looking at Workplace Pensions. At the very least, that would provide a contribution for those allowances that are not covered by the public pension system.

In doing so, you would receive 25%, up to €750, back in tax credits. Your employer will also benefit from a tax credit for their contributions.

If you’re a business owner or an HR Manager you should start considering workplace pensions as a strategic option to differentiate yourself and provide your employees with a healthy retirement fund. This will enable them to focus on today, knowing that tomorrow will be taken care of.

The Your People First Podcast, with Darran Agius, might be a good starting point if you want to learn more about the subject.

How can the teachers’ issue be resolved?

Based on reports that the pre-tax increase is of €4,000, this could mean that at retirement this would roughly be equivalent to €222.22 a month in reduced pension income (€2,666.66/year).

With a life expectancy of 82.86 years, and rising, the difference in pension due would be around €47,600.

Given the sizable amount, I do not expect teachers to accept the current offer, however, equally the government will not want to change the pay scales across all government roles, which would have massive implications for the cost of running the country.

One alternative is for the government to consider using its very own pillar two pension system. In doing so, it would be leveraging workplace pensions to contribute towards a private pension fund for all the teachers based on their existing allowances.

Should they be invested in a scheme that gives an average 3% return with compound interest, a teacher with 40 years worth of contributions in this new pot will come out with €41,257.26 at retirement age.

Part of this will remain invested and drawn down upon during retirement, meaning the actual return could be higher than that provided through an increase in basic salary reflected in the public pension.

For teachers that may be closer to retirement, given the current system looks only at the best 10 years, some additional contributions or arrangements may have to be made available to contribute to the shortfall.

What we’ve learnt

The current system is unfair to hardworking people, whether you’re a Maltese or EU Citizen, and potentially worse for those third-country nationals who will not garner sufficient contributions.

As an employee, you should be looking at your salary, and better understand what your pension will look like, what is being included and what is not.

As an optimist, I do hope that the powers that be, recognise the importance of securing people’s income throughout their retirement, not merely with political statements and increasing the burden to society at large, but rather by introducing Auto Enrolment at the earliest possible opportunity.

Jonathan Mifsud is the founder and CTO of Buddy