The pension system reforms presented in 2004 by my colleagues and I were multi-faceted. They were designed across multiple axes: (a) parametric changes to the system architecture; (b) mandatory savings in a second pension; (c) flanking policies to optimise labour participation; (d) smoothening the negative impacts of a gender inherent discrimination Pay As You Go (PAYG) system; (e) accounting for fast changing societal behaviour and norms; (f) securing solidarity in what is inter-generational insurance and (g) inculcating financial capability and incentivising investment in voluntary specifically designed pension savings instruments.
The pension journey since 2004 has been one of twists, turns, stops and detours. Many a recommendation, when first presented, was at first not politically taken on board and implemented. Of the 2004 reforms presented to it, the PN administration focused primarily on parametric changes to the system’s architecture. For example, the PN administration completely ignored the recommendations to introduce a framework for incentivised pensions. Today we take these for granted but they did not exist in 2004, dismantled by Mintoff when introducing the 1979 National Insurance reforms. Indeed, I have strong, vivid memories of imploring the PN government that introducing a third pillar framework was a no-brainer. Recently ploughing through various hard disks, I came across numerous memoranda I harried the government with arguing the importance of establishing a critical sustainable mass to drive financial capability education and strategic pension reform. It was only towards the end of the PN in government when a Commission for financial literacy (June 2012) and a Pension Strategy Unit (November 2012), were respectively set up.
Although the reform journey between 2004 and 2020 has not been a straight line, paradoxically enough, when a studied tale shall be told of this journey, one will find a path of reform more than partially sustained by a continuum. This reform continuum directly results in the innovative strategic review trigger I discussed in my previous blog. As those involved in the reform moved from one strategic review to the next, we picked up, improved and re-drawn measures not politically considered when first presented. Thus, for example, the Musu ably driven strategy group set up in 2013 presented recommendations for introducing third pillar pensions, which were politically accepted by the new administration, with the first local products appearing in the market by late 2015 (over 10 years after my colleagues and I had militated for their introduction).
Recently there was a spate of articles discussing our pension system’s health. Undoubtedly, much more could have been achieved, and there are several key reforms which, if introduced, would have resulted in a system that provides better adequacy, equity, intra-generational solidity and a stronger sustainable position than it is today. Be that as it may, when I look back at 20 years of pension reform, I tend to see a glass half full rather than half empty, which is not my normal default position. Perhaps, this stems from the fact that of all who have been involved in pension reforms over the past 20 years, I have been (until September 2021) the only constant.
On the positive side of the balance sheet, much has been achieved. Flanking policies, partially triggered through the reform, were designed, accepted and introduced to optimise active labour market participation. In 2004 less than 30% of females were active; at the time of the 2020 review, over 60%. In 2004, a handful of retirees were actively engaged in the labour market as they were disincentivised due to a cap placed on their pension income if in employment. Today thousands of retirees continue to work, enjoying their full pension and income from employment. In 2004 over 8,000 persons were designated as invalid. Tightening what defined invalidity halved this. Migrant policy flipped from one in 2004, making it impossible to import skilled labour irrespective of the local human capital supply. While fertility has fallen drastically in Malta, (1.1) carefully designed policy instruments have optimised labour market participation, buffering the otherwise damaging impact of the collapse of our fertility rate.
The top-up incentive mechanism, introduced following the 2015 strategic review, allowing persons to increase their maximum pensionable income by up to 23%, has been a resounding success. Research shows that 80% of persons worked up to their “new” statutory retirement age and even up to 65, including those working in tough and hazardous jobs. A series of reforms have been introduced to counter the inherent gender discrimination of the PAYG system – from child-rearing credits as a means of compensating for enforced breaks in careers and hence allowing for higher pensions to a widow receiving the full 6/6th vested successor right, previously set at 5/6ths.
The voluntary occupational and personal pension saving instruments are now introduced, with people incentivised to save specifically for their retirement by a tax credit of a maximum of €750 annually on the contribution paid and a 30% tax-free lump sum on its de-accumulation. Financial capability measures are being strengthened and taking root – whether these are led by Ġemma, set up at the Ministry for Social Policy in 2017 to implement Malta’s first national strategy of retirement and financial literacy, or NGO and private foundations.
The positives I present here are not exhaustive. They are meant to show that over 20 years much has been done to strengthen the pension system. I do not doubt that today’s pension system is at its strongest regarding adequacy, solidarity and sustainability since the National Insurance system was introduced in 1979. Have we reached the pension Shangri-la? Of course not. Is there still much reform to be carried out within the system itself and its determinants? Unquestionably so. With the new 2025 pension review now looming close, I will, in future blogs, discuss reforms which I believe are significant to the further strengthening of the pension system.