"Most households don't start preparing for retirement until they are close to retiring"

Sarah Micallef - 19th November 2017

“Instilling a retirement capability amongst Maltese citizens is one of the more important challenges that needs to be addressed," says Malta Pensions Strategy Group member David Spiteri Gingell.

“Malta’s demographics, like that of advanced societies the world over, are greying,” said David Spiteri Gingell, Member of the Malta Pensions Strategy Group. A direct result of a combination of factors including healthy living, medical technology advancements, and the downsizing to smaller households resulting in a low fertility rate, it begs the question: Is Malta’s current pensions system enough to ensure financial safety for all, given the sizeable demographic change expected over the next 25 years?

“The core features of any pension system are its sustainability and its ability to deliver an adequate pension income for persons in retirement. Both are intrinsically intertwined. A system can be designed to be generous – but ultimately it can only deliver on the adequacy element if it is financially robust: that is, sustainable over generations,” said Mr Spiteri Gingell.

He explains that the pension review process began in earnest in 2004, when a World Bank independent review identified that adequacy of retirement income would fall to less than 20 per cent of average wage by 2050 and that, at the same time, the percentage of pension deficit to GDP will become unsustainable. “Since 2004, significant measures were adopted to give the pension system a more sustainable footing and guarantee the minimum level of adequacy derived from the social security pension,” he continued. He stated that for the first time since 2013, demographics are now projecting an increase in Malta’s population. “EUROPOP 2015 projects that Malta’s population will reach 480,000 by 2060. In 2017, we are well on the way there, with Malta’s population standing at 440,000. This is a direct result of net migration to Malta,” he warned.

To mitigate this, significant structural reforms to the pension system have been introduced to strengthen its sustainability, including increases in the retirement age and increases in the accumulated contributory history. Another aspect worthy of note is the amount of women entering the workforce. “In 2004, less than 30 per cent of women were gainfully occupied. Today, women in employment stand above 50 per cent – whilst female participation within the 35 years and younger cohort is higher than the EU average. This means that future households are likely to have two pensions – one by each household member, doubling the income in retirement compared to contemporary retired households today,” he maintained.

Moreover, Mr Spiteri Gingell emphasised that further significant structural reform measures have been introduced to strengthen the adequacy element of the pension system, including the introduction of credits for child rearing and human capital development; the ability to fill gaps in the accumulation contributory history; linking increases to the maximum pensionable income with wage growth and inflation; increasing the pension income of current pensioners to protect them against the risk of poverty; and the removal of income tax on pension income. This leads us onto the issue of second-tier pensions. Mr Spiteri Gingell explained that a state pension system such as Malta’s social security system is designed to provide dignity in retirement by preventing persons from falling into poverty – it is not designed, however, to provide a person with the same level of income enjoyed in employment during retirement. “Pension systems are designed in a holistic manner – that is, introducing instruments that complement a state pension in the event that a person wishes to bridge the gap between the income earned in employment and the income derived from the state pension,” he affirmed.

There are different instruments countries employ to give their citizens the opportunity to plan and save for their retirement, ranging from private pensions to home equity release. In Malta, a voluntary framework targeting both personal and occupational pensions as vehicles to nudge persons to save for their retirement has been established, giving them the opportunity to enjoy a quality of life in retirement that is higher than they would otherwise enjoy if they were to depend exclusively on their state pension. Yet, despite it being too early to assess the extent of their success in nudging people to save for their retirement, he points to research on similar initiatives overseas which shows that people often don’t understand why they need to plan and save for their retirement, hence failing to take up incentivised retirement saving opportunities.

“People are not always rational in their decision-making processes: often they don’t think and plan for the long term. Saving for retirement is a long-term decision which is adversely affected by behavioural heuristics,” said Mr Spiteri Gingell. “This brings us to the second aspect – education. In January 2017, Government launched a strategy for retirement and financial capability. Work is in progress on a number of retirement and financial capability actions which are planned to be launched in early 2018. A sustained and aggressive holistic programme directed towards building the retirement and financial capability of Maltese citizens will positively influence people’s willingness as well as readiness to plan for their future.”

Despite much having been done since the 2004 World Bank report to strengthen the sustainability of the pension system, Mr Spiteri Gingell asserted that the pressure for reform of the pension system should not be relaxed. “The architecture aspect of the pension system must be under constant review because this is dependent on the changes to the surrounding polity. Changes will continue to occur and the pension system must be sufficiently flexible and agile to adopt and adapt to such changes,” he explained. “Today a person who retires between 61 and 65 years of age is expected, generally, to have a healthy living expectancy of between 15 to 20 years. This is not a short period of time – it’s nearly half the time one spends in the labour market. A pension system will provide dignity in retirement by safeguarding pensioners from being at risk of poverty. It will not provide them with the same level of income enjoyed whilst in employment,” he maintained.

Bridging the gap between income earned in employment and retirement income, and hence accounting for quality of life adjustments, is a personal responsibility, and the fact is that most households do not start preparing for their retirement until they are close to retiring, he lamented. “Instilling a retirement capability amongst Maltese citizens is one of the more important challenges that needs to be addressed: instilling a culture and a responsibility to plan the quality of life one wishes to enjoy in retirement and to take the necessary actions during one’s lifecycle to secure the desired quality of life during retirement.”

A version of this article originally appeared in The Business Observer

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"Most households don't start preparing for retirement until they are close to retiring"