17 February 2021 1100 hrs 029/2021By the end of 2018, Malta’s pension entitlements stood at 36.4 billion, 290.8 per cent of GDP.Pension Entitlements in Malta: 2018Accrued-to-date liabilities (ADL) represent the present value of pensions to be paid in the future, based on therights accrued until a specific date. These accrued pension rights result from social contributions paid by currentcontributors and remaining pension entitlements of existing pensioners. In simpler terms, it shows what it wouldcost to settle the outstanding pension liabilities if the pension scheme were, theoretically, to be closed.Following the requirements established in both the European System of Accounts (ESA 2010)1 and the Systemof National Accounts (SNA 2008), EU Member States are obliged to report the total pension entitlements accruedby members of employment-related pension schemes or social security pension schemes.Main AssumptionsA real discount rate of two per cent was applied to determine the present value of Malta’s pension liabilities as at end2018. Since an inflation rate of two per cent was assumed, this implies a discount rate of four per cent in nominalterms. These standard assumptions, laid out in Eurostat and the European Central Bank’s Technical CompilationGuide for Pension Data in National Accounts2, were applied by all Member States to ensure comparable results.The wage growth assumptions found in the European Commission’s 2021 Ageing Report3 were used to calculatethe progression of wages, while life expectancy was determined through the latest (2019) EUROPOP assumptions4.ResultsAt the end of 2018, total pension entitlements in Malta amounted to 36.4 billion, equivalent to 290.8 per centof GDP. Most of these entitlements were accumulated by members of the Social Security Pension System, withthese accounting for 33.2 billion, or 91.2 per cent, of the total entitlements. The remaining 3.2 billion, or 8.8per cent, represent entitlements relating to the Treasury Pension System (Chart 1).In 2018, social contributions totalled 2.1 billion, 1.9 billion of which were used to cover the Social SecurityPension System. Furthermore, pension payments of 0.9 billion were disbursed (Table 1), the significant majoritygoing towards recipients of old age type pensions (Charts 2 and 3).Sensitivity AnalysisBesides the standard discount rate of two per cent, other discount rates were considered to examine the sensitivityof the results. In particular, entitlements were re-estimated using discount rates of one per cent and three percent. Assuming a lower discount rate of one per cent causes pension obligations to rise by 27.4 per cent to 46.3billion. Conversely, pension liabilities decline by 19.5 per cent to 29.3 billion when a higher discount rate of 3per cent is assumed (Table 2).International ComparisonMalta’s pension entitlements amounted to 290.8 per cent of GDP in 2018, the 10th lowest percentage among the28 European countries (24 EU Member States, Iceland, Norway, Switzerland and the United Kingdom) for whichdata is currently available. The highest ratio was reported by Luxembourg (528.0 per cent), with Austria (446.0per cent) in second and France (430.0 per cent) in third. In contrast, Denmark registered the lowest share, withtheir obligations amounting to 94.0 per cent of GDP, followed by Bulgaria (178.0 per cent) and Ireland (186.0per cent) (Chart 5) EU Regulation 549 of 2013 of the European Parliament and of the Council of 21 May 2013.Eurostat/ECB Technical Compilation Guide for Pension Data in National Accounts (2020 edition).3See European Commission (2020), “The 2021 Ageing Report: Underlying Assumptions and Projection Methodologies”, InstitutionalPaper 142.4Eurostat population projections.12Kindlyindicate source when quoting from this release.Compiled by: Public Finance UnitTheadvancerelease Statisticscalendar maybeLascaris,consultedVallettaat NationalOffice,VLT 2000T. 356 25997219, E. [email protected] by: Dissemination Unit, National Statistics Office, Lascaris, Valletta VLT 2000, Malta.T. 356 2599 7219 F. 356 2599 7205 s://

Table 1. Pension Entitlements: 2018TreasuryDescriptionSocial Security millionTotalOpening Balance Sheet113,095Pension entitlements31,19834,2921,9072,1080306306Changes in pension entitlements due to transactionsIncrease in pension entitlements due to social201contributions ( 2.1 . 2.4-2.5)22.1Employer actual social contributions2.2Employer imputed social contributions77-772.3Household actual social contributions03543542.4Household social contribution supplements1241,2481,3722.5Less pension scheme 22673,21633,15936,37525.7265.1290.83Other (actuarial) increase of pension entitlements4Reduction in pension entitlements due to payment ofsocial benefitsChange in pension entitlements due to socialcontributions and pension benefits ( 2 3-4)56Transfers of entitlements between schemesChange in pension entitlements due to other0transactionsChange in pension entitlements due to other economic flows78Changes in entitlements due to revaluations9Change in entitlements due to other changes in volumeClosing Balance Sheet10Pension entitlements ( 1 5 6 7 8 9)As a percentage of GDP2Main Assumptions1. Discount rate: 2% real / 4% nominalSource: Pension Technical Guide (2020 edition)2. Wage growth: 1.8% average growth per year (period: 2019-2070)Source: Labour Productivity Growth from the 2021 Ageing Report3. Life expectancy: EUROPOP 2019 population projectionsSource: Eurostat1Equal to the closing stock for the previous year.2As published in NSO News Release 194/2020.Chart 1. Pension entitlements categorised by scheme: 20188.8%TreasurySocial Security91.2%2

Chart 2. Treasury pension payments by type of pension: 20181.7%Old AgeSurvivors98.3%Chart 3. Social security pension payments by type of pension: 20183.2%20.2%Old AgeSurvivorsDisability76.7%3

Table 2. Sensitivity Analysis: Discount Rate ( 1%)2018DescriptionTreasurySocial SecurityTotal million3,87242,47646,348% of GDP131.0339.6370.5 million3,21633,15936,375% of GDP25.7265.1290.8 million2,72226,54229,264% of GDP21.8212.2234.0Discount rate(%) as published in NSO News Release 194/2020.Chart 4. Pension entitlements by discount rate: %discount ratePension Entitlements4Percentage of GDP (right axis)0per cent billion30

Chart 5. Pension entitlements by country as a percentage of GDP: 2018600500400% of GDP300200LuxembourgAustriaFranceSlovakiaUnited elandBulgaria0Denmark100Note: Country publications can be found through the following formation-member-states5

Methodological Notes1. The rows of the supplementary table (Table 29) are defined as follows:1. The opening stock of pension entitlements (equal to the closing stock of the previous year).2.1 Actual social contributions made by employers during the reference year.2.2 Balancing item for defined benefit pension schemes, recording any changes in entitlements not included in anyother rows of Table 29.2.3 Actual social contributions made by employees during the reference year.2.4 Relates to the property income earned, or imputed on the schemes. This is equivalent to the unwinding of thediscount rate, equal to the nominal discount rate for the base year multiplied with the pension entitlementsrecorded at the beginning of the year.3. The imputed transactions of social security pension schemes. This row is used as a balancing item for socialsecurity pension schemes. Therefore, figures may be either positive or negative, with a positive value implyingthat the discount rate is lower than the scheme’s annual rate of return.4. Pension payments made during the year.5. Changes in pension entitlements due to contributions and pension benefits.6. Amount of entitlements transacted from one pension fund to another.7. Changes in entitlements due to any pension reforms introduced during the year.8. Changes in entitlements due to changes made to the key model assumptions, such as the discount rate, wagerate and inflation rate.9. Other changes to the volume of assets that are not classified under row 8.10. Total pension entitlements recorded at the end of the year.2. Glossary:2.1. Accrued-to-date pension entitlements (ADL) amount to the present value of pensions to be paid in futureperiods to members of a pension system as based on their accrued rights.2.2. In Defined Benefit (DB) pension schemes a formula is used to determine the amount of pension benefits to bepaid to each individual, normally taking into consideration years of service, the person’s salary over a certainperiod of time, the age at retirement and the pension indexation rules.2.3. Disability Pensions are benefits paid to persons below the legal/standard retirement age suffering from adisability which prevents them from working or earning above a certain minimum level as legislated.2.4. The Discount Rate represents an interest rate used to convert a future sum of money to its present value.2.5. The Gross Domestic Product (GDP) is the total value of all goods and services produced, deducting the valueof any goods and services used in their production within a certain period in a country.2.6. The Inflation Rate is the rate at which the general level of prices for goods and services is increasing during aparticular reference period.2.7. Old Age Pensions are benefits paid to persons who have retired from gainful employment at the legal/standardretirement age, in return for years of service and/or social insurance payments.2.8. Pension Indexation refers to the method used to update pensions on an annual basis. In Malta’s case,pensions are updated by a sum equivalent to 70 per cent growth in average national wage and 30 per cent of theinflation rate.2.9. The Present Value represents the current worth of a future sum of money.2.10. The Projected Benefit Obligations (PBO) approach takes into consideration future wage increases, obtainedeither through promotions or a general increase in wages, when estimating the ADL of a pension system.2.11. Survivors Pensions are paid to the close relatives (wife or children) of a deceased person who would havebeen eligible to receive an old age pension upon reaching retirement age.3. In 2015, the National Statistics Office (NSO) embarked on a project in collaboration with the Research Centre forGenerational Contracts (RCG) at Freiburg University to compile a suitable model able to estimate Malta’s pensionentitlements for its two pension systems; (i) the Social Security Pension system and (ii) the Treasury Pension system.6

Anonymised data was collected for each of the reference years and inputted into the ADL model. Data used includedcurrent pensioners’ micro data, reflecting each individual’s pension intake categorised by type of pension payment (OldAge, Survivors or Disability), and contributions micro data, where for each individual the number of contributions paidwere categorised by class (1 to 3). Credited contributions given to each eligible person along with data on person’swage history (from 1982 onwards, when available) were also covered in the contributions database.The model takes a forward-looking approach to estimating pension entitlements, making use of each currentcontributor’s historical data to project their future entitlements. No projection is required for current pensioners as theyhave already accrued their full pension rights.4. The present value of future pension rights is determined by applying a real discount rate of 2 per cent to the model, oneof a set of standard assumptions established in the Eurostat/ECB Technical Compilation Guide for Pension Data inNational Accounts and which all countries applied in their calculations to ensure comparable results. Furthermore, theProjected Benefit Obligation (PBO) approach, taking into consideration future wage increases when applying wageindexation rules to pension payment increases, is the selected estimation technique. Other standard assumptions werethe use of the latest (2019) EUROPOP life expectancy assumptions for demography, and the use of the labourproductivity growth forecasts from the 2021 Ageing Report assumptions for wage growth .Pension Technical Guide (2020 4-af17-15da303ee9252074?t 15997512070002021 Ageing on-methodologies en5. Data on pension entitlements should not be used as a time series, since data for different years are based on differentassumptions and are thus not comparable. Therefore, prior estimates should be considered obsolete since these arebased on assumptions which are now outdated.Since Member States are obliged to carry out this exercise every three years, for completeness, the excel version ofthis news release also contains accrued-to-date pension entitlements data for the years 2012 and 2015. Users shouldnote that these figures differ from those reported in past News Releases due to refinements to the model. Again,comparisons between years should be avoided in light of the differing assumptions.6. It needs to be highlighted that ADL is not to be used as an indicator of fiscal sustainability as only entitlements up to thereference year are considered, implying a limited time horizon. Furthermore, all present or future assets of the pensionsystems, which are a crucial element one needs to take into consideration when assessing the long-term sustainabilityof any pension system are being disregarded in the study.7. The System for the Administration of Social Benefits (SABS), held by the Ministry for Family, Children’s Rights andSocial Solidarity, was used to obtain both the pensioners' micro data for the Social Security pension scheme and alsothe contributors’ micro data.8. The Treasury pensioners’ micro data was obtained from the Treasury Department.9. Figures may not add up due to rounding.10. References to this news release are to be cited appropriately.11. A detailed news release calendar is available on: Releases/Release Calendar/Pages/News-Release-Calendar.aspx12. Further details on Malta’s pension system are available ons-for-Malta2016-2070-final.pdf13. Pension entitlements data for 2012 and 2015 may be found on the online version of this news release: Releases/View by Unit/Unit A2/Public Finance/Pages/Pension-Entitlements.aspxHowever, as pointed out previously, the results for different years are not comparable since they are based on differentassumptions14. European statistics comparable to data in this News Release are available /database15. For further assistance send a request or-Information.aspx7

Contact us: National Statistics Office, Lascaris, Valletta VLT 2000 T. 356 25997219, E. [email protected] By the end of 2018, Malta’s pension entitlements stood at 36.4 billion, 290.8 per cent of GDP. 1 E