The ‘fundamental flaw’ in Malta’s pension system

Malta’s pension system has come under scrutiny once again, with management consultant David Spiteri Gingell highlighting what he describes as a “fundamental flaw” in its structure.

Taking to LinkedIn, he pointed out that pension contributions are calculated solely on an employee’s basic wage, excluding allowances, bonuses, and other forms of remuneration – a gap that could have significant long-term implications for retirees.

This, he argues, leads to a significant discrepancy between what employees earn and what their pension income will be upon retirement.

“What does this mean in practice? An individual with a total compensation package of €30,000 but a basic salary of €18,000 will have their pension calculated on two-thirds of €18,000, not €30,000. This drastically reduces their expected pension income upon retirement,” Mr Spiteri Gingell explained.

He further noted that many workers remain unaware of this limitation, often assuming their pension will be based on their entire earnings.

“By the time they realise the reality, it is often too late to make adjustments, leaving them with a pension that is far lower than expected,” he added.

Employer practices and long-term consequences

A common practice among employers has exacerbated this issue. To minimise social security costs, companies often structure salary increases as allowances rather than boosting the basic wage. While this might provide short-term savings for businesses, Mr Spiteri Gingell warned that it creates long-term financial insecurity for employees.

“With the 2025 Strategic Review on Pensions due this year, I am of the considered opinion that one of its core recommendations should be to change this outdated limitation,” he stated.

He argued that social security contributions should be based on an employee’s total compensation, not just the basic wage, ensuring that pensions better reflect actual earnings.

Broader implications of the current system

Patrick Debattista, a financial independence coach, also weighed in on the debate, highlighting additional shortcomings in Malta’s pension system.

He pointed out that older workers face disadvantages due to the lack of catch-up contributions, a mechanism used in countries like the US to allow individuals over 50 to increase their pension savings tax-free.

He also criticised Malta’s private pension framework, which he described as overly reliant on expensive, actively managed funds. “Private pensions in Malta limit choice and often charge high fees. Meanwhile, the UK empowers savers with Stocks & Shares ISAs, offering access to low-cost, passive investments. Why can’t we do the same here?” he questioned.

Additionally, Mr Debattista flagged the exclusion of self-employed individuals from the second pillar pension system, despite other countries offering incentives to encourage their participation. “If we’re serious about pension reform, we should be looking at global best practices and acting decisively on them,” he stressed.

Impact on other employment benefits

The way wages are structured in Malta does not only affect pensions but also influences other employment benefits, as Jeremy Mifsud, Head of Customer Success at Buddy, pointed out.

“A number of companies will only pay the basic rate for leave, or calculate overtime on the basic pay,” he noted. This means that employees who earn a significant portion of their income through commissions, bonuses, or overtime may find themselves at a disadvantage when taking leave or working extra hours.

Mr Mifsud also raised concerns about how this structure affects employees taking maternity or parental leave.

“Take it one step further, overtime and commission income should be included as part of the ‘average wage’ of the employee. This is what the UK system does. In Malta, you have the issue of employees going on maternity leave, for example, and their average income decreases significantly. Then we wonder why parental leave is severely underutilised,” he said.