Transfer of Pension Rights

Feb 2012

Mark Musu’Joe Camilleri

Department of Social Security, Malta

Following Malta’s accession to the EU in 2004, Malta is under the obligation to transfer Maltese pension rights to the EU pension scheme for persons who were insured under the Maltese system prior to their employment with any of the EU institutions and who request such transfer

In practice, this means that a person may decide to transfer the Maltese pension rights to the EU scheme (transfer in).  All rights acquired, as a result of periods of employment are transferrable

Upon termination of service with an EU institution, a person may also opt to transfer back out of the EU scheme to the national scheme

Background

Background

To fulfil this obligation, an actuarial study was required and in July 2009, the DSS concluded a contract for the provision of such services with the UK Government Actuary’s Department (GAD)

After a number of meetings, provision of substantial data and several exchanges, the UK GAD provided its final report in July 2011 outlining the formula necessary to calculate the cash transfer value of such pension rights

Once we had this report in hand, the necessary administrative procedures were put in place, the required legal instrument (Legal Notice) was drafted and political approval was sought and finally obtained

Background

We are now ready to go and here we are to explain what this means to you!!

Transfer formulaStep 1: E = D / 365.25

Step 2: AF = ( (1-E) x F[Y, PA] ) + ( E x F[Y+1, PA] )

Step 3: TV = P x AF

WhereE = Proportion of year between the transferor’s last birthday and the quotation

dateAF = The actuarial factor appropriate for the exact age of the transferor at

quotation dateTV = Cash equivalent transfer value at quotation dateY = Age of transferor in years at their last birthday prior to (or on) the quotation

dateD = Number of days from transferor’s last birthday to quotation date (zero if

quotation dateis the transferor’s birthday)PA = Earliest permitted pension age applicable to the pension rights which are to

betransferred based on the transferor’s date of birth and number of contributions

made to dateP = Annual pension the transferor would be entitled to if they were aged PA at the

quotationdate

Transfer formula

Transfer values are calculated by multiplying the amount of a contributor’s pension earned as a result of their previous contributions by an actuarial factor, and then allowing for interest to be added on for any delay between the original transfer quote and the date the transfer payment is made.

The actuarial factor is calculated as the amount of money that, if invested, would be sufficient to fund a pension of €1 a year payable for the remaining lifetime of the contributor from retirement age. The actuarial factor also includes allowance for pension increases and the spouse’s pension that is payable to the contributor’s spouse on the contributor’s death.

Transfer formula

The actuarial factor used depends on the contributor’s age and

the earliest age they are entitled to retire at.  In order to

calculate the actuarial factor, assumptions have been made on:

– future pension increases,– the rate of investment return if the transfer value

were invested to fund future pension payments– the expected future lifetime of the contributor

and the contributor’s spouse, and– the proportion of contributors who are married

Actuarial factors

Actuarial factors

Example calculation

Let us consider an example of a contributor who:

was born 1 October 1970 has accrued a pension of €2,000 per annum at the quotation

date has a pension age of 65

In this example the quotation date is 10 July 2011 and the date at which the payment is made is 20 January 2012.

The member’s age at the quotation date is 40 years and 282 days. So:

Y=40 D=282 PA=65 P= €2,000

Example calculation

Then looking up the factors from AF Table for a

member aged 40 with a pension age of 65:

F[ Y=40, PA=65 ] = 8.67

And looking up the factors from AF Table for a

member aged 41 with a pension age of 65:

F[ Y+1 =41, PA=65 ] = 8.89

Example calculation

We can then proceed with the 3 steps mentioned before in order to

calculate the cash equivalent transfer value at quotation date

1: E = D / 365.25282 / 365.25 = 0.7721

2: AF = ( (1- E) x F[PA,Y] ) + ( E x F[PA,Y+1] ) AF = ( (1-0.7721) x 8.67 ) + (0.7721 x 8.89 ) AF = ( 0.2279 x 8.67 ) + (0.7721 x 8.89 ) AF= 1.9761 + 6.8637 AF= 8.9399

3: TV = P x AF TV = €2,000 x 8.9399 TV = €17,680

The cash equivalent transfer value at the quotation date is €17,680

Interest accruedNow we allow for the interest accruing between the quotation date

and the payment date. There are 194 days between 10 July 2011 and 20 January 2012. So:

DP = 194 TV = €17,680

The interest can be calculated as follows:

1: I = TV x 5.25% x DP / 365.25I = €17,680x 5.25% x 194 / 365.25I = €493 (interest accrued between quotation date and payment date)

So the total amount payable on the payment date in respect of the transfer will

be:

2: AP = TV + I AP = €17,680 + €493 AP = €18,173

The total amount payable on payment date is €18,173

Maltese pension calculation

How is the Maltese pension worked out?

Qualifying Criteria for Contributory Pensions

Two Thirds Pension (post-1979 scheme)

Satisfies all statutory conditions

Contribution average (must not be less than 15 per year)

Pensionable Income Any Service Pension?

Retirement age

Born before 1952 – 61 yrs (M) 60 yrs (F)*Born from 1952 to 1955 – 62 yrs**Born from 1956 to 1958 – 63 yrs**Born from 1959 to 1961 – 64 yrs**Born from 1962 onwards – 65 yrs***

* Women may opt to retire at 61 and employer cannot refuse request** May retire at 61 years of age with 1820 (35 yrs) paid/credited conts*** May retire at 61 years of age with 2080 (40 yrs) paid/credited conts

How is the pension worked out?

What contribution average does claimant have? Contributions taken into account are those

paid from age 19 (18 if born after 3/4/1958) to last full year prior to retirement

Carry out contribution test Establish contribution average

IF THE LATTER IS LESS THAN 15 THERE IS NO ENTITLEMENT!

Two-Thirds Pension

Contributory period on which test is calculatedBorn before 1952(last 10 full yrs + best 20 of remaining yrs) = 30yrs

Born from 1952 to 1961(last 10 full yrs + best 25 of remaining yrs) = 35 yrs

Born from 1962 onwards(best 40 yrs of working career) = 40 yrs

This is the weighted average of both contributory periods

Born before 1952 – ((average of last 10 full yrs) + (average of best 20 yrs))/2

Born from 1952 to 1961 – ((average of last 10 full yrs) + (average of best 25 yrs))/2

Born from 1962 onwards – average of best 40 yrs

Contribution average

How is the pension worked out?

How much is the Pensionable Income?

THERE IS A MINIMUM AND A MAXIMUM AMOUNT WHICH DEPENDS ON TWO MAIN FACTORS – MARITAL STATUS & DATE OF BIRTH!

Two-Thirds Pension

EMPLOYED PERSONS

Born before 1952 Average of the highest basic salaries in 3 consecutive years

in last 10 years prior to retirement

Born from 1952 to 1961 Average of the highest basic salaries in 3 consecutive years

in last 11 or 12 or 13 years prior to retirement)

SELF-OCCUPIED & SELF-EMPLOYED PERSONS

Born from 1952 to 1961 Average of the net income in 10 consecutive years in in last

11 or 12 or 13 years prior to retirement)

How is the Pensionable Income worked out?

ALL PERSONS

Born in or after 1962

Average of the highest basic salaries (employed persons) or net income (self-occupied and self-employed persons) in 10 years in 40 yrs)

How is the Pensionable Income worked out?

– Basic salary (employed) – the wage, salary (or part of) on which the social security contribution is paid (excluded are bonuses, allowances, overtime and other remunerations)

– Net income/earnings (self-occupied) – gross profit net of expenses on which the social security contribution is paid

How is the Pensionable Income worked out?

How is the pension worked out?

The rate of TTP is equal to:

Cont. Avrg x 2 x Pensionable Income 50 3

Two-thirds Pension

The rate of TTP is equal to:Cont. Avrg x 2 x Pensionable Income 50 3

E.g.1 One has full contribution average (>50) and a pensionable income of €15,000

TTP = 50* x 2 x €15,000 = €10,000 p.a. 50 3

* If the contribution average is >50 for the purposes of the formula it is deemed as 50

How is the pension worked out?

The rate of TTP is equal to:Cont. Avrg x 2 x Pensionable Income 50 3

E.g.2 One has contribution average of 35 and a pensionable income of €12,500

TTP = 35 x 2 x €15,000 = €5,833 p.a. 50 3

How is the pension worked out?

The rate of TTP is equal to:Cont. Avrg x 2 x Pensionable Income 50 3

E.g.3 One has a contribution average of 14.5 and a pensionable income of….. STOP!

SINCE CONTRIBUTION AVERAGE IS LESS THAN 15 THERE IS NO ENTITLEMENT!

HOWEVER FOR THE PURPOSES OF THE TPR WE STILL CALCULATE PENSION IN CASES WHERE THE AVERAGE IS LESS THAN 15 AS IF THERE IS NO MINIMUM CONT. AVG

How is the pension worked out?

The rate of TTP is equal to:Cont. Avrg x 2 x Pensionable Income 50 3

E.g.3 One has a contribution average of 14.5 and a pensionable income of €3,000

TTP = 14.5 x 2 x €3,000 = €600 p.a. 50 3

How is the pension worked out?

Future increases in MPI– Born before 1952 – will increase by COLA up to

€17,470.30– Born from 1952 to 1961 – will increase by COLA

annually up to €20,964.36 – Born from 1962 onwards – will increase from

€17,115.80 up to €20,964.36 by 2013– Born from 1962 onwards – will increase

annually from €20,964.36 by (70% increase in average wage + 30% inflation) from 2014

Maximum Pensionable Income

Queries/questions made

Queries/questions madeWe note that the Maltese authorities are taking as the date of application not the date of application with the EU institution of the applicant but (presumably) the date when the Maltese Department of Social Security was notified by the PMO. We think the Department should take as a date the date the applicant applied with the institution.

We calculated transfer as at Feb 2012 but we need to revise to calculate transfer as at date indicated to us by relevant EU institution. All applicants will be informed of revised workings in coming weeks

Queries/questions madeHow was the transfer value calculated? We think that, for transparency's sake the formula should be made part of the legal notice.

We see the point but since formula depends on actuarial factors and these need to be reviewed at least every 3 years, it is not feasible to include it in LN – but we have no problem to explain our workings!

Queries/questions madeLetter from Social Security Department refers to a "per annum" pension entitlement. What does this mean?

This means that this is the annual pension the person is entitled to under the Maltese Pension scheme, assuming (a) that present conditions are unchanged, (b) person retired today and (c) based on the contributions paid in the Maltese Social Security Scheme up to the day when the application was made

Queries/questions madeIf one decides to return to Malta after a calculation of the transfer value had been made but no transfer occurred, and starts contributing again to the Maltese national social security scheme, will the final pension calculation under the Maltese pension scheme will take into consideration the additional contributions paid afterwards?

Absolutely! Furthermore, if a person opts to transfer and returns to Malta after some time and starts contributing again, new pension rights in Malta may arise although the transferred contributions will not be taken into account.

Queries/questions madeDoes the Maltese Social Security Act take into account the pension received from the EU pension scheme) when calculating the Maltese pension one is entitled to on reaching pensionable age?

No – since the EU pensions are paid through a social security scheme which does not run parallel to other schemes in the relevant EU Member States, this will not affect entitlement to Maltese pension

Queries/questions madeIs the Maltese national social security pension taxable whether in Malta or elsewhere? Is an EU pension taxable in Malta?

The Maltese social security pension is taxable in Malta. However whether it is taxable in other states or whether EU pension is taxable in Malta, the query has to be made to IRD.

Queries/questions made

At what age will someone who opts not to transfer receive his Maltese pension and EU pension if retirement periods differ?

Each at their respective retirement ages. In Malta (refer to previous slide re retirement age) while in EU institutions it is 63

Queries/questions madeWhat is the minimum number of years of contributions required to benefit from a Maltese pension and how can one check if he has any gaps in contributions before starting work with the EU institutions? How can social security contribution gaps be addressed and by when)?

The minimum number of years required varies according to age. However as explained before, for the purpose of the TPR, no minimum has been taken into account. Any gaps in contributions can be paid at IRD by not later than 5 years in arrears provided that such person was liable to pay contributions during such missing periods.

Queries/questions madeIf after the pension accrued is transferred into the EU pension scheme, but some years later the person opts to leave the EU Institution, will it be possible to transfer out of the EU scheme back into the Malta pension scheme?

Such a person has the right to transfer out from the EU scheme but since the Maltese scheme is not funded, such a transfer is not possible. In such cases, person may transfer into a private funded pension plan of his choice although there are no such schemes currently in Malta.

Queries/questions madeIf a Maltese person who had transferred his pension to the EU pension, retires in Malta is he/she still entitled to benefits for pensioners and the elderly etc (e.g. free medical treatment, reductions etc)?

In theory yes but one has to keep in mind that most of these benefits are means-tested!

Re free medical treatment, such a query has to be made to the Health Authorities although one has to say that social security contributions in Malta cover health care as well.

Queries/questions madeDoes the Department of Social Security make pension payments to SEPA accounts outside Malta? Does this involve any fees for the pensioner?

To date payments are not made through SEPA. These are either made by direct credit in bank accounts (UK residents) or through the Maltese embassies in other EU MS. There are no fees involved for pensioners other than ROE issues (where currency is not the Euro)

Queries/questions madeAre there any minimum thresholds for transferring pension rights to the EU scheme (e.g. 10 years plus working in the Commission as a fonctionnaire)?

There are no minimum thresholds to transfer but you still need to work for at least 10 years to qualify for a pension from EU scheme (apart from transfer).

Queries/questions madeBy when should the transfer request be made (prior to retirement) and what are the procedures?The application form to be filled is made available by the employing EU institution within the first few weeks of employment. Such application is to be filed with the institution. The modalities of applying (including time frame by when one can apply) are best discussed with the institution concerned.

Final considerations

Think twice before deciding to transfer!

If you are not planning to work for at least 10 years with EU institution, we do not advice you transfer as you will not have right to a pension from EU and neither from Malta!

If you are planning to work for more than 10 years there but you are of a certain age and already have entitlement to a reasonable rate of Maltese pension, you may wish (i) not to transfer and in such a case you will be entitled to two pensions from Malta and the EU or (ii) transfer if the additional EU pension this will give you is higher than the Maltese pension!

If you are still young and plan to work in EU for a long time, then it may be worth deciding to transfer although the cash transfer value is not expected to be high!

Final considerations

Think twice before deciding to transfer!

Whatever decision you take, always consult with your EU pensions office first re what the Maltese Cash Transfer Value will be worth in the EU scheme you are member of – at the end of the day this is the most important thing to know before taking a decision!

Department of Social SecurityTel: 2590 3000

SPIC: 159

Email: social.security@gov.mtiru.dss@gov.mt

url: www.socialsecurity.gov.mt

Thank you for your attention