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Transfer of Pension Rights

Transfer of Pension Rights. Feb 2012. Mark Musu’ Joe Camilleri Department of Social Security, Malta.

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Transfer of Pension Rights

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  1. Transfer of Pension Rights Feb 2012 Mark Musu’Joe CamilleriDepartment of Social Security, Malta

  2. 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

  3. 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

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

  5. Transfer formula Step 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 Where E = Proportion of year between the transferor’s last birthday and the quotation date AF = The actuarial factor appropriate for the exact age of the transferor at quotation date TV = Cash equivalent transfer value at quotation date Y = Age of transferor in years at their last birthday prior to (or on) the quotation date D = Number of days from transferor’s last birthday to quotation date (zero if quotation date is the transferor’s birthday) PA = Earliest permitted pension age applicable to the pension rights which are to be transferred based on the transferor’s date of birth and number of contributions made to date P = Annual pension the transferor would be entitled to if they were aged PA at the quotation date

  6. 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.

  7. 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

  8. Actuarial factors

  9. Actuarial factors

  10. 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

  11. 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

  12. 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 / 365.25 282 / 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

  13. Interest accrued Now 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 / 365.25 I = €17,680x 5.25% x 194 / 365.25 I = €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

  14. Maltese pension calculation How is the Maltese pension worked out?

  15. 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? Qualifying Criteria for Contributory Pensions

  16. 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

  17. 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

  18. Contributory period on which test is calculated Born 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

  19. 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

  20. 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

  21. 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?

  22. 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?

  23. 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?

  24. 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

  25. 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?

  26. 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?

  27. 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?

  28. 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?

  29. 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

  30. Queries/questions made

  31. Queries/questions made We 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

  32. Queries/questions made How 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!

  33. Queries/questions made Letter 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

  34. Queries/questions made If 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.

  35. Queries/questions made Does 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

  36. Queries/questions made Is 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.

  37. 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

  38. Queries/questions made What 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.

  39. Queries/questions made If 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.

  40. Queries/questions made If 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.

  41. Queries/questions made Does 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)

  42. Queries/questions made Are 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).

  43. Queries/questions made By 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.

  44. 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!

  45. 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!

  46. Department of Social Security Tel: 2590 3000 SPIC: 159 Email: social.security@gov.mt iru.dss@gov.mt url:www.socialsecurity.gov.mt

  47. Thank you for your attention

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