“The key purpose of pension systems is to protect older people from poverty and to allow them to enjoy decent living standards and economic independence when ageing,” says Deborah Schembri, Managing Director and CEO of STM Malta Pension Services Ltd.

Financial sustainability of pension schemes is the indispensable means to this end, she explains, as pensions affect public budgets and labour supply in major ways, which must be considered in pension policy.

Ms Schembri highlights that the main goals of pension and retirement policies are to provide adequate income in old age while ensuring financial sustainability and maximising employment through incentives in support of stable formal work careers and longer working lives for women and men.

“Employment patterns and pension systems sustainability and adequacy are strongly interlinked. In ageing societies, maintaining a sustainable link between working life and retirement duration and building entitlements to an adequate pension will generally require people to work longer before retiring,” Ms Schembri explains.

“To retain overall pension income at replacement levels similar to those obtainable in the 1990s and 2000s, many people will also have to increase their complementary retirement savings.”

With people living longer and working-age population shrinking, the required increase in expenditure might become unsustainable, she adds. “Pension adequacy will not be guaranteed unless people work more and longer before retiring. Pensions entitlements will have to reflect contributions more closely and be calculated on actuarial bases. Pension reforms can achieve this by moving to career averages as a basis for benefit calculations.”

Pension systems can help optimise labour supply over working life, particularly for older workers, by setting strong work incentives in their entitlement rules and restricting access to early retirement, asserts Ms Schembri.

“Postponing retirement and pension take-up by working longer – and thus contributing and building entitlements for longer – can contribute significantly to simultaneous improvements in the sustainability and adequacy of pensions. Shortening and/or preventing increases in the average time spent in retirement enables countries to free up resources that can be used to improve or maintain the present adequacy of pension benefits or at least limit the extent to which they will reduce,” says Ms Schembri.

Additionally, equal pensionable ages for women and men are an important element in closing the gender pension gap. “Linking the statutory pension age to life expectancy is a good way to reconcile pension system sustainability and adequacy in the context of ageing populations. Knowing that living longer implies working longer in order to finance the pension system provides strong incentives for postponing the actual retirement age, in line with increases in life expectancy.”

However, coping with the challenges posed by ageing populations requires pension reforms that ensure a better balance between contributions and entitlements, reduce early retirement and raise the pensionable age.

“But on their own they are not sufficient. The success of pension reforms based on these factors depends on workplace and labour market measures supporting longer and uninterrupted working careers for both women and men,” says Ms Schembri.

“Such incentives can influence age management practices at work only to a certain degree. Specific policies for older workers on both the demand and supply side of the labour market are also needed, in close cooperation with social partners.”

But in order to enable longer working lives, workers’ health conditions and professional skills need to be maintained as they age. Even for older workers, skills matching and mobility has to be guaranteed, she asserts.

“Flexibility in working arrangements has proved particularly useful in enabling and encouraging workers to extend their working life. The degree of autonomy in work organisation, access to job rotation and the ability to adjust working hours are important measures for improving the work-life balance. However, the focus should not only be on the last phase of peoples' working life,” says Ms Schembri.

She highlights how measures that lower longer-term unemployment among young people and ensure early labour market integration on normal contractual conditions, including social protection coverage, will also contribute to lowering the risks to pension adequacy. “Policies for reducing gender gaps in pay, working hours and career length are, likewise, active means of narrowing the gender gap in pension entitlements.”

As adequate pensions are becoming increasingly dependent on contributory periods, policy-makers in the field of social protection must also take into account those who for different reasons cannot have longer or less interrupted careers.

“Specific measures will be needed to protect those unable to meet the longer contribution requirements against poverty. Such measures would include minimum pensions or other minimum income provisions for older people,” says Ms Schembri. “Some form of crediting of involuntary absence from employment will also be needed to reduce the impact on pension rights caused by considerable periods of illness, unemployment, caring duties, etc.”

She adds that complementary retirement savings are necessary to secure adequate replacement rates in the future. “Supplementary pensions can take the form of occupational pensions, i.e. pension schemes organised at the level of a company or sector and accessed through an employment relationship, or personal pensions, i.e. individual contracts with a pension provider.”

Ms Schembri concludes that supplementary pensions will in fact need to play an ever greater role in maintaining the future adequacy of pensions, in particular where the adequacy of public pensions is expected to deteriorate. "Public policies can promote occupational pension coverage also through mandating (i.e. making them compulsory), auto-enrolment (i.e. compulsory for employers to offer occupational pensions to workers, though the latter may opt out) or collective bargaining, depending on the national context," she asserts.

"Tax and other financial incentives (subsidies, matching contributions) are an important part of the policy mix to develop occupational and personal pensions. In any case, the means used to achieve this will need to be cost effective, safe and transparent."