Cyprus' hints of progress
Of the 334,000 people registered with Cyprus’ first pillar social security system around 142,500 have some form of additional pension provision.
Some 30,000 of these are employees of central government who benefit from a pay-as-you-go system. The rest are covered by some form of funded or part-funded scheme.
Among them are 7,500 employees of semi-governmental institutions such as utilities and local government institutions. They enjoy a system of defined benefit provision and include Cyprus Telecom with a fund totalling CYP300m (E525m) fund and the electricity authority with a CYP200m fund. Both are 90% funded.
The telecom and electricity utilities have a very cautious investment policy. In total these schemes are worth around CYP800m. Bonds and cash account for 95% of investments. “The reason for this is that most funds are managed by employees and government-appointed board of directors, who are neither sufficiently trained nor have the necessary time to manage a fund,” says Marios Demetriades, manager of Nicosia-based Laiki Asset Management.
In addition to this the Cypriot market fell from a high of 850 to 75 back in the period 1999-2000. “This made people very cautious. But they have to invest more aggressively otherwise there will be deficits for ever. Currently the funds are in deficit to the tune of around 20%; this is due in part to the fall in interest rates. Now they are under pressure from the government to fill the deficit.”
He adds: “The market will expand because the public sector funds cannot continue to put money in cash. The first step will be to secure the capital with structured products.”
Meanwhile the private sector is served mainly by tax efficient defined contribution schemes – so-called provident funds which covered around 95,000 employees in 2001. The investment strategy for these funds is more aggressive than that of the public sector funds.
In 2001 cash deposits represented 51% of the assets; 15% was accounted for by loans to members, government bonds represent 2%, real estate 3% and Cypriot stocks and corporate bonds 27%. Until the accession of Cyprus to the EU in May of last year funds could not invest abroad.
Pension funds are showing an interest in generating more return but are only willing to select conservative investments. “So now they are looking at local government bonds, capital secure and bank guaranteed products,” says Demetriades. “There has been some move to hedge funds but usually with a capital guarantee. We have also seen a limited interest towards foreign equities. There is little interest in foreign bonds due to low yields compared to the high rates offered by local banks and government bonds.”
He adds: “When Cyprus moves over to the euro in 2007, yields from deposit based products will decrease considerably and will fall significantly short of the approximately 8% they need to generate to avoid deficits so there will be a large move towards riskier products eg foreign equities.”
The above may present opportunities for fund managers in Cyprus and abroad.
The main local players are Laiki, CISCO and Hellenic Investments. “There are no foreign players because the market is too small,” says Demetriades.