Despite a volatile round of EU summits over the past six months, the Mediterranean island of Cyprus is still on course for fast track entry into the EU. Nevertheless, pension reform is moving at the same pace as a tourist’s hillside donkey on the holiday hotspot.
While a revamp of the social welfare system has taken place, a re-appraisal of the pension system still remains low on the agenda of the relevant ministries. The closest it gets to a mention in the government’s Strategic Development Plan for the five years 1999–03 is in a vague reference to “the reform and modernisation of the public sector”.
A fierce debate is going on about the future of the state pension, and the development of a private sector to provide supplementary pensions. This is part of the ongoing reform, which has been in the background during Cyprus’ slow ascent to the lush plains of the EU.
In October 1980, a new Social Insurance Scheme was put into operation. With some minor exceptions the scheme covers all employed and self-employed persons on the island. Non-employed persons may, under certain conditions, join the scheme on a voluntary basis.
A more recent development was the Social Pension Law, which was enacted in 1995 to provide pensions to persons who reach the age of 65 and are not entitled to a pension or other similar payment from any source, provided they satisfy certain residence conditions. The amount of the pension is reviewed every year. Currently it is CYP92.56 per month payable for 13 months in a year. The cost of social pensions is borne by general taxation, and is effectively a pay-as-you-go scheme.
The contribution to the scheme in the case of employees is 16.6% on their earnings up to a maximum of £1.434 per month. Broken down 6.3% is paid by the employee himself, a similar amount by the employer and 4% out of the General Revenue of the Republic.
The problem for the government is that with life expectancy increasing, the scheme is beginning to buckle under the weight of both expectation and the longevity of its members. Although it is not unusual for a Cypriot to boast two or three insurance policies, most still believe that pension provision should come from the state.
Recently trades unions and the government have been meeting to assess what can be done to prevent a collapse of the scheme. The government has suggested changing retirement ages, while the trades unions have considered whether or not monies held by the government should be invested wisely. Unfortunately, the speculative nature of the Cyprus Stock exchange worries both sides, and that solution does not look viable.
Eftychios Habjighriscodoulou at the Ministry of Social Affairs says the government is hopeful that some steps will be made soon. “There are ongoing discussions over whether the government should be allowed to invest these public funds.”
Jainnakis Lazrou at KPMG in Cyprus says: “At the moment for most Cypriots the state pension is paramount, but we have some new products provided by insurance companies, which are becoming more popular, as supplementary pensions. Meanwhile company occupational pensions are rare, but reforms of the tax system may change that.” He also believes that the government may be forced to encourage opt out of the state system to avoid a crisis. “The unions and the government remain some distance apart on retirement age and the investment of the fund, and increases in contribution, but both are clear that reform is essential. In particular the unions would like to see the removal of the limit on contributions, in order that the better off should contribute a higher proportion of their income to the general fund.”
The major insurance companies were a little disappointed with the uptake of the private schemes last year, but Lazrou believes that if the government gives a tax incentive these schemes will prove more popular. Similarly, occupational pensions are unlikely to take off without a fiscal carrot for the companies.
A provident fund similar to that enjoyed by state employees is also available to bank workers, and this provides a lump sum on retirement. This is not the model that the government has in mind for occupational pensions. Emily Hadjinicolaou of Watson Wyatt Worldwide says: “The insurance market has been very active recently. Two of the larger banks established their own insurance arms giving them access to a large base of people. In the private sector however, there is little in the way of occupational pensions, except perhaps for the workers in subsidiaries of multinationals.”
The framework is there for such pensions, but it will clearly need the government to provide an incentive for companies, says Hadjinicolaou.