The Turkish Cypriot administration has tabled a bill to unify the region's two pension arrangements. Under the present system, the pension arrangements for civil servants are overwhelmingly superior to those of other employees, including those working in the public sector, private sector workers and the self-employed.

"Civil servants who began their career before 1987 make very small contributions, about 2.5% of their salary, and on retirement get a lump sum and a pension paid out of the general budget," says a social security ministry official. "Those who started working after 1987 pay a higher contribution, of 9% of their salary, or 5% of they are single, and pay it into a pension fund, the Civil Servants Pension Fund, which has been established as a DB scheme. It also pays out a lump sum and a pension, although they are smaller and the period of work required before they can be claimed is longer."

Non-civil servants pay 8% of their salary into the first pillar PAYG Social Insurance Fund, with employers paying an additional 10%. "When they retire, after at least 25 years' contributions, they get a substantially smaller pension than that received by retired civil servants," the official adds.

In addition, they pay 5% of their salary to the provident fund, a supposedly fully funded DC second pillar element of the general scheme, and their employer matches the contribution. On retirement the provident fund pays out a lump sum.

"The new law has been tabled because this inequality is a big problem," says the official.

"The minimum wage unskilled worker's income is TRY950 (€534) a month," says Hasan Sungur, chairman of the Cyprus Turkish Employers' Association. "But if they can find the same job in the civil service the wage starts at TRY2,000. Consequently, the employer of an unskilled worker puts TRY95 a month into the provident fund but the government pays TRY200 a month for a junior civil servant. That's why it is trying very hard to bring parity into the system."

And the system is unsustainable, according to a 2006 World Bank report, Sustainability and Sources of Economic Growth in the Northern Part of Cyprus. "A viable and equitable pension system can ensure old-age income security for current and future generations without compromising economic stability," it notes. "The current pension system of the northern part of Cyprus underperforms in all these respects. Total budget deficits in the EU average 2.6% of GDP while in the northern part of Cyprus the public pensions system alone generates a deficit of 6.3% of GDP, and the civil servants' pension system an additional 8.4%…Projections show that the problem will only worsen over time."

"At end-January, 17,487 people were receiving an old age pension," says Kasım Ekmen, investment and planning officer at the social security department. "In 2006 total pension liabilities totalled 14.44% of GDP, up from 13.54% in 2003.

"We are trying to create a new social insurance system that will cover all gainfully employed people with the same formula so they can get the same pension when they retire," continues Ekmen. "The pension formula will be based on the German system of points so that every day's work is included in calculating a pension. And the government is tabling an amendment to increase the minimum retirement age to 55 from 50 to bring it into line with that for civil servants. People employed after the new law comes into effect will work to 60."

But what happens to the existing pensioners? "If you make a tabula rasa here it's okay but the government is concerned about this issue and so has announced that it would not integrate the existing civil servants," says Ekmen. "They keep their privileges, and only those who join after the law is implemented will be employed under the new system."

Will parliament pass the legislation after the recent defection of the Democratic Party from the coalition? "Yes, the government now has just half of the seats in parliament but all parties support its merger measure," says a retired senior civil servant. "The programme was first put to the parliament when the [now opposition] National Unity Party was in power and when the National Unity administration fell the new government continued with the scheme after consultations and slight redrafting."

The key pressure may not come from the opposition. "The trade unions are trying to get the private sector pay scaled up but the government is trying to lower civil service pay," says Sungur. "The trade unions are a major problem, they are politically powerful because they can influence the outcome of elections. There are 4,000 employers [and] 50,000-60,000 employees so the government has to be nice to the workers."

President of the Turkish Cypriot Chamber of Commerce Erdil Nami agrees. "The civil service trade union is trying to avoid it, it wants to preserve its members' advantage," he says. "The union is very powerful and is affiliated to the current ruling party. It has the idea that it was instrumental in bringing the party to power so it thinks that the party owes them something. And some in the ruling party have come up through the trade union structure and retain their affiliation. However, the union may have gone to far and is almost managing to alienate its political allies."

Nevertheless, the boost the economy received when then UN secretary general Kofi Annan proposed a plan for the reunification of Cyprus prior to EU entry raised optimism and sparked a building boom, has bought some time.

"Around 60% of the social security fund contributions come from foreign workers, mostly from Turkey, especially construction workers," says Sungur.

"In 2006 the deficit narrowed to 7.27% of GDP from 8.15% in 2003 because as part of a government initiative to seek out previously unregistered workers from Turkey during the last two years," notes Ekmen. "Some 25,000 extra people are paying contributions to the social insurance fund."

However, there are dangers. "If the construction industry collapsed and building stopped we would not keep these people in Cyprus, we would send them back home," Sungur adds. "But their contributions have been the only thing allowing the social insurance fund to pay the pensions of retirees. In the past two workers used to pay one pension, today around 4.5 workers are paying one pension."

So can't the schemes invest the contributions to ease the pressure? "Both the civil servant provident fund and the private sector provident fund are mostly invested but there is no professional fund management, the money is just deposited in banks," says Ekmen. "Maybe the risk is very low but the interest rate is also low. Nowadays the interest rate offered by Turkish banks is around 19-21%, but the consumer price inflation rate is also very high. In the 30 years to 2007 the inflation index posted a 258,474% rise but our inflation is very flexible - it is impossible to forecast what the inflation rate will be. For example, last year our inflation rate was 19.2% while in Turkey it was 9-10%, only half the rate. The year before we had inflation of 2.7% while in Turkey it was 10-12%. Another problem is that since our central bank has no currency emission, we use Turkish liras, we have no control over our money supply. In 1974, one Cypriot pound was worth 36 Turkish liras. Before the creation of the new Turkish lira [TRY] two years ago at the rate of 1 new lira to 1m old, the rate had changed to 3.2m Turkish liras to a Cyprus pound. We don't issue government bonds either."

The Provident Fund has about TRY539m under management, or nearly 20% of GDP, says the World Bank report. But it expresses concern at its asset structure and management. "In August 2005, 66% of the Provident Fund's assets were directly lent to the budget, and an additional 8% to the public sector companies," it says. "Deposits in commercial banks are short-term and range from sight deposits to 12-month deposits, with some 50% of deposits up to three months and 75% of deposits up to six months. Deposit interest rates in the banks are set on the basis of commercial rates."

"I am on the board of directors of the provident fund and we invest it every month in several ways," says Sungur. "But do we do it in a professional way? No, not as I would like to do it. Previously the government used to give a higher return than the banks but for the past two years the new government's policy has to give a lower rate of return. So this is a problem for us. We are trying to change the law to put the fund's money to work. In the past we could give it as credit, for example, to the hotel Acapulco in Kyrenia and to the electric company, at 20% interest and 23% if a repayment day was missed. But under new legislation we cannot loan it, we can only put it in banks and take interest from it. When we started to give it to the banks we had a full guarantee from the government, but now we don't have a guarantee so generally we prefer the government banks, especially Vakıflar Bank and the Kooperatif Bank because we know that whatever happens they will not be bankrupt. And also we buy eurobonds, maybe 15% of the fund, through Isbank."

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