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Ensuring a decent living for citizens and protecting pensioners from poverty are priority issues for any modern state. For this reason, the issue of retirement is an important part of the long-term socio-economic policy of all states, since it is related to the decent living of the citizens of society as a whole.
To address this serious issue and ensure adequate retirement income for citizens, most European countries apply the system of the following 3 pillars, which combines social and private insurance.
- Pillar 1: Pillar 1:
- 3rd Pillar: Private pension schemes
Pillar 1 - Social Insurance Fund
The first pillar relates to the state pension, which is provided through a compulsory contribution to the Social Insurance Fund (SIF) and, in the case of Cyprus, is borne by the employee, the employer and the state. It is an excellent basis, however, the Cyprus Council of Economy and Competitiveness (CECC), studying the first pillar, concludes that it alone cannot address in its entirety the serious issue of ensuring adequate pension income for citizens, for the following reasons.
(b) The frequent job changes in today's working environment often mean a break in contributions to the social security system, which reduces the final pension.
(c) Young people today start to raise their families at a relatively older age and this may result in increased financial obligations close to retirement age, which cannot be covered solely by the state pension.
(d) The pensions received by low-paid workers are reduced, since their contributions to the social security system are low. This group of workers is likely to face the biggest problem, which will continue to exist if the pensionable amount is based solely on the first pillar.
In addition, the long-term sustainability of the social security system is of concern, mainly due to the ageing population and the phenomenon of under-ageing which has been strongly observed in recent years. However, the EPAC will not address the issue of restructuring/changing the way the Fund operates, as it is already under study by those responsible.
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RECOMMENDATION: The Cyprus Council of Economy and Competitiveness, having considered all the above, recommends that the Government take the necessary measures and actions to strengthen the second and third pillars of the pension system, which in combination with the first pillar will be able to offer higher pensions and thus a decent living during the pensionable period to all citizens |
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Second Pillar - Occupational Pension Funds (OPFs)
Occupational Pension Funds are pension funds, which are funded by the employer and the employee, with the aim of increasing the employer's savings for the retirement period. The position of the SOAC is that emphasis should be placed on strengthening the 2nd Pillar through the establishment and consolidation of the Occupational Pension Funds. To this end, the EPA makes the following recommendations, which should be considered by the competent bodies:
| 1. Automatic enrolment of all private sector employees in a multi-employer occupational pension fund or an employer-provided occupational pension fund |
95% of enterprises in Cyprus consist of micro SMEs employing less than 10 persons and which, most of them, do not offer an occupational pension scheme. A priority for enhancing pension income should be a horizontal approach to the institution of ETPs, through their expansion and the auto-enrollment of private sector employees in micro-enterprise ETPs or employer-provided ETPs.
| 2. Small contribution by the employer to the occupational pension fund |
The employer's contribution to the occupational pension funds is also important for the promotion of the above measure. Of course, the aim is not to impose a financial burden on companies but to boost employees' savings. To this end, it would be useful to set a minimum small employer contribution to the ETFs, perhaps in the order of 0.25%.
| 3. State contribution in cases where the employee's income level is not taxed (low paid) |
Employees' incomes subject to taxation have a negative economic impact on state revenues due to the tax deductions provided by occupational pension/life insurance funds. Low wage earners do not receive the corresponding benefit nor do they place a burden on public finances. With the state's contribution to workers whose income is not taxed, those who really need it will benefit. Employees who receive this financial support will be required to file a mandatory tax return, which will also help with tax compliance.
| 4. Right to transfer employees' pension benefits from one Occupational Pension Fund to another (transferability) |
The further promotion of the right to transfer pension benefits from one Occupational Pension Fund to another is considered by the Council to be of key importance. Through the right of transfer the continuity of savings and their long-term preservation until retirement is enhanced, as well as the more rational investment of money.
| 5. Withdrawal of money on reaching the retirement age and reduction of the borrowing rate from the Occupational Pension Funds |
The government could explore the possibility of banning the withdrawal of the total amount of money an employee is entitled to from the ETFs before reaching the retirement age. This would significantly help to increase retirement savings and ensure adequate income. A typical example in Cyprus is the financial crisis of 2013, during which the occupational pension funds were severely hit, which negatively affected the retirement income of a large number of citizens.
With regard to the borrowing allowed to members from the Professional Pension Funds, the SOAK recommends reducing the amount of the loan to 20%-25% of the total amount credited to the member.
| 6. Method of collection of the amount from the Occupational Pension Funds |
The Council also considers the method of collection of the amount from the ETFs to be important. The Council's position is that the payment of a lump sum often leads to mismanagement of the benefit by the pensioners, with negative effects on their retirement period. For this reason, the Council considers that information and promotion of options on how to collect the benefit should be strengthened. The options could include both collecting the amount at regular intervals (an option supported by the EPA) and collecting part of the amount at retirement and the remaining amount at a later stage.
Third Pillar - Private Pension Schemes:
The third pillar concerns the voluntary retirement savings of individuals so that they can receive a supplement to their pension. Encouraging voluntary retirement savings is an additional important option for those who choose to boost their retirement income. In this context, the European Commission's Regulation on the Pan-European Personal Pension Product ("PEPP"), which will enable people on a voluntary basis to save for their retirement through a wide range of financial institutions across the EU, is relevant.
| 7. Consider providing the same financial incentives/tax deductions offered to occupational fundspension/life insurance |
To encourage citizens to participate in private pension schemes (individual plans), the government could consider providing the same financial incentives/tax deductions as offered in the case of participation in occupational pension funds/life insurance schemes.
Supervision and Financial Literacy
In line with the above recommendations concerning the 3 pillars of the pension system, the following areas should also be strengthened/promoted:
| 8. Empowerment of Eauthorities |
Proper, effective and rigorous supervision of stakeholders is an integral part of the effort to improve our country's pension system, as under no circumstances should any mismanagement that would jeopardise citizens' pensions and savings be allowed. This requires the strengthening of the Supervisory Authorities supervising occupational pension funds (the Superintendent of Occupational Pension Funds and the Superintendent of Insurance of the Insurance Companies Control Authority). It is the recommendation of the SOAC that the possibility of setting up a single supervisory mechanism, adequately staffed, with people with the necessary scientific training and experience, should be considered by those responsible
| 9. Financial education |
Financial education equips people with the knowledge and skills to make rational decisions on how best to manage money and assets. Financial illiteracy is a real problem in Cyprus and special emphasis should be placed on efforts to enhance financial literacy. In cooperation with the University of Cyprus, the Central Bank, the Cyprus Securities and Exchange Commission and other stakeholders, relevant education programmes could be designed. The Ministry of Education, Sports and Youth cannot be absent from this equation, since the issue concerns and interests all levels of education. The inclusion of specific programmes in the school curriculum is considered very important, as it will play a key role in preparing active citizens, ready to manage their financial affairs properly and to plan well in advance for their future.
(NΓ/EXP)
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