With the CoLA front now settled, a new battle line is opening over pensions reform. Labour Minister Yiannis Panayiotou said on Monday that the government intends to table its pensions reform bills in Parliament before the end of the year, aiming for a vote ahead of the elections.
The focus is on low pensions in Cyprus and on efforts to strengthen the second and third pillar of retirement income, beyond the Social Insurance Fund, so that the income replacement rate at retirement can move from about 42% today to 70%. The discussion is expected to be turbulent, as one of the scenarios on the table for boosting pension income is making provident funds mandatory. In any case, reinforcing the second pillar is part of the equation.
A four pillar model
As Politis has previously reported, the government is promoting a unified pensions architecture that would cover:
• The first pillar, via the Social Insurance Fund
• The second pillar, provident funds
• The third pillar, private pension products
• A so called zero pillar, state support for vulnerable groups
Work by the technical committee set up to design the reform is intensifying. A presentation dated 5 November describes a strengthened pensions model based on four pillars.
Under this plan, the zero pillar is about protection from poverty and maintaining income for people on low earnings. Pillar 1 provides a basic pension linked to earnings up to a set ceiling. Pillar 2 adds income for replacement purposes. Pillar 3 supports individual flexibility and specific needs.
Five key challenges
The same presentation flags five challenges. The current system is described as fragmented and inadequate. Protection from poverty is not sustainable. There are persistent problems in dealing with gender based inequalities and in guaranteeing adequacy. Finally, the state’s role in financing the Social Insurance Fund is seen as complex and ineffective.
Reform drivers, it stresses, should include: social sustainability with adequate and robust pension income, preserving incentives to work and save, greater responsiveness and adaptability of the system, long term financial sustainability that takes account of public finances, and compliance with international standards.
Pensions replacement stuck at 42%
Finance professor Andreas Milidonis of the University of Cyprus recently told Politis that the pensions replacement rate in Cyprus is only 42%, the fourth lowest in Europe, where the average is 58%. He argues it is urgent to create a single, independent supervisory authority for pensions and insurance.
According to figures from the Cyprus Pensioners’ Union (EKYSY), around 100,000 people receive pensions ranging from €415 to €1,000.
The Cyprus Council of Economy and Competitiveness supports the creation of an effective institutional framework that, through the second and third pillar, would top up first pillar benefits and ensure pension adequacy for the population as a whole.
Labour Minister Yiannis Panayiotou said the main goals of the pensions reform are to increase low Social Insurance Fund pensions, strengthen the inclusiveness of the social insurance system, especially for women, modernise the Fund’s investment policy with placements outside the public sector, and rationalise long term investment practice.
This includes starting repayment of internal borrowing and building up reserves to safeguard the Fund’s sustainability, alongside strengthening the second pillar.