A draft bill providing pension increases for 123,000 pensioners was presented and handed to the social partners on Wednesday.
In total, 53,000 pensioners will receive a monthly increase of more than €100, while 60,000 will receive less than €100 a month over a five-year period.
The bill also introduces a guaranteed minimum increase of €30 for existing Social Insurance Fund pensioners receiving up to €600 a month. The increase will be paid from the first month of the reform’s implementation.
The new pension system introduces a revised basic pension, the amount of which will be determined by the total registered insurance period, expressed in months of basic insurance. This will include both paid contributions and contributions subsidised by the state.
The pension effectively redefines the Social Insurance Fund’s basic pension and provides for greater redistribution through its calculation method and the broader recognition of subsidised insurance years.
The revised basic pension will replace the existing basic pension and improve pension adequacy. The supplementary, or earnings-related, pension will remain contribution-based, although its structure will be adjusted.
Anyone registered under the new social insurance system who meets the minimum insurance requirements will be eligible for the revised basic pension. All employees who meet the minimum contribution requirements will be eligible for the adjusted supplementary pension.
The revised basic pension will be financed through contributions from employees and employers, contributions from people who are not economically active and whose absence from employment is not covered by subsidised contributions, and state subsidies and transfers covering contributions for people who are legitimately outside the labour market.
The supplementary pension will be financed through employee and employer contributions.
Proposed framework for pension reform
The proposed reform, based on planning by the International Labour Organization, represents a comprehensive redesign of Cyprus’ pension system. Its main objectives are:
- Reducing the risk of poverty among pensioners.
- Ensuring adequate pension income.
- Promoting solidarity and fairness within and between generations.
- Safeguarding the long-term sustainability of pensions.
The proposal sets out the government’s intended policy framework for reforming the first pillar of the pension system, namely the social insurance system.
Challenges facing the pension system
Cyprus’ pension system faces serious challenges. It does not provide sufficiently robust protection against poverty or adequate pension income for all beneficiaries.
It also fails to address gender inequalities in pension income adequately, while the state’s participation in financing the system is considered complicated and inefficient.
Purpose of the proposed reform
The proposed reform seeks to introduce a fairer, more rational and simpler system that will:
- Ensure adequate and resilient pension income.
- Further reduce the risk of poverty among pensioners.
- Strengthen the importance of employment and saving.
- Improve the system’s responsiveness and adaptability.
- Safeguard its long-term financial sustainability, taking into account the impact on public finances.
- Bring the system into line with international standards, including International Labour Organization and Council of Europe conventions, while adopting good practices from other countries.
Main elements of the reform
The principal elements of the proposed reform are:
- Clearly defined roles for the different components of the pension system.
- An integrated and adequate basic social insurance pension for those participating in the system.
- A redesign of the General Social Insurance Scheme, including its contribution-based component.
- Improved pension adequacy.
- A transparent and effective state contribution to the system’s financing.
Additional reforms
The proposal also includes:
- A redesign of the Low-Income Pensioners’ Allowance to provide greater protection against poverty and replace part of the income of pensioners on low incomes.
- A review of the Social Insurance Fund’s investment policy and the introduction of a new investment governance framework.
Design of the new pension system
The proposed reform creates a new and simpler social insurance pension system based on the existing structure. It provides for targeted income redistribution and a more rational state contribution to its financing.
A central element is the provision of a decent pension for those insured under the social insurance pension system, strengthening universal coverage in a simple, effective and efficient manner.
The pension is intended to reduce the risk of poverty among pensioners, narrow the gender pension gap and improve the targeting of pension income, thereby supporting solidarity within generations.
The revised basic pension will be calculated according to a person’s total registered insurance period, expressed in months of basic insurance and covered either by paid or state-subsidised contributions.
The new calculation method and the broader recognition of subsidised insurance years will give the revised basic pension a stronger redistributive character.
It will provide greater protection for people on lower earnings or with limited insurance records, as well as those whose insurance history has been affected by periods spent providing care, living with a disability, studying or entering the labour market.
The revised basic pension will replace the current Social Insurance Fund basic pension and improve pension adequacy.
The supplementary pension will remain linked to supplementary insurance points but will be adjusted. Everyone registered under the new system who meets the minimum insurance requirements will qualify for the revised basic pension, while employees meeting the minimum contribution requirements will qualify for the adjusted supplementary pension.
The redesigned Low-Income Pensioners’ Allowance will supplement the Social Insurance Fund pension and provide more comprehensive and effective protection against poverty by helping to replace the income of low-paid workers.
Redesigned basic old-age pension
The monthly basic old-age pension will be calculated using a coefficient ranging from 1.1 at the age of 63 to 1.5 at the age of 67.
The coefficient will rise by 0.1 for each intervening year, reaching 1.2 at 64, 1.3 at 65 and 1.4 at 66. It will be applied to every month of registered insurance, based on 12 months per year.
The retirement age will remain 65. Anyone choosing to continue working until 67 will be able to receive a higher pension, provided contributions continue to be paid until that age.
Recalculated supplementary pension
For existing pensioners, the total old-age pension currently received will be compared with the total pension calculated under the reform, using an accrual rate of 1.25% for the supplementary pension.
If the combined amount of the redesigned basic pension and the new supplementary pension is lower than the current pension, the pensioner will continue receiving the amount due under the existing system.
A similar comparison will be made for new pensioners retiring during the five-year transitional period from 2027 to 2031.
If the combined redesigned basic and supplementary pensions, calculated using a 1.25% accrual rate, are lower than the amount resulting from the existing system, the supplementary pension will be recalculated using an accrual rate of 1.34%.
From 2032 onwards, the 1.34% accrual rate will apply across the board to all new pensioners.
The legislation will also include a provision allowing contributions to be increased depending on the financial findings of an actuarial study to be carried out before 2032.
Benefits relating to incapacity, widowhood and orphanhood will also be reformed for all new pensioners, together with the related increases for dependants.
The reform will include transitional arrangements applying to both existing and future pensioners.
Benefits of the proposed reform
The principal benefits of the reform include:
- Extending coverage through the revised basic pension paid by the Social Insurance Fund.
- Guaranteeing a basic level of income for beneficiaries of the social insurance pension system.
- Providing greater protection for people on low incomes and reducing the risk of poverty during retirement.
- Ensuring that every additional social insurance contribution increases pension income, thereby providing an incentive to work and contribute beyond the revised basic pension.
- Addressing the gender pension gap more effectively through a more generous and redistributive basic pension.
- Rationalising state funding for the social insurance pension system.
- Strengthening the Social Insurance Fund’s financial governance and safeguarding pension rights and fairness between generations through a revised investment policy and a new investment governance framework.
- Improving pension income adequacy, with the combined revised basic and supplementary pensions providing a satisfactory replacement rate for employment income after retirement.
Broader insurance coverage
The reform expands insurance protection beyond the traditional link with employment.
It provides for the recognition of pensionable earnings for people habitually resident in areas controlled by the Government of the Republic. Subsidised contributions will be granted for:
- Women during periods associated with caring for children.
- Informal carers providing full-time, unpaid care at home to relatives up to the second degree.
- People with disabilities.
- Students.
- New entrants to the labour market.
These provisions are intended to prevent pension gaps caused by social responsibilities or temporary absence from the labour market.
Recognition will be subject to specific restrictions to prevent simultaneous credits for periods already covered by another form of insurance. Notional and other insurable earnings credited in any year may not exceed the annual amount of basic insurable earnings.
New contribution obligation for income recipients
The reform introduces a new contribution obligation for income recipients, up to the annual amount of basic insurable earnings.
It will apply to citizens of Cyprus or another EU member state, as well as third-country nationals falling within the scope of EU Regulation 883/2004, who are habitually resident in areas controlled by the Government of the Republic and are not covered by another insurance obligation or corresponding credit.
Income taken into account will include earnings from holding an office, dividends, interest, rent, intellectual property or patent rights, fees and other profits derived from property.
For employees who are also shareholders in the company where they work, dividends received from that company will be included in the definition of earnings.
Voluntary payment of contributions
People without insurable employment will be given the right to make voluntary contributions if they are not subject to the new contribution obligation for income recipients, do not contribute through another arrangement and have not been credited with assimilated or notional earnings.
During the first five years, they will also be able to purchase insurance points for previous years. There will be no limit on the number of years that may be purchased, although the maximum will be one insurance point per year.
Relief from the 12% actuarial reduction
The 12% actuarial reduction applied at the age of 63 will be partially eased, as its full abolition would affect the Social Insurance Fund’s long-term sustainability.
Relief equivalent to half of the applicable period, capped at nine months, will be granted from the actuarial reduction applied to the basic pension.
This will cover existing pensioners and future pensioners retiring by the final year of the transitional period in 2031. The relief will apply for life.
Social pension arrangements
Existing Social Pension beneficiaries will be transferred to the Social Insurance Fund as a special category and treated as recipients of a non-contributory basic old-age pension.
New pensioners who do not meet the Social Insurance Fund’s old-age pension requirements during the five-year transitional period from 2027 to 2031 will be assessed under the existing Social Pension scheme criteria.
Those meeting the criteria will be placed in the same special category of Social Insurance Fund beneficiaries.
The transitional eligibility period for future beneficiaries who would have qualified for a Social Pension under the existing system will be extended from five to 15 years from the introduction of the new system.
These beneficiaries will be placed in the special Social Insurance Fund category. The Fund will cover the cost of their pensions, while the cost of their contributions will be covered either by the beneficiaries themselves or by the state.
Future beneficiaries qualifying between the sixth and 15th years will also be required to have been registered under the new system for at least 80% of the period between its introduction on 1 January 2027 and their retirement date.
For the first 15 years of the reform, the state will pay contributions in the form of an allowance on behalf of potential future Social Pension beneficiaries who cannot afford to contribute to the new system.
This group is estimated to represent between 25% and 30% of all potential beneficiaries. The contribution subsidy will require an application to the competent authority, which will assess whether the relevant income criteria are met.
The income criteria for subsidised contributions will be determined by the competent authority and will apply from 1 January 2027.
Guaranteed minimum increase of €30
Existing Social Insurance Fund pensioners receiving up to €600 a month will be guaranteed a minimum monthly increase of €30.
The increase will be paid from the first month of the reform’s implementation.
Funding and long-term sustainability
The reform will restructure the Social Insurance Fund’s financing base.
The bill clarifies that non-contributory benefits will be financed through the Republic’s Consolidated Fund and provides for specific state funding to cover part of the pension increases.
The reform therefore combines enhanced social protection with a gradual expansion of the funding base and mechanisms linking future benefits and contributions to the Social Insurance Fund’s long-term sustainability.
As part of the restructuring, the state will stop borrowing from the Social Insurance Fund. Annual surpluses will instead be deposited in the Fund’s investment account.
Arrangements have also been made for the state’s existing debt to the Social Insurance Fund to be repaid over time. These arrangements take into account the condition of the Cypriot economy and the sustainability of public finances.
Social impact of the reform
A detailed table provides a range of examples showing how Social Insurance Fund pensions will increase during the five-year transitional period.
Under the new provision covering the 2027-2031 transitional period, a supplementary pension accrual rate of 1.34% will apply to all future pensioners whose old-age pension would otherwise be lower than under the existing system if calculated using the 1.25% rate.
