The decisions announced on pension reform appear, at first glance, to be moving in the right direction, the president of the Fiscal Council of Cyprus, Andreas Charalambous, told CNA, though he noted that the question of cost and how the reform will be funded remains open.
Charalambous said the council had previously seen some draft versions of the reform and had only just received the draft submitted to the social partners. He said the council was not yet in a position to comment in detail, though some elements appeared, in principle, to be moving in the right direction.
Interim report due in September
He said the council would publish its interim report in early September, with particular emphasis given to the pension reform question. The matter of cost and financing remains open and, based on the information available so far, has not yet been fully determined, he said, adding that both cost and financing were significant factors.
On the elements he considers to be moving in the right direction, Charalambous said the council agrees that the retirement age should remain at 65. Given today's conditions and demographic data both globally and in Cyprus, lowering the retirement age is not feasible, he said, adding that doing so would undoubtedly affect pension adequacy. He said the incentives offered for voluntary extension of the retirement age were also, in principle, appropriate.
He added that strengthening support for low-income pensioners and the basic pension, along with an adjustment to the proportional component, was also the right approach, describing it as a modest redistribution in favour of low-income pensioners that moves in the right direction.
Actuarial study seen as essential
Charalambous reiterated that what matters most is that an actuarial study be carried out, so that the long-term impact on the sustainability of the Social Insurance Fund, and how the reform will be financed, are properly understood. He said the accompanying documents contain some references to this, but that the detail still needs to be examined for a more informed assessment.
Asked to comment on the actuary's estimate of an annual €50 million burden on public finances over the first five years, Charalambous said what matters is how the financing will be structured. He said this was something that would be studied in detail, and that if this figure holds, and provided long-term adequacy and sustainability are secured, it could be considered, subject to a detailed review of the provisions.
Support for second and third pension pillars
Charalambous said the Fiscal Council agrees that the second pillar and provident funds need to be developed. He said demographic trends in Cyprus and across Europe mean the Social Insurance Fund alone cannot guarantee adequate pensions, making it important to gradually roll out a major initiative, implemented as soon as possible, to provide supplementary support for pensioners and ensure long-term sustainability.
The same applies to the third pillar, he said, under which incentives are offered to individuals to make their own private arrangements. He said all three pillars need to be developed, given the demographic data, in order to ensure long-term pension adequacy.
End to state borrowing from the fund
On the decision to end state borrowing from the Social Insurance Fund, Charalambous said the decision is the right one, since it is not appropriate for the fund's entire reserve to be invested in government borrowing, particularly in the manner currently practised. He said this could not happen overnight and would need to be phased in gradually, adding that it is also essential to put in place the right conditions for proper management of the reserve.
He said that in all cases, management needed to be professional and prudent, meaning investments carrying lower risk, which in turn deliver lower returns. He said the country should not take on risks that could endanger the Social Insurance Fund's reserve, but should instead build realistic expectations of what such a fund can be expected to return, given that it must remain low risk.
Asked whether ending state borrowing from the fund carries risks for public finances in the event of future crises, Charalambous said this was precisely why the phase-out of borrowing, and the repayment of the amount the state has already borrowed, needed to happen gradually. As a first step, he said, there could simply be no additional borrowing, which in practice would mean that instead of the projected surpluses of 2% to 3% in the coming years, the state would run balanced accounts.
Beyond that, he said, repayment of the reserve would need to happen very gradually to avoid affecting public finances and to allow for prudent management, noting that managing such large sums is not easy, particularly for a small economy like Cyprus, which does not offer many options, at least domestically.
Source: CNA
