MISSOC NETWORK MEETING,NICOSIA

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Presentation transcript:

MISSOC NETWORK MEETING,NICOSIA Cyprus Pension Reform: Safeguarding the Adequacy and long-term Sustainability Theofanis Tryfonos Director of Social Insurance Services Ministry of Labour & Social Insurance 26 October 2012 MISSOC NETWORK MEETING,NICOSIA

Presentation Structure Cyprus Presidency of the Council of the EU Overview of the Pension System Overview of the Cyprus Social Insurance Scheme (SIS) Pensions System - Main challenges Adequacy of Pensions Financial Sustainability Pension Reform and Impact Further Reform proposals

Overview of Pension System before the reform Cyprus Presidency of the Council of the EU General Social Insurance Scheme (SIS) Old - age pension Social Pension - non - contributory with residence conditions Special Allowance to Pensioners Scheme – (granted when individual pension amount is less than €854) Public Assistance Scheme Supplementary occupational pension provision Government Employees Pension Scheme (GEPS) Semi-government employees pension schemes Provident Funds - lump sum upon termination of employment Bank employees retirement schemes

Overview of SIS : Old - age Pension Cyprus Presidency of the Council of the EU Old-age pension Gross replacement rate of c.60% after a full career, from 2023 onwards (maturity of the earnings related system introduced in 1980) Minimum pension guaranteed (€348.60 in 2012) – 85% of full basic pension Basic pension indexation: wage indexation Supplementary pension indexation: CPI Conditions: Minimum paid contributions of 3 years Minimum paid and credited contributions of 10 years (credits for education - unlimited from the age of 16, credits for military service and child raising) Investment policy: not negotiable government bonds

Overview of SIS – Financing Cyprus Presidency of the Council of the EU Overall contribution rate (2009) Employed: 16.6% Self-employed: 15.6% Voluntary insured: 13.5% Contribution rates Employed persons – 12.6% of insurable earnings, shared equally between employee and employer Self-employed persons – 11.6% of notional income Voluntary insured contribution – 10% of (at least) basic insurable earnings State contribution – 4% of insurable earnings for employed and self-employed and 3.5% for voluntary insured

Overview of SIS – Financing Cyprus Presidency of the Council of the EU Source: MISSOC - OECD Contribution rate = employee + employer rate for covering pension benefits

Breakdown of total pension system expenditure Cyprus Presidency of the Council of the EU

Public pension expenditure Cyprus Presidency of the Council of the EU Public pension expenditure (% GDP): AWG 2009 vs. 2012 projection exercise 2009 AWG exercise - net increase of 10.8 pp. over 2010-60 2012 AWG exercise - net increase of 8.6 pp. over 2010-60 The net saving of 2.2 pp. represents 1 pp. from the SIS and 1.2 pp. from the GEPS Source: AWG 2012 projection exercise

Overview of SIS Cyprus Presidency of the Council of the EU Main driver is population ageing – Old-age dependency ratio (OADR): CYP vs EU-27 EU15 population ageing completes its cycle by c.2040 - only 8% increase in OADR over 2040-60 CYP population ageing completes its cycle by c.2060 – 43% increase in OADR over the 2040-60 Source: AWG 2012 projection exercise

Pensions System - Main Challenges Cyprus Presidency of the Council of the EU Adequacy of pensions Risk of Relative Poverty Replacement Rates Long-term sustainability, in light of Increases in life expectancy Low birth rate Upcoming maturity of the supplementary part of the SIS (2023+)

Pensions Main Challenges before the reform - Adequacy Cyprus Presidency of the Council of the EU Risk of Relative Poverty Income below 60% of Net Median Equalised Income Relative poverty rates for population aged 65+ 52% in 2005 from 58% in 1997 Main reasons: Low pension income earned under flat-rate scheme (until 10/1980) for older pensioners The low level of declared insurable incomes of the self-employed that lead to low pensions Late entry of women in the labour market The ineffectiveness of the additional income support measures in targeting low income pensioners households Benefits in kind are not included

Adequacy of Pensions - Objective Cyprus Presidency of the Council of the EU Reduce the at-risk-of-poverty from 52% to 40% by 2011 Reform of additional income support measures Household income Pensioners living alone Pensioners aged 75+ Any additional expenditure will be covered by the Government Budget

Pension Main Challenges - Sustainability Cyprus Presidency of the Council of the EU Annual public expenditure and contributions (% of GDP) - all schemes Source: AWG 2012 projection exercise

Financial Sustainability - Objectives of SIS Reform Cyprus Presidency of the Council of the EU To ensure the long-term sustainability To enjoy the highest possible public acceptance Fairer distribution of pension costs between generations and between Social Partners To be inline with the Lisbon Objectives for Economic Growth To improve the service and some of the benefits provided to the insured

Financial sustainability - Reform package Cyprus Presidency of the Council of the EU The solution is based on a combination of reform measures: Increase of revenue Containment of expenses Increase of income Gradual increase of contribution rate – from 14.3% (long-term) to 23.4% applying 1,3% every 5 years from 1.4.2009 (1st increase) until 1.1.2039 (final increase) Improvement of investment policy Although the financial sustainability is addressed with the current investment policy, we are in the process of reassessing it on the basis of a recent study conducted by the World Bank

Financial sustainability - Reform package Cyprus Presidency of the Council of the EU Containment of Expenses Adoption of stricter qualifying conditions for the payment of old-age pension - 10 years paid contributions, instead of 3 Adoption of stricter qualifying conditions for the payment of old-age lump sum at the age of 68 - 6 years paid contributions, instead of 3 Maximum limit on the number of education/ training credits granted for old age pension - 6 years, instead of unlimited number of years Scheme supporting Pensioners` Household with Low Income

Financial sustainability - Reform package Cyprus Presidency of the Council of the EU Risk of Relative Poverty Source: EU - SILC

Financial sustainability - Reform package Replacement Rates Cyprus Presidency of the Council of the EU

Financial sustainability - Reform package Cyprus Presidency of the Council of the EU Impact Revenue measure – boost revenues from contributions by c.3% of GDP Expenditure measures – savings of c.1% of GDP Improvement of future labour force participation rates, especially female older workers – further increase in the average age of exit from labour force in future and thus effective retirement age: currently stands at 63.5 years considerable above EU27 Actuarial equilibrium is maintained until 2047

Financial sustainability - Reform package Cyprus Presidency of the Council of the EU Impact: projected revenue and expenditure Source: Actuarial Report of the Social Insurance Scheme as at 31 December, 2009

Further Pension Reform measures Cyprus Presidency of the Council of the EU Actuarial reduction of pension for early retirement ( impact : 0.8% of GDP) Pension increment for spouse To be granted only when the spouse is not gainfully occupied ( impact : 0.3% of GDP)