1. 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

2. 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

3. 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

4. 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 (€ 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

5. 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

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

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

8. Public pension expenditure
Cyprus Presidency of the Council of the EU
Public pension expenditure (% GDP): AWG 2009 vs projection exercise
2009 AWG exercise - net increase of 10.8 pp. over
2012 AWG exercise - net increase of 8.6 pp. over
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

9. 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 only 8% increase in OADR over
CYP population ageing completes its cycle by c.2060 – 43% increase in OADR over the
Source: AWG 2012 projection exercise

10. 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+)

11. 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

12. 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

13. 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

14. 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

15. 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 (1st increase) until (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

16. 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 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

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

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

19. 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 years considerable above EU27
Actuarial equilibrium is maintained until 2047

20. 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

21. 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)