With the dispute over the cost-of-living allowance (CoLA) largely settled, the way is now open for a politically sensitive debate on pension reform, a change that will shape incomes for decades.
The memorandum-era reforms under the Christofias government, which introduced actuarial reductions for early retirement, linked retirement age to life expectancy and raised contributions every five years, resolved the question of the Social Insurance Fund’s sustainability. Actuarial studies confirm that the fund is now considered viable.
The Christodoulides government’s new reform, which it ambitiously hopes to push through Parliament before its dissolution ahead of next May’s elections, aims instead to tackle pension adequacy.
Experts and academic research suggest that a decent retirement income that allows pensioners to maintain something close to their previous standard of living should be around 70 per cent of lifetime earnings. In Cyprus, the replacement rate provided by the Social Insurance Fund falls well short of that benchmark.
Solving the adequacy problem therefore requires building additional income through the second pillar (occupational and supplementary pensions) and the third pillar (private savings). The question has a clear fiscal dimension: if pension adequacy is not improved, the state will face rising pressure to support thousands of poor pensioners in future decades.
In practice, this pushes the debate onto the second pillar and, in particular, the expansion of what are widely known as provident funds. At the heart of the dispute is whether Cyprus should move to a mandatory occupational pension system or rely on voluntary participation.
Deep divide over the second pillar
Politis has mapped a deep rift between trade unions and employers’ organisations over the government’s direction of travel.
Trade unions are calling for mandatory participation by employers and employees to guarantee a decent standard of living in retirement. Employers’ bodies counter with proposals for voluntary participation backed by incentives, warning of the risks to businesses from higher labour costs.
The Council of Economy and Competitiveness, for its part, recommends automatic enrolment of all salaried workers, and even the self-employed, into a provident fund or other occupational pension scheme. Supervision and taxation of the funds are additional flashpoints.
In other words, all sides agree on the goal of more adequate pensions and lower poverty risk. They sharply disagree on the route to get there.
Unions push for mandatory participation
Against this backdrop, Politis asked representatives of unions and employers’ organisations for their views on the second pillar.
Michalis Michael, deputy secretary-general of SEK and chair of the union’s provident fund, said that no matter how much the Social Insurance Fund is improved, “there will continue to be increased needs for a decent standard of living in retirement which can only be covered through mandatory regulation of provident funds, an issue that must be addressed within the pension reform.”
“We need to focus on strengthening the second pension pillar and make employer participation in provident funds compulsory so that all workers are covered,” he stressed. “This can be done by extending collective agreements, where provident funds are already a basic term.”
Citing research by SEK and European trade unions, he noted that in sectors where collective agreements are in place, wages and benefits are 20 to 30 per cent higher.
PEO secretary-general Sotiroula Charalambous reminded that provident funds were created by the trade union movement in the 1970s precisely to provide supplementary income on retirement.
After the 2013 financial crisis, contribution rates in many collective agreements were cut and several companies outside collective bargaining abolished their funds altogether. Since then, Charalambous said, unions have been fighting to restore contribution levels.
She recalled that the Anastasiades government had previously attempted to move towards mandatory participation, but withdrew its bill in the face of strong opposition.
“We believe there must be regulations introducing mandatory provident funds, in order to safeguard them as the second pension pillar,” she underlined.
For Stelios Christodoulou, president of DEOK, the second pillar is “quite important” for ensuring that future pensioners can combine their state pension and provident fund benefits to maintain a decent standard of living.
“Our position is that the institution should first be expanded wherever collective agreements already provide for provident funds, whether sectoral or company level, so that they are applied universally and progressively extended to cover all workers,” he said, adding that over time the question of generalised mandatory participation in all sectors of economic activity must also be examined.
Council of Economy backs automatic enrolment
In its own proposal on pension reform, the Council of Economy and Competitiveness sets out five pillars, with automatic enrolment of private sector workers at their core.
It calls for all employees to be automatically enrolled into a multi-employer occupational pension fund or into a professional pension scheme offered by their employer.
“The most important thing is automatic enrolment,” council member Vaggelis Tryfonos recently told Politis 107.6 & 97.6. “If we do not start now, tomorrow we will have to raise taxes to support those who do not have enough to live on.”
He argued that social insurance alone is insufficient to maintain quality of life in retirement. “It is simply a safety net. To ensure adequacy, all three pillars must function.” Today, the second pillar covers only a small part of the workforce, something the council wants to change.
The proposal foresees initially low employer contributions so that businesses are not overburdened. “We understand you cannot tell employers from one day to the next to take on this cost. That is why contributions would start low and gradually increase to build up reserves,” Tryfonos said. One idea is to redirect the existing 1.2 per cent contribution to the Social Cohesion Fund into provident funds.
On supervision, he noted that Cyprus is currently “non-compliant” with EU rules, which require a single supervisory authority. At present there are two, something he described as far from ideal. On the table is either the creation of an independent authority or handing supervision to the Central Bank, as Greece has done.
The council also proposes state contributions for those below the taxable income threshold. “These are precisely the people most likely to face problems with their pensions. If the state contributes for them, we believe the problem can be eliminated,” he said.
Dispute over supervision and taxation
On supervision, Charalambous voiced opposition to a single authority overseeing both provident funds and insurance companies, arguing that occupational schemes and insurance products are not the same.
“Provident funds as an institution must remain under the supervision of the labour minister,” she said. The provident fund registrar, she added, should be strengthened and made more autonomous, but political responsibility should stay with the Labour Ministry, since provident funds are part of labour relations.
Christodoulou added that provident funds are products of collective agreements and that the role of trade unions “is and must remain visible”.
“We disagree with unified supervision. Our position is that oversight should remain with the labour minister and that the provident funds registrar should be strengthened,” he said.
Michael noted that an effort had already begun under former finance minister Harris Georgiades to create a single authority for provident funds and insurance companies, which SEK supported with some suggestions. “If the government brings it back, we will evaluate it positively,” he said. “What matters for us is stronger oversight to protect members’ interests, regardless of where the authority is housed.”
Charalambous, however, argued that the government’s priority is not to strengthen provident funds but to tax them more heavily. As part of wider tax reform, she said, the government wants to tax investment income of the funds, including rental income.
According to information previously reported and since confirmed by Politis, the government is considering transferring supervision of both provident funds and insurance companies to the Central Bank of Cyprus.
Employers insist on voluntary schemes
Employers’ organisations agree in principle on boosting the second pillar, but insist that any scheme must remain voluntary.
“We support strengthening the pillar, but only through incentives and on a voluntary and consensual basis. If a demand for mandatory provident funds is placed in front of us, we will react,” said Emilios Michael, deputy director general of the Cyprus Chamber of Commerce and Industry (KEVE).
“We want to see how the overall pension reform will evolve,” added Lena Panayiotou, deputy director general of the Employers and Industrialists Federation (OEV). “We are open to discussion on strengthening the second and third pillars,” she said, stressing that the aim must be to improve pensions in a way that is financially sustainable.
There are currently around 800 provident funds in Cyprus, a number that has been declining. Before the 2013 crisis, there were between 2,500 and 3,000.
Legal framework and EU direction
Provident funds are currently governed by Law 10(I)/2020 on the establishment, activities and supervision of Institutions for Occupational Retirement Provision. The law tightened the regulatory framework, increasing accountability and powers for supervisory authorities.
Proposed amendments under the late labour minister Zeta Emilianidou ran into strong opposition from OEV and KEVE and were not taken forward. The organisations objected to clauses that would have prevented funds or their members from transferring to approved pension plans, arguing this would restrict choice and limit competition. While they support stronger funds, employers insist that a broader reform of the pension system is needed to address structural problems.
At EU level, the European Commission last week approved a package of measures aimed at ensuring citizens have an adequate income in retirement by widening access to better, more efficient supplementary pensions. The measures are designed to complement, not replace, public pensions, which remain the core of national systems.
The package forms part of the Commission’s Savings and Investment Union strategy, which seeks to give households more opportunities to build wealth through capital markets while boosting growth and competitiveness in the EU economy.
“Our goal is clear: everyone should be able to maintain a decent standard of living in retirement,” said financial services and savings commissioner Maria Luís Albuquerque. “We have adopted a comprehensive approach to strengthen supplementary pensions so they complement rather than replace public pensions. Our measures will give Europeans the tools to plan their old age with more confidence, while unlocking new funding sources to support the EU economy,” she added, calling on member states and other stakeholders to ensure effective implementation at national level.