Social partners are awaiting further briefing from the government on the framework for investment policy and governance of the surpluses of the Social Insurance Fund (SIF), at a time when it remains unclear who will participate in the independent body that will manage the SIF’s investment account.
Economists specialising in the social insurance system and investments are also seeking clarification on the composition of the independent investment body. At the same time, explanations are being requested regarding the repayment of the state’s debt to the SIF and the methodology that will be used.
Accountability and transparency
The general secretary of union SEK, Andreas Matsas, told Politis that the creation of an independent institution has been announced, adding that its composition, structure and mode of operation will be discussed within the framework of social dialogue.
Within the discussion, he added, reference was made to possibly assessing the operating model of the hydrocarbons fund. Social partners who contribute to the fund should participate in an advisory capacity, he stressed.
The general secretary of union PEO, Sotiroula Charalambous, stated to Politis that there must be a legal framework governing the fund and its investment policy, based on international practices, with know‑how and expertise from those who will participate.
“We do not want to have a role in the day‑to‑day management of the reserve, the so‑called day‑to‑day running, but we must know the rules and there must be accountability, transparency and access to data, and assurance that there will be no risk,” she said.
“The owners of the fund cannot be unaware of how their money will be managed,” she added.
Union DEOK president Stelios Christodoulou argues that it must be clarified how this independent body will operate, noting that what has been communicated so far is that it will function within a restrictive framework and that there will be no margin for mismanagement.
“Those who contribute to the fund, namely the social partners, must be informed, must be able to express views, and there must be transparency and accountability,” he noted.
“Clarifications must also be provided by the Ministry of Finance on the repayment of the debt and the methodology that will be used, as this is expected to be a complex mathematical exercise involving many economic and other variables,” he added.
“We are discussing this without the innkeeper present – and the innkeeper is the Ministry of Finance,” he remarked.
Investments for social development
In previous statements to Politis, social partners stressed that the fund’s investment policy should focus on sectors that contribute to social development.
“We have long emphasised that the SIF can invest in social housing with a dual benefit – addressing the housing crisis on the one hand and increasing state revenues on the other,” the general secretary of PEO had said.
According to the general secretary of SEK, the fund’s investment policy should target sectors with a social dimension, delivering reciprocal benefits to its members.
“We propose that, over the long term, there should be an investment policy with diversified investments, low‑risk investments, and an emphasis on investments related to sustainable development,” said the DEOK president.
What does ‘independent body’ mean?
“At this stage it is not clear what the term ‘independent body’ means and who will participate in it. If anyone other than a professional investment adviser is involved, then not only must strict limits be placed on the fund’s investment policy, but those limits must be particularly narrow,” former Fiscal Council chair Michalis Persiannis told Politis.
“In any case, a clear risk policy and investment strategy must be announced, which will be binding and subject to strict monitoring,” he stressed.
The University of Cyprus professor of finance, specialising in pension research, Andreas Milidonis, has publicly raised questions about whether there will be a clear separation between political oversight of the fund, independent supervision and investment management.
Speaking recently on public broadcaster CyBC’s programme Proino Dromologio and in statements to Politis, he noted: “We cannot talk about any kind of planning without independent supervision. Who will supervise pension funds? Who will supervise insurance products? Who will supervise the investments of this fund that is being created for the SIF? Where is the institutional independence?” he asked.
The plans
In the presentation recently delivered to social partners, reference is made to the establishment of a new independent body that will manage the SIF’s investment account, based on international standards and principles of governance, with an effective governance structure that ensures separation of roles, transparency, accountability and independence in investment decision‑making.
The ultimate objective of upgrading the SIF’s investment framework, it is stated, is to strengthen the fund’s economic governance.
The goal, as noted, is to better safeguard insured persons’ pension rights, enhance intergenerational fairness and improve the long‑term sustainability of the SIF, by achieving higher returns within defined, measured‑risk frameworks.
Regarding the challenges of the current SIF investment framework, reference is made to weak investment governance and almost no portfolio diversification, with 97 per cent of assets placed in non‑tradable deposits at the Treasury.
Also highlighted are low expected long‑term returns (linked to European Central Bank base rates) and the continued increase in the state’s debt to the SIF over time.
Key aspects of the proposed solution
Key elements of the proposed reform include ending state borrowing from the SIF, repaying the existing state debt to the SIF, and developing an effective investment‑governance framework.
As regards ending borrowing from the SIF, it is stated that all future SIF surpluses will be transferred to a separate investment account and will no longer be added to the existing state debt to the fund, which currently stands at €12 billion, or around 30 per cent of GDP.
The gradual repayment of the existing state debt to the SIF over time, through annual instalments amounting to 0.3 per cent of the previous year’s GDP, will take into account the sustainability of public finances and access to borrowing markets. Repayment instalments will be channelled into the investment account.
“The proposed reform of the investment policy and investment‑governance framework of the SIF is very substantial. It provides for future generations by better safeguarding their pension rights. It lays the foundations for higher returns with controlled risk. It obliges the state to undertake an extremely large fiscal commitment over the next 40 years, within the framework of the proposed SIF reform design,” the Ministry of Labour presentation notes.
“Strong governance is a fundamental prerequisite for success and enhances insured persons’ trust in the SIF,” it concludes.
Debt repayment and €60bn for investments
It is noted that the government’s target is the full repayment of the state’s €12 billion debt to the SIF by 2066, while future surpluses, estimated at €800 million annually, will be deposited into a special investment fund.
Based on the actuarial study, Marinos Mousiouttas stated after the recent meeting of the Labour Advisory Board that there is a 40‑year window from 2026 to 2066 within which the SIF’s existing borrowing will be fully repaid.
“The long‑standing practice of the state borrowing from the Social Insurance Fund is coming to an end,” he reiterated, noting that all future surpluses will be channelled into an investment fund.
New meeting tomorrow
The Labour Advisory Board will meet again tomorrow, with discussions on pension reform expected to continue.
As the Minister of Labour stated after the last meeting of the Labour Advisory Board, details regarding public‑debt issues and the methodology behind the figures shared with social partners will be presented by the Ministry of Finance at a forthcoming session.
