Specific numerical examples of how much pensions will increase were presented yesterday to the social partners by actuary Costas Stavrakis, who analysed the government’s plans and policy direction for strengthening benefits under the first pension pillar, which concerns the Social Insurance Fund.
The plans include the introduction of a redesigned basic pension of a fixed amount for each registered year of insurance, whether from paid contributions or contributions credited by the state.
This pension redefines the basic Social Insurance Fund pension and has a higher degree of redistribution, replacing the current minimum Social Insurance Fund pension and providing for the abolition of the social pension.
A redefinition of the supplementary Social Insurance Fund pension is also envisaged. It will retain its contributory character, while the Low-Income Pensioners’ Support Scheme will be redesigned to provide protection against poverty and income replacement for low-income pensioners.
Significant improvement in pensions
Within the framework of the Labour Advisory Body meeting, Mr Stavrakis provided specific examples of pensions for existing or future Social Insurance Fund pensioners following the five-year transitional period.
Under the current system, the minimum pension for a low-income individual retiring with 30 years of paid contributions and seven years of credited contributions is €436. With full implementation of the reform, this will rise to €577, an increase of 33%.
In the case of 35 years of paid contributions and seven years of credited contributions, the pension will increase from €462 to €655, a 42% rise.
An individual retiring at 65 with 42 years of paid contributions and low earnings currently receives a basic pension of €538. Under the full reform, this will increase to €764, a 42% rise.
Smaller increases for higher incomes
The increase in pensions decreases as earnings rise. With 35 years of paid contributions and seven credited contributions for low to middle incomes, the pension will rise from €680 to €837, an increase of 23%.
For 42 years of paid contributions and seven credited contributions, the pension will rise from €807 to €989, a 22% increase.
In the case of 35 years of paid contributions and seven credited contributions for middle incomes, the increase is limited to 13%, with pensions rising from €897 to €1,018.
The same 13% increase applies to 42 years of paid contributions and seven credited contributions for middle incomes, with pensions rising from €1,078 to €1,213.
For middle to higher incomes, with 35 years of paid contributions and seven credited contributions, the increase is 4%, with pensions rising from €1,333 to €1,381.
For 42 years of paid contributions and seven credited contributions for middle to higher incomes, the increase is limited to 3%, from €1,614 to €1,661.
Gradual transition
During the five-year transitional period, the change in pension amounts from the current system to the new system will be gradual, at 20% per year.
Based on data for existing pensioners, the average monthly Social Insurance Fund pension is €717 for women and €1,033 for men. With the reform, this will increase to €800 and €1,095 respectively. Pension adequacy will also increase from 42% to 47% for women and from 59% to 62% for men.
For current contributors to the Social Insurance Fund who will retire between 2025 and 2045, the average monthly pension is €1,054 for women and €1,266 for men. With the reform, this will rise to €1,126 and €1,316 respectively. The replacement rate, meaning the percentage of working-life earnings reflected in pensionable income, increases substantially: for women from 37% to 64% and for men from 41% to 66%.
Calculation formula
The redesigned basic pension includes a fixed monthly amount ranging from €1.1 at age 63 to €1.5 at age 67 for each month of registration, with 12 months per year.
Redesigned basic pension = Months of registration x fixed monthly pension amount.
Months of registration cover the period from age 16 until retirement age or during the insured period.
The fixed monthly pension amount per month of registration according to retirement age is as follows:
63: €1.1
64: €1.2
65: €1.3
66: €1.4
67: €1.5
The redesigned basic pension increases by 10% for each dependent person, up to a maximum of 30%.
The redesigned supplementary pension is calculated with a coefficient of 1.25% for each supplementary unit applied to the value of basic insurable earnings at retirement.
Redesigned supplementary pension = 1.25% x Number of supplementary units x Basic insurable earnings.
Retirement conditions
Retirement at age 65 requires 15 years of registration, whether paid or credited contributions, of which 10 years must come from paid contributions.
This requirement will gradually increase to 20 years, of which 15 must come from paid contributions.
Retirement at the earliest possible age of 63 requires registration in the Social Insurance Fund for at least 80% of the insured period.
Relief for 12%
Relief from the actuarial reduction of the basic pension amount will be granted to all existing pensioners and to future pensioners retiring up to the last year before full implementation of the reform in 2030, who chose or will choose early retirement before the statutory retirement age.
All pensioners, regardless of whether they remain under the existing system or move to the new system, will be credited with a nine-month period in the total months between their retirement age and age 65, capped at half of that period.
Call for planning on provident funds
Social partners are calling for the design of the second pension pillar to proceed in parallel with the strengthening of the first pillar, noting that the Ministry’s original intention was for the two to advance together.
SEK Secretary-General Andreas Matsas stated that the reform cannot be promoted in a fragmented manner but must be comprehensive, including provident funds. He noted that the minimum pension remains below the poverty line and warned that without provident funds there will be adequacy issues.
PEO Secretary-General Sotiroula Charalambous said that the policy direction and parameters for provident funds must be clarified, noting that there are many questions, including how much the state currently spends on pensions and how much it will spend.
DEOK President Stelios Christodoulou stressed that the second pillar is equally important and that many parameters must be examined, discussed and agreed.
Union representatives stated that they are not requesting simultaneous implementation, but clarity on policy direction.
Employers are also awaiting the government’s positions on provident funds, according to Cyprus Chamber of Commerce and Industry Secretary-General Philokypros Rousounides and OEB Assistant Director-General Lena Panayiotou. Employers’ organisations have sought expertise from Aon on the pension reform, focusing also on the sustainability of the Social Insurance Fund.
Social partners are expected to submit their questions in writing to the Ministry of Labour. The Labour Advisory Body is scheduled to meet again on 24 February.