Apostolos Tomaras
The submission of the pension reform bill to the social partners marks the beginning of the final stage of a long-running effort to modernize Cyprus’ social insurance system.
On Wednesday, Aug. 19, Labour Minister Marinos Mousiouttas may receive an initial response from the parties involved to the government’s proposal. If everything proceeds smoothly, the bill will be sent to Parliament in September for debate and approval.
From the government’s perspective, the proposal represents the maximum it can offer without changing the underlying philosophy of the social insurance system. The labor minister is expected to make this clear during Wednesday’s meeting, when the bill’s provisions will be presented in detail.
The Labour Ministry expects the social partners to formally state their positions on Aug. 28, when the Labour Advisory Board is due to meet. The finance minister may also attend to explain the proposed investment policy for the Social Insurance Fund.
According to information obtained by Kathimerini, the government is proposing to reduce, rather than abolish, the 12% penalty imposed on those who retire at 63. The bill reportedly provides for the penalty to be cut by one-third.
The bill
Labour Minister Marinos Mousiouttas will approach Wednesday’s meeting with the social partners in a positive spirit, even on issues that are difficult by their very nature, such as the 12% actuarial reduction applied to those who retire at 63.
The minister told Kathimerini that the ministry is prepared to discuss any proposal involving additional expenditure, provided those making the proposal can identify where the extra money would come from. The aim is to maintain the system’s financial balance.
The main provisions of the bill prepared by the Labour Ministry include:
- A new method for calculating pensions, which the government says could result in increases ranging from 2% to 60%.
- Changes to benefits paid by the Social Insurance Fund.
- Social insurance credits for mothers with young children, people with disabilities, informal carers and young people who work while studying.
- The inclusion in the Social Insurance Scheme of people living on private income. This group currently receives a social pension without having paid social insurance contributions.
- A new investment policy for the fund’s reserves.
- Provident funds for all private-sector employees.
The unions and the 12% penalty
For trade unions, abolishing the 12% reduction applied to the pensions of people who retire at 63 has been, and remains, one of their main demands.
The government, however, says complete abolition is out of the question for two reasons. First, it would effectively lower the retirement age. Second, it would place such a burden on the Social Insurance Fund that it could raise questions about the long-term sustainability of the system.
In an effort to ease union pressure, the government accepts that the 12% penalty could be reduced. According to reliable sources cited by Kathimerini, the bill proposes cutting it by one-third, bringing the reduction down to 8%.
The government has said that all issues can be discussed, provided any additional cost is matched by an equivalent source of funding. In theory, this means the Labour Ministry could consider reducing the penalty further.
However, government sources said the resulting financial gap would have to be covered either by increasing contributions to the Social Insurance Fund or by raising the retirement age. Neither option is currently being considered by the government.
The same sources said the actuarial reduction would no longer apply after 2032, when the new method for calculating pensions is due to take effect.
Provident funds
During earlier discussions, trade unions strongly supported extending provident funds across the private sector.
Statements from the Labour Ministry suggest, however, that the issue will be difficult to resolve before next December, when the bill is scheduled to be sent to Parliament for approval.
The ministry believes provident funds can be extended to all private-sector workers but says more time will be needed to complete the necessary preparations.
The Labour Ministry is therefore expected to propose to the Labour Advisory Board that the issue remain under discussion without holding up the wider pension reform.
Investing the reserves
Discussions beginning at the Labour Advisory Board on Aug. 28 will also cover the investment of the Social Insurance Fund’s reserves.
The Labour Ministry is considering adopting a model based on the law governing the Hydrocarbons Fund. A final decision will have to be reached before Jan. 1, 2028.
The investment fund would be managed by an independent authority. It would receive surpluses from the Social Insurance Fund, as well as the state’s annual installments toward repaying the €12 billion it owes the fund.
