Provident Funds in Cyprus: where they came from and where they might be going

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Norma Anthony
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and where they might be going Bernard H Casey Institute for Employment

1 18th Regional Social Insurance, Pension and Provident Fund Conference Nicosia October 2011 Provident Funds in Cyprus: where they came from and where they might be going Bernard H Casey Institute for Employment Research University of Warwick and Hellenic Observatory London School of Economics

2 Outline of presentation What Provident Funds are Where Provident Funds come from Provident Funds today Where Provident Funds might go Lessons

3 What Provident Funds are Important component of social protection voluntary arrangements or product of collective bargaining covering 1/3 of employees (optional or automatic) employee and employer contributions individual accounts on DC basis accounts not portable benefits for sickness, approved loans, severance (inc. retirement), but lump sum tax privileged (EEE)

and employer contributions individual accounts on DC basis accounts not portable benefits

4 coverage of supplementary pensions all contributors to GSIS % in public sector occup pension 30 9% in semi-public sector occup schemes 7.5 2% in banking sector retirement gratuity scheme 7.5 2% in petroleum sector retirement gratuity scheme 0.5 * in public sector manual workers retirement gratuity scheme 1 * other members of a provident fund % employees without any supplementary coverage % in special schemes for doctors and lawyers 2.5 1% self-employed without any supplementary coverage % * under 0.5% c35% of dep. emps

5 2% in petroleum sector retirement gratuity scheme 0.

5 Where Provident Funds come from UK colonial service tradition foundation for post-independence national pension schemes (Africa, India, Malaysia) Singapore Central Providence Fund History of PFs in Cyprus trade union mutual-aid funds OPs for white collar staff in municipalities 1945 PF for non-pensionable civil servants growth of industrial workforce lack of trust in company-based pension schemes national unemployment and pension system in 1957

mutual-aid funds OPs for white collar staff in municipalities 1945 PF for non-pensionable civil servants growth

6 Where Provident Funds come from The period of expansion national severance payment system in 1967 Hotels Fund and the Construction Industry Fund in 1968 conversion of semi-public sector PFs into OPs 1974 hiatus and concentration on reconstruction reform of national pension system in 1980 Provident Funds Act of 1982 The steady state new funds, but only small uncovered sectors (retail) penetration scarcely grew (28% 1976 to 35% today)

and concentration on reconstruction reform of national pension system in 1980 Provident Funds Act of 1982

7 total number of funds and start date (number of members in 2007) 1,600 1,400 recreation centre (1K) 1,200 total number of funds 1, bank (2K) hourly paid govt. employees (8K) + aeronautics (1K) commerce (6K) building industry (21K) + hotel industry (15K) press/ media (1K) bank (1K) start year

employees (8K) + aeronautics (1K) commerce (6K) building industry (21K) + hotel industry (15K) press/ media (1K) 200

8 Recent trends Provident Funds today possible reporting issues re membership membership (000s) assets ( % GDP) assets/gdp affiliated members active members

9 Provident Funds today Heavy concentration 90% < 100 membs., 45% of membs. in 4 PFs 37% of assets in 4PFs, 1/2 all assets in 18 PFs Investment portfolios bank deposits rule! 100% 90% 80% 70% 60% asset allocation in % 40% 30% 20% 10% 0% all PFs PFs with 10K+ members PFs with 1-49 members assets in stocks assets in banks/coops assests as loans to membs assets in property other assets

100% 90% 80% 70% 60% asset allocation in 2007 50% 40% 30% 20% 10% 0% all PFs PFs with 10K+

10 Provident Funds today PFs do not act as retirement funds payouts in % 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% all PFs PFs with 10K+ members PFs with 1-49 members retirement disability death termination

11 Provident Funds today PF performance and the 2000 stock-market crash reserves, changes in reserves, and the equity shares index (2004=100) equity share (%) equity share of investments (RHS) nominal reserves index (*10) CSE index change in reserves index 0

15 10 equity share (%) -200 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 5-400

12 Provident Funds today The performance of two large PFs real returns, the real interest rate and equity shares real returns (%) equity share (%) -7 0 Fund X equity share (RHS) Fund Y equity share (RHS) Fund X real return real interest rate Fund Y real return

2004 2005 2006 2007 2008 2009 2010 25 20 15 10 5 equity share (%) -7 0 Fund X equity

13 Provident Funds today Provident Fund performance benefiting from high interest rates on bank deposits consultants advocating greater equity holdings volatility and the current crisis Administration costs seem to be low c 0.6%, but very high variance some above 3.5% of assets some very low % (small PFs, but what are the costs?)

and the current crisis Administration costs seem to be low c 0.

14 Where Provident funds might go Fiscal pressures ( high risk, AWG; unsustainable, IMF) % of GDP % of total total expend as % GDP total revenue as % GDP pension expend as % GDP pension revenue as % GDP pension deficit as % total deficit

0 2010 2020 2030 2040 2050 2060 20 total expend as % GDP total revenue as %

15 Where Provident Funds might go Classic responses increase contributions, cut benefits, work longer, or make use of private saving Reform/restructure Provident Funds social partner views dislike of annuitisation dealing with uncovered sectors mandating participation/auto enrolment

saving Reform/restructure Provident Funds social partner views

16 Where Provident Funds might go Issues to be resolved rationalisation and concentration of funds wish for choice/active participation default funds and their management Difficult questions investment strategies/investment opportunities risk aversion and guarantees (cost like put options ) the state as back-up

their management Difficult questions investment strategies/investment

17 Where Provident Funds might go Uncomfortable questions difference between investment risk and longevity uncertainty guarantees and the residual role of state political risk in the current crisis Unavoidable questions increasing longevity distribution of costs and pension adequacy system sustainability and the age of retirement

state political risk in the current crisis Unavoidable questions increasing

18 Lessons PFs important, but not sufficient, component of social protection Need for better, more timely data Funding raises as many problems as it answers Crisis makes reform more urgent, but shouldn t drive responses Need for comprehensive, informed debate

many problems as it answers Crisis makes reform more urgent,

The Cypriot Pension System: Adequacy and Sustainability

Cyprus Economic Policy Review, Vol. 6, No. 2, pp. 49-58 (2012) 1450-4561 49 The Cypriot Pension System: Adequacy and Sustainability Philippos Mannaris Aon Hewitt Abstract The fundamental objective of pension