Government: We are proceeding first with the SIF pillar and subsequently with Provident Funds

• Diverging views between employers and unions regarding the expansion of Provident Funds to businesses
• Government aim: Pension reform discussions to be completed within June
• The Minister of Labour to hold contacts with all new parliamentary groups – The timetable must not change

There is still a long road ahead regarding the establishment of a new investment policy for the Social Insurance Fund (SIF), particularly concerning the implementation of the political decision to create an Independent Authority to manage the Fund's reserves for investment purposes. However, the priority of the government—and by extension the Ministers of Finance and Labour who manage the relevant portfolio—is to achieve convergence among social partners, primarily regarding the first pension pillar, which is the SIF.

Information gathered by Brief regarding today's meeting of the Labour Advisory Body (ESS) indicates that the Minister of Labour, Marinos Mousiouttas, will explain to the leadership of the other two social partners (employers and unions) the difficulties inherent in the simultaneous implementation of the first and second pillars—namely, the SIF and the expansion of the institution of Provident Funds to the private sector.

The government is convinced that if the first and second pillars are not decoupled, it will not be possible to submit the relevant bills concerning the increase of low pensions and the regulation of the 12% actuarial reduction ("penalty").

According to the government, the main reason that might put a "brake" on pension reform is the gap separating employer and trade union organizations regarding the "mandatory" expansion of the Provident Fund institution to the private sector.

The two employer organizations, OEB (Employers and Industrialists Federation) and KEBE (Cyprus Chamber of Commerce and Industry), are reacting strongly to the adoption of Provident Funds by businesses as a supplementary pension scheme. The employers' reaction focuses primarily on the increased operating costs that would arise if collective agreements included a provision for the mandatory implementation of a supplementary pension plan.

Employer leaderships further argue that any expansion of Provident Funds into businesses would lead to a reduction in their available capital, which is needed to stimulate the economy. Specifically, OEB appears to be discussing the possibility of agreeing on a medium-term transitional period for the implementation of regulations, thereby giving businesses time to adjust. Employers also argue that the increase in labor costs may have negative impacts on the labor market and business operations.

On the other side, the trade union movement invokes the relevant EU directive, which recommends that member states gradually expand the institution of Provident Funds as a second pension pillar across the entire spectrum of economic activity. Trade union members of the ESS also consider the second pension pillar essential for creating conditions for more dignified pensions.

In light of these diametrically opposed views between employers and unions, the government does not appear willing to keep the pension reform "held hostage," in the words of a senior government official. The Minister of Labour is prepared to schedule a series of ESS meetings within June, once a week, to make a final effort to ensure the pension system reform project is not derailed.

The political decision to establish an Independent Authority for the purpose of investing SIF reserves has been taken. However, the study by the actuary of the International Labour Office (ILO)—who also serves as the Ministry of Labour’s actuary—will be scrutinized by the Ministry of Finance and the social partners.

A basic outline has been provided by the actuary regarding the direction of the investment policy. This will target international markets, stocks, bonds, infrastructure, and real estate. The goal is for any profits from investments to be returned to the beneficiaries by strengthening benefits and the sustainability of the SIF based on three pillars:

• The first pillar concerns investment diversification. Following the models of large international funds, such as the Norwegian Sovereign Wealth Fund, the SIF will turn to international markets, stocks, bonds, infrastructure, and real estate. This dispersion will decouple the Fund from exclusive dependence on the domestic economy and create prospects for participation in global growth, aiming for higher and more stable long-term returns.
• The second pillar concerns strict supervision. A specialized technical committee will define investment parameters, risk limits, and capital withdrawal procedures to ensure the protection of reserves even during periods of international economic instability.
• The third pillar is independence. The separation of the Fund from state assets attempts to end the long-standing perception that the SIF constitutes an easy fiscal solution for the state. Profits from investments will be returned exclusively to beneficiaries through the enhancement of benefits and the long-term sustainability of the system.

For the first time, an attempt may be made to build a system where the employee is not just a contributor but an owner of their insurance property, through an organization that aspires to operate with transparency and a long-term strategy.

Regarding the repayment of the state debt to the SIF, the view of both the Ministers of Finance and Labour is that repayment should occur gradually to avoid any problems with public finances. The new reserves created will be deposited into a special fund for investment purposes.

Source: Brief