The Cyprus banking sector restructuring and the impact on Provident Funds

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Cyprus became the fifth Eurozone country to enter into an international bailout deal (worth  €10bn) with the Troika in order to recapitalize the banking sector, achieve fiscal consolidation and implement structural reforms. This bailout deal resulted in the liquidation of the Popular Bank of Cyprus (“Laiki”) and a major restructuring of the Bank of Cyprus, by far the biggest two banks on the island. Depositors with Laiki and Bank of Cyprus are protected against losses on deposits for deposits up to €100.000. However, amounts in excess of €100.000 are subject to substantial losses (in Laiki’s case) or to a deposit-to-equity swap (in Bank of Cyprus’ case).

To the great relief of the provident fund industry, President Anastasiades in his public address on 26 March 2013 promised the safeguarding of provident funds from losses incurred due to the restructuring. Subsequently, a number of institutions with bank accounts with the Bank of Cyprus and Laiki have been exempted from this “bail-in” of depositors in the public interest. The first list of exemptions included government organizations, universities, charities, insurance companies and other auxiliary financial institutions. Provident funds were not included under these exemptions.

The Government has, however, declared that it reached a deal with the Troika to transfer the assets of all provident funds from Laiki to the Bank of Cyprus. In parallel to this, a mechanism for reimbursing any losses arising from the deposit-to-equity swap within Bank of Cyprus is being prepared. It is our understanding that the latest draft of the staff-level agreement makes the following provision for provident and retirement funds:  “The 2013 deficit target may be revised to incorporate compensation for provident and retirement funds in Cyprus Popular Bank to ensure equal treatment with such funds in Bank of Cyprus following the conversion of deposits into equity. Given the social welfare nature of provident and retirement funds, the Cypriot authorities will use the necessary amount out of programme financing for such compensation.”

The provident fund industry is anxiously awaiting full details of the structure of this protection of provident fund cash deposits.

Cronje & Yiannas Actuaries and Consultants are willing to respond to any questions from Committee members of Provident Funds either through our online form or by telephone.

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