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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.


Timeline of the Cyprus Bailout

16 March

The first round of discussion with the Eurogroup results in bailout deal with the Troika including a 6.75% levy on deposits up to €100.000 and 9.9% over €100.000.

Access the Eurogroup statement here [PDF-English]

19 March

The Parliament of Cyprus rejects the bailout deal and banks remain closed until a new bailout agreement can be reached.

22 March

Chancellor Merkel’s opposes the utilization of pension assets as part of the bail-out solution for Cyprus.

The Parliament of Cyprus adopts several laws in preparation of the revised bailout deal, including a bill regarding the restructuring of the banking sector.

Access the Bank Restructuring Law here [PDF-Greek]
Access the Order for the restructuring of the Bank of Cyprus here [PDF-Greek]
Access the Order for the liquidation of the Popular Bank of Cyprus here [PDF-Greek]

25 March

A new bailout agreement is reached with the Troika including the liquidation of Laiki and the restructuring of Bank of Cyprus.

Access the Eurogroup statement here [PDF-English]

26 March

President Anastasiades in his public address promises to make every effort to preserve provident funds in banks in Cyprus

28 March

After almost two weeks of closure, banks are reopened with very restrictive capital controls in place. The capital controls are set to be reviewed every 7 days.

Access the first order regarding capital controls here [PDF-Greek]
Access the unofficial translation by the Central Bank of Cyprus of the capital controls here [PDF-English]

12 April

The Eurogroup welcomes the staff-level agreement reached between Cyprus and the Troika for the macro-economic adjustment program. The final agreement is expected to be in place by 24 April 2013, provided national procedures are complete. The mechanism for reimbursement of any provident and retirement fund losses from the debt-to-equity swap has not been finalised or any draft officially circulated.

Access the Eurogroup statement here [PDF-English]

14 April

The capital orders continue to be revised. The eight decree has been issued.

Access the eight order regarding capital controls here [PDF-Greek]
Access the unofficial translation by the Central Bank of Cyprus of the capital controls here [PDF-English]

30 April

The Cyprus parliament approves the MOU with the Eurogroup.

8 May

Cyprus enters into final financial assistance agreement with the European Stability Mechanism.

Access the Agreement here [PDF-English]

13 May

First tranche of bailout assistance is disbursed to Cyprus.

Access the Eurogroup statement here [PDF – English]

17 May

The capital orders continue to be revised. The twelfth decree has been issued.

Access the twelfth order regarding capital controls here [PDF-Greek]

Access the unofficial translation by the Central Bank of Cyprus of the capital controls here [PDF-English]

13 Sept

Provident Funds which held deposits with ex-Laiki Bank at 26th March 2013 and have been affected by a reduction of their deposits can submit a compensation claim to the Republic of Cyprus Treasury Department, based on the relevant decision of the Ministry Council of the Republic and further to the agreed Memorandum of Understanding. Read more here.


Brief note on the importance of Provident Funds for adequate retirement provision in Cyprus

Cyprus faces significant demographic and financial pressures on the first and main pillar of pension provision in Cyprus. This provision is currently barely sufficient to provide adequate retirement pensions, and is due to suffer reductions as a result of the increasing financial pressures. This places a much greater importance on other sources of retirement income, and in particular the role of provident funds in providing retirement income. The latest demographic and poverty-in-retirement statistics from the EU for Cyprus confirm this (see tables 1 and 2 below).

There is currently no pension provision in Cyprus through group pension policies provided by insurance companies due to the lack of tax incentives and a comprehensive regulatory framework. Therefore, the only sources of additional retirement income for people in Cyprus are occupational pension plans, mainly defined contribution provident funds, and personal savings (which have suffered significant reductions following the Eurogroup decision). Currently, provident funds typically provide 30% to 40% of a private sector retiree’s pension savings (including state provision).

In addition, Cyprus faces rising unemployment and the restructuring of the banking and professional services sector, which is the biggest private sector employer in Cyprus. A critical source of income for people who are likely to be forced to retire early or be made redundant with limited prospects of securing another job is their provident funds.

Table 1 – Adequacy of Pension Provision in Cyprus

2010 Data 1
27 EU States Cyprus
Aggregate Replacement Ratio 2 53% 36%
At risk poverty rate for older people 3 16% 41%

1 Source: EUROSTAT data 2010.
2 Aggregate Replacement Ratio: The indicator is defined as the ratio of the median individual gross pensions of 65-74 age category relative to median individual gross earnings of 50-59 age category, excluding other social benefits.
3 At risk poverty rate for older people: Share of population aged 65 or over with an equivalised disposable income below the risk-of-poverty threshold, which is set at 60 % of the national median equivalised disposable income after social transfers.

Table 2 – Sustainability of State Pension Provision

Public Expenditure on Pensions % of GDP 4 27 EU States Cyprus
2010 11.3% 7.6%
2060 12.9% 16.4%

4 2012 Aging Report.


Compensation claim for affected ex-Laiki Provident Funds

Provident Funds which held deposits with ex-Laiki Bank at 26th March 2013 and have been affected by a reduction of their deposits:

  • Can submit a compensation claim to the Republic of Cyprus Treasury Department, based on the relevant decision of the Ministry Council of the Republic and further to the agreed Memorandum of Understanding.
  • The documentation required to file a compensation claim has been posted in the Treasury Department’s website and can be found here.
    The compensation claim document can be downloaded in pdf form here [PDF-Greek].
  • Applications will be received by the Republic of Cyprus Treasury Department at the following address:
        Treasury of the Republic
        Corner of Michael Karaoli and Gregory Afxentiou
        1441 NICOSIA
        Telephone contact number – 22 602333

The Treasury Department’s announcement [PDF-Greek].


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