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The Cyprus banking sector restructuring and the impact on Provident Funds - Brief note on the importance of Provident Funds for adequate retirement provision in Cyprus

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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.

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