By Stefanos Sofroniou
An increasing number of employers are weighing the merits of introducing an occupation pension plan for their employees. Employer contributions towards employees’ pension pots are crucial for workforce satisfaction, setting companies apart in attracting and retaining top talent.
In recent years, the emergence of new streamlined and more flexible solutions for establishing company pension plans has prompted many businesses to transition from burdensome ‘in-house’ provident/pension funds to ‘turnkey’ plans offered by life insurers or multi-employer occupational pension funds (so called IORPs – Institutions for Occupational Retirement Provision).
However, choosing the right plan can be challenging, requiring companies to assess and compare various providers along with the individual characteristics and features of the plans offered by different insurers or IORPs. Many employers engage external experts, including lawyers, to gain a comprehensive understanding of the pros and cons of the different options, and to select a provider and plan that best suits their demands and needs.
Occupational retirement provision in Cyprus
Occupational pension schemes, also known as ‘Pillar 2’ pensions are employment-related group pension plans that supplement statutory ‘Pillar 1’ social insurance pension benefits.
In Cyprus, it is estimated that fewer than 50 per cent of employees benefit from membership in a company pension plan. The planned review of the pension system in Cyprus is anticipated to include initiatives to increase the availability of such plans, ultimately seeking to bolster the adequacy of people’s retirement income.
The conventional vehicle for employers wishing to provide pension benefits to their employees in Cyprus involved creating a separate entity, such as a provident fund or a pension fund, governed by a management committee responsible for filing returns to the Registrar of Occupational Retirement Funds. This setup has proven to be particularly costly and administratively burdensome, especially for small pension/provident funds, and even more so following the introduction of additional stricter obligations by the IORP II Directive that was transposed into national law in 2020.
Modern ready-to-use solutions
Some years back, life insurance companies in Cyprus, operating under the EU’s Solvency II regulatory framework, began offering streamlined occupational pension plans to companies and their employees. This simplified procedure allows employers to set up a company pension scheme through a “participation agreement” with the insurer. Under this agreement, the insurer receives and keeps records of the employer and employee contributions, invests funds based on individual preferences, discloses performance and cost information, and pays pension benefits to eligible members. Notably, both employer and employee contributions to these plans enjoy the same beneficial tax treatment as that afforded to provident/pension funds.
In addition to life insurers, multi-employer occupational retirement funds operating under the EU’s IORP directive also offer occupational pension plans. In contrast to traditional single employer provident/pension funds, these are umbrella funds that various employers can easily accede to, eliminating the need for setting up their own in-house provident fund.
The past few years have seen many employers setting up company pension plans through life insurers or multi-employer IORPs. Some of these were first-time plans, while others involved a switch from an existing in-house provident fund that was subsequently shut down.
The preference for these plans stems from their easy and quick set up, cost-effectiveness, and reliability. Moreover, they empower plan members by granting each individual the ability to manage their accumulated savings. Members can choose from different investment funds, transfer between funds and monitor investment performance, as well as track inflows of employee and employer contributions, costs, and charges. Members are also equipped with digital tools, such as smartphone apps, that enable them to easily monitor and manage their personal account at any time.
Navigating the different options
As discussed, these “ready-to-use” pension plans are offered by several life insurance companies and by certain multi-employer IORPs. Certain differences exist between insurers and IORPs, stemming from the different regulatory frameworks that govern each one and the nature of the two types of entities. Moreover, there are also vital distinctions between the solutions offered by different insurers and by IORPs. These pertain primarily to costs, performance, investment options, employer/member management tools and participation agreement terms.
Navigating the different options, as well as assessing and comparing providers and products can be challenging. Employers should consider using external experts where expertise is not available internally, to ensure a proper understanding of the different options, weighing advantages and disadvantages, and making a well-informed choice of a plan tailored to their specific needs and demands.
Stefanos Sofroniou is a senior associate at Elias Neocleous & Co LLC