A large number of countries are facing increasing problems with pension sustainability and adequacy. To address this challenge, some European countries have adopted a three-pillar framework, which is based on: state pensions (known in Cyprus as the social insurance fund or SIF), professional pension funds (PPFs) and private pension schemes.

Although it constitutes a satisfactory basis, the SIF does not provide adequate pension benefits from a long-term perspective, which, based on the relevant EU regulation, should amount to 60 per cent of the income.

The causes relate to evolving social trends that are widely observed, mainly in developed countries, such as increasing life expectancy, entering the labour market and creating families at an older age, low birth rates and the reduced pensions received by low-paid people.

The problem is expected to intensify if measures are not taken in a timely manner to strengthen the second and third pillars, which, combined with the first pillar, could offer adequate pensions. The following recommendations of the Cyprus Economy and Competitiveness Council, which focus on the second pillar, are relevant.

First, given that 95 per cent of businesses in Cyprus are classified as very small (fewer than 10 employees), and do not generally offer PPFs, it is proposed to adopt the mandatory and automatic registration of employees in multi-employer PPFs.

As an incentive for employees to register, a minimum employer contribution could be set. However, in order to avoid abrupt financial burdens on businesses, it is suggested that employer contributions are introduced gradually.

Second, the state could contribute in the case of vulnerable groups, whose income is below the current tax-exempt threshold of €19,500 annually. This practice would benefit only those who really need it, while a mandatory requirement for the filing of tax returns by the beneficiaries would enhance tax compliance.

Third, the promotion of the right to transfer pension benefits between PPFs would strengthen the culture of saving and its maintenance until retirement, as well as contribute towards a more rational investment of funds.

Fourth, employees in Cyprus are currently allowed to withdraw the total amount from their PPF, in case of change of employer. Limiting this right of withdrawal would help increase retirement savings. With the same rationale, it is proposed to reduce the right to borrow from the PPFs to 20 per cent of the accumulated benefits.

Fifth, the practice of a lump sum payment from PPFs upon retirement often leads to mismanagement. It is accordingly proposed to allow a certain percentage of the total amount to be collected on retirement and the balance to be granted later, possibly as a monthly pension.

As regards the third pillar, encouraging voluntary retirement savings is another important option, which the government should continue supporting, taking into account the relevant European Commission Regulation on the Pan-European Personal Pension Product (PEPP).

In the same context, the adoption of flexible systems regarding the length of service, the rationalisation of policies regarding the minimum pension and multiple pensions, as well as the formulation of a selective policy of integration of the foreign workforce would be helpful factors.

Cultivating a culture of financial literacy, aiming at educating Cyprus’ citizens from a young age on the importance of managing finances through savings and efficient retirement planning, would also be beneficial for the long-term. Such an effort would require the collaboration of the Ministry of Education, the central bank, the Cyprus Securities and Exchange Commission, as well as universities and high schools.

Lastly, the above recommendations require further strengthening of the competent supervisory authorities. Strict supervision of the entities involved is necessary to avoid mismanagement, which would endanger citizens’ pensions and savings. Potentially, this could be achieved by the creation of a single supervisory authority, adequately staffed by personnel with the necessary scientific expertise.

Andreas Charalambous and Omiros Pissarides are economists and the opinions they express are personal