Provident Funds in Cyprus: where they came from and where they might be going

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1 18th Regional Social Insurance, Pension and Provident Fund Conference Nicosia October 2011 Provident Funds in Cyprus: where they came from and where they might be going Bernard H Casey Institute for Employment Research University of Warwick and Hellenic Observatory London School of Economics

2 Outline of presentation What Provident Funds are Where Provident Funds come from Provident Funds today Where Provident Funds might go Lessons

3 What Provident Funds are Important component of social protection voluntary arrangements or product of collective bargaining covering 1/3 of employees (optional or automatic) employee and employer contributions individual accounts on DC basis accounts not portable benefits for sickness, approved loans, severance (inc. retirement), but lump sum tax privileged (EEE)

4 coverage of supplementary pensions all contributors to GSIS % in public sector occup pension 30 9% in semi-public sector occup schemes 7.5 2% in banking sector retirement gratuity scheme 7.5 2% in petroleum sector retirement gratuity scheme 0.5 * in public sector manual workers retirement gratuity scheme 1 * other members of a provident fund % employees without any supplementary coverage % in special schemes for doctors and lawyers 2.5 1% self-employed without any supplementary coverage % * under 0.5% c35% of dep. emps

5 Where Provident Funds come from UK colonial service tradition foundation for post-independence national pension schemes (Africa, India, Malaysia) Singapore Central Providence Fund History of PFs in Cyprus trade union mutual-aid funds OPs for white collar staff in municipalities 1945 PF for non-pensionable civil servants growth of industrial workforce lack of trust in company-based pension schemes national unemployment and pension system in 1957

6 Where Provident Funds come from The period of expansion national severance payment system in 1967 Hotels Fund and the Construction Industry Fund in 1968 conversion of PFs into OPs (semi-public sector and banks) 1974 hiatus and concentration on reconstruction reform of national pension system in 1980 Provident Funds Act of 1982 The steady state new funds, but only small uncovered sectors (retail) penetration scarcely grew (28% 1976 to 35% today)

7 total number of funds and start date (number of members in 2007) 1,600 1,400 recreation centre (1K) 1,200 total number of funds 1, bank (2K) hourly paid govt. employees (8K) + aeronautics (1K) commerce (6K) building industry (21K) + hotel industry (15K) press/ media (1K) bank (1K) start year

8 Recent trends Provident Funds today possible reporting issues re membership membership (000s) assets ( % GDP) assets/gdp affiliated members active members

9 Provident Funds today Heavy concentration 90% < 100 membs., 45% of membs. in 4 PFs 37% of assets in 4PFs, 1/2 all assets in 18 PFs Investment portfolios bank deposits rule! 100% 90% 80% 70% 60% asset allocation in % 40% 30% 20% 10% 0% all PFs PFs with 10K+ members PFs with 1-49 members assets in stocks assets in banks/coops assests as loans to membs assets in property other assets

10 Provident Funds today PFs do not act as retirement funds payouts in % 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% all PFs PFs with 10K+ members PFs with 1-49 members retirement disability death termination

11 Provident Funds today PF performance and the 2000 stock-market crash reserves, changes in reserves, and the equity shares index (2004=100) equity share (%) equity share of investments (RHS) nominal reserves index (*10) CSE index change in reserves index 0

12 Provident Funds today The performance of two large PFs real returns, the real interest rate and equity shares real returns (%) equity share (%) -7 0 Fund X equity share (RHS) Fund Y equity share (RHS) Fund X real return real interest rate Fund Y real return

13 Provident Funds today Provident Fund performance benefiting from high interest rates on bank deposits consultants advocating greater equity holdings volatility and the current crisis Administration costs seem to be low c 0.6%, but very high variance some above 3.5% of assets (146(1)2006?) some very low % (small PFs, but what are the costs?)

14 Where Provident funds might go Fiscal pressures ( high risk, AWG; unsustainable, IMF) % of GDP % of total total expend as % GDP total revenue as % GDP pension expend as % GDP pension revenue as % GDP pension deficit as % total deficit

15 Where Provident Funds might go Classic responses increase contributions, cut benefits, work longer, or make use of private saving Reform/restructure Provident Funds social partner views dislike of annuitisation dealing with uncovered sectors mandating participation/auto enrolment

16 Where Provident Funds might go Issues to be resolved rationalisation and concentration of funds wish for choice/active participation default funds and their management Difficult questions investment strategies/investment opportunities risk aversion and guarantees (cost like put options ) the state as back-up

17 Where Provident Funds might go Uncomfortable questions difference between investment risk and longevity uncertainty guarantees and the residual role of state political risk in the current crisis Unavoidable questions increasing longevity distribution of costs and pension adequacy system sustainability and the age of retirement

18 Lessons PFs important, but not sufficient, component of social protection Need for better, more timely data Funding raises as many problems as it answers Crisis makes reform more urgent, but shouldn t drive responses Need for comprehensive, informed debate