Cyprus outlines major pension overhaul with minister pushing for dual-income model

Every worker in Cyprus should be able to retire with two sources of income, combining their state pension with an occupational retirement scheme, Labour Minister Marinos Mousiouttas said this week, outlining plans for a pension overhaul that would also bring increases of up to 60 per cent. Speaking at the 17th Pension Forum in Nicosia, Mousiouttas said the reform aimed to strengthen pension adequacy, protect the long-term viability of the social insurance fund and address inequalities that have left many retirees struggling to make ends meet. The legislation has already undergone consultation with social partners and is now in the final stages before being submitted to the Council of Ministers and the House of Representatives. The proposed reform would introduce a revised basic pension to improve retirement incomes, alongside plans for occupational pension schemes that would provide workers with a second source of income. Mousiouttas explained that the social insurance system, introduced in 1980, had served Cyprus for 46 years but no longer fully reflected the country’s demographic and social realities. “We live longer, have fewer children and have working lives with interruptions and periods of caring that the old system did not recognise,” he said, pointing to changing employment patterns. He also acknowledged that many pensioners receive insufficient income, while the gender pension gap remains among the highest in Europe. The reform therefore focuses on three objectives: adequate pensions and greater equality, solidarity within and between generations, and the long-term sustainability of the social insurance fund. Under the proposals, the revised basic pension would improve pension adequacy, while the supplementary pension would retain its earnings-related character without increasing contribution rates. Pension increases would be introduced gradually over the next three years, ranging from 5 to 60 per cent, depending on individual circumstances. Furthermore, for the next 15 years, pensions would be calculated using both the existing and proposed methods, ensuring that no pensioner receives less than under the current system. The changes would also cover periods outside employment for justified reasons, with the state assuming responsibility for contributions for parents with caring duties, people with disabilities, informal carers and young people entering the labour market. “The reform is not just about today’s pensioners,” Mousiouttas stressed, describing this provision as one of its most important elements. However, one of the most contentious issues remains the 12 per cent actuarial reduction applied to pensions taken at 63 rather than the standard retirement age of 65. The minister made clear that 65 remains the retirement age, despite trade union pressure to ease the financial consequences of retiring earlier. Following extensive discussions with social partners, the government proposed reducing the actuarial cut by 4.5 percentage points on the basic pension, from 12 per cent to 7.5 per cent. The relief would apply to those who have already retired and those retiring over the next five years. Beyond that period, however, the proposed arrangements would encourage employees to remain in the workforce until 65, with the option of continuing voluntarily until 67. Those choosing to work until 67 would receive a 15 per cent increase, while those retiring at 63 after the five-year transitional period could face a reduction of approximately 15 per cent. Mousiouttas acknowledged that the arrangement would be “more difficult than what applies today”, but explained that the aim was to encourage longer working lives as life expectancy rises and the economy continues to need experienced workers. Another major element concerns the social insurance fund, whose reserves currently exceed €12 billion. Although the amount is presently recorded as a claim against the state, government borrowing from the Fund is being brought to an end, with the outstanding debt to be repaid gradually from 2028 through annual instalments. “With the reform, the Fund acquires real investment assets,” Mousiouttas said, stressing the importance of international governance standards, transparency and investment returns in securing future pensions. Meanwhile, attention is turning to the second pillar of the pension system, covering provident funds and occupational retirement schemes. The reform is designed to be implemented in stages, with the first phase focusing on low-income pensioners and the sustainability of the Fund, followed by the development of occupational pension schemes. Discussions with social partners are continuing, with the government seeking a framework agreement that would allow legislation to proceed with a realistic adjustment period. According to Mousiouttas, implementing the second pillar in full would require three to four years, while an occupational pension fund would need approximately a decade to mature. Several questions remain unresolved, including whether participation should be compulsory, based on automatic enrolment or encouraged through incentives, and how existing provident funds should be treated. Another issue is the gradual transition from receiving a lump-sum payment at retirement to securing regular supplementary income. Whatever form the framework takes, Mousiouttas stressed that the objective should be for every worker to receive “a second income from an occupational scheme” alongside their social insurance pension, adding that “how we get there is the subject of the dialogue”. The third pillar, involving individual savings, would follow later, although the minister made clear that private saving should not replace occupational pensions. “It is aimed at those who can save. The point is to cover those who cannot,” he explained, stressing the need to reach workers unable to build sufficient retirement savings independently. Trust, he added, would be central to the overhaul, particularly in ensuring workers that today’s contributions would be available when they retire. Asked about the supervision of provident funds, Mousiouttas said positions were converging towards an independent supervisory authority. Options include supervision under the Cyprus Securities and Exchange Commission (CySEC), the Central Bank of Cyprus (CBC), another independent authority, or a dedicated regulator for provident funds, with most views currently favouring the latter. As for whether participation should become compulsory, the minister declined to reveal his preference before presenting it to the labour advisory body. However, he stressed that the choice was “not black and white” and that a middle ground could be found. There was, he added, broad agreement that the second pillar was necessary, as the state pension system alone could not provide the retirement income needed for people to enjoy a good standard of living in Cyprus.