Library & Tools


The decisive aim of any pension policy is to ensure decent incomes for the elderly population. In Cyprus, as in most other European Countries, the “Three Pillar Model” is the working model for securing retirement provision.

  • The first pillar (Public Pension) is financed by statutory social insurance contributions.
  • The second pillar (Occupational Pension) is financed by voluntary contributions of employers and employees.
  • The third pillar (Individual Pension) is financed by voluntary individual contributions.

Financial Well-being

Income is the traditional measure associated with financial freedom and well-being. In reality, individuals must adopt a multi-dimensional view of well-being; one to include security and freedom of choice, for both the present and the future. For all individuals, the financial future includes retirement years and retirement provision is therefore a basic feature of financial well-being.

Repalcement Ratios

As a rule of thumb, approximately 70% of final salary should be sufficient to provide retirees with the same standard of living they enjoyed while working, assuming there are no significant loan expenses outstanding at retirement. This is called the replacement ratio and a key question for individuals is how to achieve an appropriate replacement ratio at retirement. The OECD average replacement ratio from Public Pension (first pillar) schemes of an average earner is 41%, compared with 54% when Individual Pensions (third pillar) are included. When Occupational Pensions (second pillar) are added, the average replacement ratio is 68% for an average earner1.

Pillar 1 - The Public Pension

The first pillar is designed to provide all members of society with a basic standard of living. Provided individuals meet specific criteria upon retirement, this translates to a basic monthly pension, plus a supplementary monthly pension which depends on contributions made over and above the “basic insured emoluments”2.

The first pillar is organised as a pay-as-you-go (PAYG) structure which relies on the working population to make Social Security contributions, through taxation, to provide a pension to those already retired. PAYG systems meet their goals sufficiently when the overall population is young.

Studies project that, as working populations shrink due to ageing populations and low fertility rates, replacement ratios from first pillar schemes will generally decline in the period from 2013 to 2053 across the European Union3, challenging the adequacy of the Public Pension pillar. The projected replacement ratio from the basic monthly pension in Cyprus amounts to 29% for men and 36% for women in 20454.

Pillar 2 – The Occupational Pension

The second pillar is usually organised as savings made into Institutions for Occupational Retirement Provision (IORPs) which manage collective retirement schemes for employers to provide retirement benefits to employees and their beneficiaries. This usually takes the form of Defined Contribution (DC) or Defined Benefit (DB) schemes.

As demography and low replacement ratios challenge the adequacy of the first pillar, the second pillar is growing in importance across the European Union and is currently holding assets worth €2.5 trillion on behalf of around 75 million Europeans, ensuring better pension adequacy. Occupational pensions contribute more than 20% percent to the replacement ratios in France, the Netherlands, Sweden and the United Kingdom3.

Policy makers contribute to the agenda for sustainable and adequate national pension systems by adopting necessary laws and regulations (IORP II Directive) and tax incentives which aim to increase transparency, governance and protection of second pillar pension schemes, and therefore give adequate incentives for individuals to contribute and supplement their replacement ratios upon retirement.

Pillar 3 – The Individual Pension

The third pillar is usually organised as a voluntary private pension savings scheme where the decision to contribute is unrelated to the workplace. The third pillar is more flexible and dynamic, it relies entirely on individual choices and provides another option for saving towards increasing retirement income, i.e. increasing replacement ratios at retirement.


National tax systems play an important role in the development of pension systems through preferential tax treatment to pension contributions across all pillars. In Cyprus, the tax system allows for tax exemptions that amount up to 1/6 of net total income. In addition, the Special Defence Contribution applicable to interest received from IORPs is reduced from 30% to 3%.

Public Pension Systems in Need of Reform

Most countries have focused reforms on the first pillar and the most common reform is increasing the statutory age of retirement. Since 2010, twenty out of 28 EU countries have already increased the retirement age, and several others have also either increased the contributory period and/or the contributory rates. To keep public pension systems viable and secure appropriate replacement ratios for retirees, employees today will need to make more contributions and retire at an older age.

With all the challenges faced by public pension schemes, Occupational (Pillar 2) and Individual (Pillar 3) pension schemes are increasingly becoming very important in ensuring the adequacy and sustainability of pension systems in the future.

1. OECD (2013), Pensions at a Glance 2013: OECD and G20 Indicators.
2. Basic insured emoluments are currently set at €9.068 annually.
3. Social Protection Committee and DG EMPL (2015), The 2015 Pension Adequacy Report: current and future income adequacy in old age in the EU.
4. ILO (2017), Actuarial valuation of the General Social Insurance Scheme as of 31 December 2014