By Marinos G. Gialeli
General Manager
Hotel Employees Provident Fund
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The provident and pension funds are waiting for the Ministry of Labour and Social Insurances to implement the Law passed by the House of Representatives on the 16th November 2006 in accordance with the European Directive 41/2003; as far as we know this Directive has be adopted by all the other member states of EU.
This however should not be considered by the funds as a reassurance, as in any case their responsibility to safeguard the members’ retirement pension is huge.
A pension fund, whether provident or Retirement pension, must have an Investment Strategy to be based on the fundamental data of members such as, among others, the following:
(a) Age of members so as to calculate the investment horizon of the fund or
(b) Salaries of members so as to be able to calculate the desirable return percentage and therefore the risk that can be assumed by the fund to achieve its targets.
With desirable return percentage, we mean that the pension funds have the obligation as well as the objective to provide a complete retirement pension for their members, while the provident funds have the obligation to provide a satisfactory lump sum upon retirement or resignation of the member from the fund. The funds must cover together with Social Insurances about the 2/3 of the last salary of the member.
For instance: an employee who will retire in 5 years and he is not a member of any provident or pension fund, apart from the governmental pension fund, at the time of retirement his salary is expected to be CYP 2.000 (EUR 3,440) per month and his retirement pension from Social Insurances is expected to be CYP 650 (EUR 1120); his family budgets are planned based on a salary of CYP 2.000.
Hence, it will be extremely difficult for such employee to cope with his obligations within such consumer society demonstrating such demographic changes which are noted during the recent years as most of the people today don’t get married around the age of 20 but around the age of 35 and therefore their obligations don’t end at the age of 63 but much more later. At this very point the role of the provident or/and pension Funds becomes clear; that is to increase the monthly income of such employee from CYP 650 up to CYP 1.200- 1.400 (EUR 2,060 – 2,400), provided that the member when receiving his money upon retirement he will deposit them in a bank account and withdraw every month within the next 10 years the amount necessary according to his needs.
Their role is extremely important and such role should be given the attention required by everybody involved; they should take over the leading role in the retirement planning of their members. This strategy in respect of the investments of each fund must represent also the significant role of the provident and pension funds being the second pylon of our pension system.
As also explained above, this role contains the duty of the funds to provide for their members sufficient retirement pension benefits. This is related to the need of each one of us to receive approximately 2/3 of his final salary upon retirement so as to be able to maintain his standard of living. The role of the provident and pensions funds is to cover the difference between the retirement pension given by the state, being the first pension pylon, and the targeted amount of retirement which is the 2/3 of the final salary.
Furthermore, we may be one of the few European Countries in which when a member retires or resigns from the industry or a company that he works, he may receive his provident fund and use it as he wishes. This however, is not correct as it annuls the purpose for which the fund was originally established. It would be more reasonable for the benefit of the employee to transfer his fund to his new job or to keep his old job, so as to receive such fund upon retirement; something that applies already in other European Countries; otherwise, the second pylon (provident and pension funds) will not be in a position along with the first pylon (Social Insurances) to supplement his retirement according to the cost of living. It is remarkable that the Parliament of Romania passed a few months ago the law adopting the second pylon.
