Opinion of the European Central Bank of 16 September 2022 on the new occupational retirement benefits plan for state service employees and employees of the wider public sector (CON/2022/34)

OPINION OF THE EUROPEAN CENTRAL BANK of 16 September 2022 on the new occupational retirement benefits plan for state service employees and employees of the wider public sector (CON/2022/34) Introduction and legal basis

On 20 July 2022 the European Central Bank (ECB) received a request from the Minister for Finance of the Republic of Cyprus for an opinion on a draft law on the Occupational Retirement Benefits Plan for employees of the State service and of the wider public sector, including local Government Authorities (General Implementation Provisions) (hereinafter the ‘draft law’). The ECB’s competence to deliver an opinion is based on Articles 127(4) and 282(5) of the Treaty on the Functioning of the European Union and the third indent of Article 2(1) of Council Decision 98/415/EC , as the draft law relates to the Central Bank of Cyprus (CBC). In accordance with the first sentence of Article 17.5 of the Rules of Procedure of the European Central Bank, the Governing Council has adopted this opinion.

1. Purpose of the draft law

1.1 The purpose of the draft law is to establish a new single occupational pension benefits plan for newly recruited public sector servants as well as employees of the wider public sector, which includes also newly recruited staff of the CBC. 1.2 In particular, the draft law provides that certain employees will become members of the new plan. These categories of employees are: (1) all permanent employees serving on the date of entry into force of the draft law who were appointed for the first time on or after 1 October 2011, as well as those permanent employees who are appointed for the first time on or after the date of entry into force of the draft law, both in the public sector and in the wider public sector, including the CBC (such employees will be included in the plan from the date of their appointment to a permanent position); (2) all employees with employment contracts of indefinite duration on the date of entry into force of the draft law in the State service and in the wider public sector, including the CBC (such employees will be included in the plan from 1 January 2021); and (3) all employees with employment contracts who, on or after the effective date of the draft law become employees with employment contracts of indefinite duration in the State service and in the wider public sector, including the CBC (such

employees will be included in the plan on the date of conversion of their employment contract to an indefinite period). 1.3 A new Special Fund for the payment of retirement benefits will be created which will be financed by both the employer (including the CBC) and the employees. Specifically, the employer and each member of the plan will both pay an amount corresponding to 5% of the member's monthly pensionable benefits (hereinafter the ‘funding ratio’). This ratio may be adjusted in the future based on the results of actuarial studies conducted for this purpose. The Special Fund will not be a separate entity and will be managed by the Minister for Finance on behalf of the Republic of Cyprus. The draft law provides that the Minister for Finance may invest the assets of the Special Fund in the best interests of the plan’s members, the members’ dependents and the retirees. The draft law states that where it is found that the Special Fund has insufficient funds to cover its technical reserves, the funding ratio may be adjusted so that the Special Fund has sufficient assets to cover its technical reserves in full. The Minister for Finance may adopt a decree establishing the funding ratio from time to time. The draft law further provides that charges calculated using a specific methodology determined by the Minister for Finance will be imposed for the services provided to organisations by the Treasury of the Republic of Cyprus for the purpose of processing the work of the Special Fund.

2. General observations

2.1 The ECB understands that the new single occupational benefits plan will not affect public servants appointed to a permanent position prior to 1 October 2011, including staff of the CBC, and that these public servants will remain members of their current sector-specific pension plan. The ECB also understands that the draft law stipulates that newly recruited CBC staff may only be members of the plan to the extent provided for in the draft law. 2.2 The ECB notes that currently the CBC enjoys statutory autonomy in determining its staff policy with the employees of the CBC, subject to the CBC Employee Directives, individual employment contracts and collective bargaining agreements entered into between the CBC and the banking sector union. The ECB also understands that for employees appointed prior to 1 October 2011, certain matters such as the percentage of the employees’ contributions, the calculations for pension and one-off lump sum benefits for any service after 1 January 2013 are determined by Law 216(I)/2012 . The contributions of the employees of the CBC to the CBC pension plan are paid and held by the CBC . The measures provided for in the draft law seem to represent a departure from the current pension plan arrangements insofar as some of the provisions in the draft law are to be imposed unilaterally by the Minister for Finance on CBC employees without consultation of the CBC. Under the draft law, the contributions of all employees to whom it is applicable will be held in the Special Fund that is to be managed by the Minister for Finance, who may, inter alia, invest the assets thereof and adjust the funding ratio so that the Special Fund has sufficient assets to cover its technical reserves in full.

2.3 The ECB notes that the draft law has potential implications for the CBC’s financial independence, in particular its autonomy in staff matters, which is an element of the principle of central bank independence under Article 130 of the Treaty. Autonomy in staff matters extends to issues relating to staff pensions. As previously stated by the ECB on issues concerning autonomy in staff matters, the principle of financial independence requires that a Member State does not impair the ability of its national central bank (NCB) to employ and retain the qualified staff necessary to perform independently the tasks conferred on it by the Treaty, the Statute of the European System of Central Banks and of the European Central Bank (hereinafter, the ‘Statute of the ESCB’) and national legislation. In addition, a Member State may not put its NCB in a position where it has limited or no control over its staff, or where the government of that Member State can influence that NCB’s policy on staff matters. Any amendment to the legislative provisions on the remuneration for members of an NCB’s decision-making bodies and its employees should be decided in close and effective cooperation with the NCB, taking due account of its views, to ensure the ongoing ability of the NCB to independently carry out its tasks. Autonomy in staff matters extends to issues relating to staff pensions. 2.4 As previously stated by the ECB , to protect the CBC’s financial independence and its autonomy in staff matters, the Cypriot authorities are under an obligation to ensure that the application of the draft law to CBC staff is decided by the Cypriot authorities in cooperation with the CBC, taking due account of the CBC’s views, and such cooperation must ensure the ongoing ability of the CBC to perform independently the tasks conferred on it by the Treaty, the Statute of the ESCB and national legislation. 2.5 A good example of effective cooperation between a government of a Member State and its NCB is one in which the relevant national legislative provisions provide that the public service pension plan is only applicable to the NCB with its consent. This would allow the CBC to take into account the particularities of its own legal framework and special legal regime as well as any other relevant considerations – in particular, obligations arising under the Treaty – in formulating the form and extent of its consent or objection to the application of the plan to CBC staff. Moreover, where the CBC’s consent has been given, a fresh consent should be required to any subsequent significant change to the plan, to ensure the ongoing ability of the CBC to perform independently the tasks conferred on it by the Treaty, the Statute of the ESCB and national legislation. 2.6 Therefore, the ECB would welcome an amendment to the draft law accordingly. This would allow the CBC to take into account the particularities of its own legal framework and special legal regime as well as any other relevant considerations, in particular, obligations arising under the Treaty, so as to

safeguard central bank independence and the obligation to comply with the prohibition of monetary financing under Article 123 of the Treaty. This opinion will be published on EUR-Lex. Done at Frankfurt am Main, 16 September 2022. [signed]

The President of the ECB

Christine LAGARDE