Greeks await new pensions framework

The €29bn Greek pensions industry was shaken by a bond purchasing scandal earlier this year and is now awaiting the introduction of a new regulatory framework.

In March, Greek media reported that TEADY, the Civil Servants Auxiliary Fund, had overpaid €5m for a structured bond, which it had purchased through Akropolis, an Athens-based broker. The news sparked widespread public condemnation of the Greek pensions sector, leading to accusations of poor management and incompetent regulation. The government has stepped in to diffuse the crisis and acted to prevent Greek pension funds from purchasing structured bond products and credit derivatives until new regulations are introduced later this year.

On 15 May, the Greek trade union representing private sector workers (GSEE), organised a general strike to protest against the government's handling of the scandal. Meanwhile, Agapios Simeoforidis, chairman of TEADY, has resigned. His replacement is Andreas Kintis, previously professor of econometrics at the Athens University of Economics and Business.

Eleni Linardou, sales manager at Allianz Mutual Fund Management Hellas, tells IPE that the existing regulatory regime needs urgent reform. "Legislation relating to pension fund investments has remained unchanged for several years without taking into account the development of the investment world. Funds in Greece should follow the prudent man principle. But being prudent does not mean being obsolete. The regulations should be urgently updated to reflect today's realities," she explains.

Linardou also believes that the bond crisis will probably lead to an improvement in the general standard of the Greek pensions sector. "The bond crisis can be turned into an educational experience. What is needed now is modernising the legal framework, and unifying and strengthening the supervision of local pension funds. The transparency of pension fund investments and decision making should also be supported," she adds.

Nicholas Tessaromatis, chief investment officer at Edekt-OTE pension fund, which covers the employees of Hellenic Telecommunications, emphasises the need to improve the reporting standards of Greek pension funds. "Some funds have not published information for the last five years. Because of this, the public has little information on the performance of the funds," he says.

Linardou refers to the Norwegian Government Pension Fund, previously known as the Petroleum Fund, and argues that adopting similar standards of transparency and corporate governance in Greece would be beneficial for the industry. "Today, the only official information that is available about Greek pension funds is the annual report of the ministry of employment and social protection. It is very difficult for ordinary scheme members to follow the development of their investment," she argues. "Funds should start publishing their returns on a regular basis. The provision of detailed information to the public would be a constructive approach and would sustain the development of the industry."

Many experts in the Greek pensions industry admit privately that there is a lack of asset management expertise within the industry. Tessaromatis argues that governance standards are particularly weak in Greece. "Chairmen and members of the board are sometimes political appointees with little knowledge and understanding of investment issues. Training on the job is also lacking," he explains.

 

ne root cause of the problem is the demographic composition of the investors paying into the system. The vast majority of pension funds insure public sector employees and in Greece this has a direct effect on the way the funds are managed. Neither does the existing regulatory framework always encourage good governance.

For example, the rules do not permit discretionary asset management, but they do allow pension funds to hire investment advisers in certain circumstances. Tessoromatis is unhappy with this arrangement. "Advisers usually represent the organisation executing the trade. Conflicts of interest are bound to arise all the time. The recent scandal illustrates this in the clearest possible way," he says.

However, in many ways, the regulatory framework is restrictive by European standards. At present, pension funds can invest only in domestic assets. Many asset classes are also excluded from the market; Greek pensions funds cannot invest in funds of funds, structured products, private equity, alternative investments, absolute return products, property funds, foreign equities or foreign bonds.

The unpopular 23/77 rule further stipulates that Greek funds can invest up to 23% of their assets into investment products based on Greek shares and property. The rest must be invested in Greek bonds or deposits.

As a result, Greek pension funds have placed a significant proportion (43.14% at the end of 2006) of their assets into deposits. At the same time, bonds make up 31.69%, Greek equities 17.25%, mutual funds 4.67%, real estate 2.42% and treasury bills 0.81%.

"The strict regulations put quantitative limits on investment and provide detailed and, in many cases, confusing or unclear rules. They also make it impossible to achieve returns in excess of inflation or wage growth," explains Tessaromatis.

"The 23/77 rule is arbitrary and not the outcome of a careful analysis of the liabilities. Besides, even if it had some merit for mature funds, it would not make sense to impose this rule on all funds."

Tessaromatis goes on to argue that the real problem is the lack of modern portfolio management expertise within the regulatory regime. "The rules change frequently. Furthermore, there is a procedure whereby exceptions to the rules can be granted by the minister of employment and social protection. The rules are broken not only because of market movements, but also intentionally, because of the lack of proper supervision," he says.

Linardou explains that, before the bond crisis broke out, the Greek pensions industry was discussing whether it would be possible to increase the limit on equity investments to 30%.

"However, after the scandal the discussion died down," she says. She also argues that the existing ban on structured bond investments does not take into account the fact that there are many kinds of structured bond. "Not all of them are equally risky," she explains.

Tessaromatis argues that there are four main changes, which most Greek pension funds would like to see. "First, the regulatory environment should encourage professional asset management and allow funds to decide whether they want to manage their assets internally or externally, provided that professional standards are met. Secondly, we should move to a more liberal system with regard to what and where we can invest in. The system should allow funds to decide their own strategic asset allocation on the basis of their liabilities.

 

ore generally, the system should move away from detailed quantitative restrictions to regulations based on the prudent person principle. Thirdly, all funds should be asked to publish statements detailing their investment policies, standards and procedures. Reporting standards should also be introduced. And, finally, a specialist pensions regulator should be created immediately. There is no point in giving the market more freedom unless a competent regulator can monitor and manage the risks."

Finance minister Giorgios Alogoskoufis has announced the setting up of a new committee to draw up a list of investment reforms. The committee consists of independent experts from the Capital Markets Commission, the Greek Central Bank and the ministry of finance. As IPE was going to press, it was announced that it would publish its findings in late May.

The committee is the third of its kind during the term of the present government. It is expected to base its recommendations on a report produced by the previous committee, chaired by the deputy governor of the Bank of Greece.

That committee's report was published in February 2007, before the TEADY scandal broke out. The main recommendation of the report was that two new regulatory bodies should be created: first, an organisation to provide advice and support, and, secondly, a committee that would supervise the funds.

"I believe that those proposals will do little to resolve the weaknesses and inadequacies of the current system. However, we need to be patient and see what will be the proposals of the third committee," concludes Tessaromatis.