Patching up a monolith

Related Categories

Pension reform in Greece has been a work in progress for the past 75 years and there is still a long way to go, finds George Coats

One of the ancient monuments that Greece is less than proud of is its pension system. At least this is the opinion of Platon Tinios, a professor in the department of statistics and insurance science at the University of Piraeus and previously an economic advisor to a former prime minister.

“The system’s architecture has remained essentially unchanged for 75 years, since 1934,” says Tinios. “And that was a compromise. Rather than replacing the old sectoral pension providers it set up a main private sector social insurance institution, IKA, as a pole of attraction that was designed to gradually absorb the ‘old’ arrangements to arrive at a unitary state system.” But it did not. “The 1934 project was still under implementation in 2009. Reform proposals written in the 1950s are still viable.”

As a result the Greek system is what he calls “a fragmented monolith”. And it has a number of characteristics: “It is costly, it absorbs more than 12% of GDP, the second highest in the EU. It faces dramatic demographic challenges, the second highest ageing rate in the EU. It is economically very inefficient, it is a patchwork of cross-subsidisation and non-wage costs, and the costs are borne disproportionately by the private sector. And it is socially ineffective as Greece has one of the highest rates of old age poverty in the EU. Finally, it is resistant to change; there has been a ‘reform by instalments’ since 1990 or even earlier, the last change being only a year ago and already the Bank of Greece and the EU are asking for more reform.”

Early last year the Greek parliament passed legislation intended to streamline the country’s first pillar pension system, reducing the number of so-called main and auxiliary PAYG schemes to 13 organisations from the previous 133. The intention was to raise the level of professionalism throughout the system and cut administration costs. The law also introduced parametric reforms, eliminating most early retirement schemes and offering incentives to those who continue working after retirement age.

The bill’s introduction triggered another key characteristic of the Greek pensions environment: it was met by trade union protests, street demonstrations that clashed with the police and a 24-hour general strike that brought the country to a standstill.
Nevertheless, the mergers went through.

“The new entities have been established as far as the legal structure is concerned,” says Haris Stamatopoulos, vice-chairman of Alpha Trust Investment Services, an asset manager, and chairman of the investment committee of TEA-ELTA, a second pillar fund. “But they haven’t gone much further in the merging process. The previous regime is still in place, and most, although not all, of the funds still keep separate accounts for their members from the previous funds. So it seems that although the process is going ahead slowly, they will eventually manage to consolidate everything to bring all the people together in these funds. But as far as the organisation is concerned I am not sure they have made a great impact in reducing costs; probably they have managed to reduce the premises a little bit. But I think they still employ quite a lot of people. I think they are still trying to find their way around.”

And, as Tinios’ analysis would lead one to expect, there are still a number of loose ends. Perhaps the key issue is that while few doubt that the auxiliary funds are in deficit, nobody appears yet to have come to terms with the extent of the funds’ shortfalls.

Last year, ahead of the change, it was noted that although the reform had been mooted for a considerable time there had been no actuarial study before the legislation was drafted and passed. However, it was noted darkly that the findings of an earlier examination when a previous government in 1999-2000 was considering a pension reform were never published in full but this did not stop rumours that the total pensions deficit amounted to two or three times Greece’s annual GDP.

Perhaps one of the reasons for the opacity was that it served Greece’s purposes at the time to overlook an all-too-grim reality. “A feature of Greece’s pensions has been what they call the ‘white hole’, the unrecorded surpluses of the state pension funds,” says a seasoned observer. “That is what got them into the euro-zone as it enabled the government to bring the budget deficit down from about 6.5% to about 4.5% in one fell swoop because the person who know about it was advising the then finance minister.”

“As I understand it, most of the assets in the pension fund system, the cash and bonds, are included as assets of the government, and that’s the white hole,” says Nikolaos Tessaromatis, general manager and CIO of EDEKT Asset Management, the dedicated manager of a portion of the portfolio of pension fund IKA-ETAM. “They include the assets but they don’t look at the liabilities, and they don’t do it because it is 10 or 20 times more.”

The deficits are a reflection of years of non-professional leadership of the auxiliary funds. Board membership was a function of state patronage and members are not expected to have investment expertise. Indeed, they had a propensity to raise benefits irrespective of the financial health of their fund. And when governments changed there were widespread resignations as one set of party placemen was replaced by another.

This had an impact in shaping the system. Legislation to implement the EU’s IORP directive also allowed the creation of second pillar pension funds. The hope at the time was that the newly formed professional schemes would merge with the corresponding PAYG auxiliary fund to bring some cohesion into the sprawling system. And the second pillar was effectively stillborn, only a handful being created, primarily because of a lack of clarity around their tax status. But there was also a dawning awareness that no new venture would willingly tie itself to a deficit-addled structure.

Similarly, part of the resistance to the merger proposals was that those who were members of reputedly solvent auxiliary funds did not want to see their assets used to fill deficits in more laxly run institutions. And one of the rationales behind the merger initiative is to raise the professionalism of fund board members.

“The ministry of labour and social affairs has issued a directive concerning the management of those pension funds,” says Stamatopoulos. “They are invited to call professional fund managers to take over the management of their funds, they can also use advisers to help structure the fund’s long-term strategy and the management framework. And it introduced an idea of some sort of internal audit and an external audit that will be under the auspices of the ministry. In addition, it has introduced the idea of avoidance of conflict of interests, that if a fund uses a bank for one purpose it should not also use it for fund management, that funds should spread the risk and try to find the people who do not have interests apart from the proper management of the pension funds.”

But the way the guidelines are issued is also starting to look like another loose end. “The ministerial decision issued in October 2008 did put more details on the framework,” says Tessaromatis. “It defines benchmarks, for the first time they talk about risk and how it ought to be measured and it sets out the way to invest assets, and also for the first time allows funds to invest outside Greece. They can now invest in euro-zone equities and euro-zone government bonds and in private/public initiatives, although the bad news is that these options must be included in the 23% of a portfolio that previously they could only invest in Greek equities or property, with the remainder having had to be in bonds or cash. But unfortunately we expect further ministerial decisions to further define the role of the manager: who should be able to do it and how would the funds actually go about finding managers. So they do all this and that is good but it goes slowly.”

So far the funds have done little to exploit their newfound investment freedoms, according to Eleni Koritsa, general manager at Eurobank EFG Asset Management. “The only thing they did was to take advantage of an ability to place 1% of their total assets under management in time deposits at commercial banks and thus take advantage of the high interest rates offered until the end of 2008. But it involved only small amounts and was done primarily by pension funds that had been active in the past. And a few participated in Greek government bond auctions or bought immediately after. But we have seen nothing with respect to equities, although again a few have participated in Credit Agricole’s capital increase for the Commercial Bank.”

“The nemesis of a monolithic unreformed pension system is to enter the current crisis with its problems unsolved,” says Tinios. So what impact has the global financial and economic downturn had on Greek pension funds?

“Nobody knows right now, because after 2006 the labour ministry stopped issuing year-end details of the social security budget, which included a breakdown of investments,” says Koritsa. “At the end of 2006 it said the total assets of all social insurance schemes was €29bn. The number for 2007 has not been formally announced and for end-2008 the press has reported that pension funds lost €4-5bn due to the market meltdown, but these numbers are not necessarily reliable and we have no breakdown. Nevertheless, the Athens stock exchange was down around 65%, with the banks having the worst performance, down around 70%, and that raised concerns about the equity holdings of pension funds because they have not diversified and most of their equities are in bank shares.”

Tessaromatis is willing to make an estimate of the impact. “We know more or less how much they have in Greek equities and how much in banks, in fact we know which bank because it is just the National Bank of Greece,” he says. “And I think the impact has been minimal because although equities have done very badly and the lack of diversification outside Greece was costly, they didn’t have much in equities. So, I estimate that Greek pension vehicles lost around 10% overall.”

A start from scratch
Following the law implementing the EU’s IORP directive, which allowed the creation of second pillar pension funds, the Greek postal employees’ trade union, POST, opened discussions with the Hellenic Post, ELTA, on the formation of a pension fund for its 11,000 employees. The union pointed out that while in addition to their main state pension other public employees were covered by an auxiliary fund and so received extra money on retirement, postal workers did not, and it called for a structure to give ELTA employees a lump sum at the end of their working life.

The fund, TEA-ELTA, was up and running by April 2006. However, postal workers are not highly paid and as they were already paying 25% of their gross wage to their main fund, TAP-OTE, they were reluctant to pay more. Consequently, employee contributions were set at 1% of a wage, with ELTA paying an additional 2% and also undertaking to meet all the fund’s operational expenses.

Another, and still unresolved, problem was the tax treatment of contributions and payouts. The legislation left the tax framework vague and the ministries of social affairs and of finance, which share responsibility, have been unable to reach agreement on the issue. This has prevented the development of the second pillar, deterring multinationals from establishing funds for their Greek employees, for example, and TEA-ELTA is one of only four such operations.

And the fund was established in the wake of the 2000-03 market collapse. As a result, its board decided on a very conservative asset allocation strategy, opting to forego performance in the interests of maintaining the fund’s capital.

The strategy allowed an unlimited amount in repos and overnight bank deposits, a maximum of 70% in Greek government bonds and 20% in corporate bonds with a minimum S&P rating of BBB+. It required a maximum equity allocation of 20%, of which a maximum of 5% could be foreign and up to 80% should be from the top 20 Greek blue chips, with the rest in smaller market cap companies. All investment in derivatives was prohibited.

Its asset manager selection process was to place an advertisement in the press detailing the allocation specifications, former board member Michael Kravvaris explained at the time. He said the fund only wanted one of the top five banks in Greece or abroad and the basic requirements were monthly reports detailing what has been done over the previous month, what was the current situation, a forecast of developments over the coming quarter and a market analysis.

In the event it appointed the Commercial Bank of Greece, which shortly afterwards was bought by Credit Agricole. The subsequent personnel changes included those that had negotiated the TEA-ELTA mandate, and this resulted in what Kravvaris called a period of confusion. The mandate was to run to April 2009 but it was decided to extend it to the end of this year because of he market turmoil.

“We want to prepare a new tendering process with new ideas but because of the situation it was very difficult to judge whether there were better fund mangers out there,” says TEA-ELTA investment committee chairman Haris Stamatopoulos. “We might not have a huge tendering process as before but we may call a selected number of fund managers, four or five, and proceed to evaluate them.

“In fact the Commercial Bank did relatively well. Last year’s return was -0.6%, which was relatively satisfactory vis-à-vis the benchmarks and competitors. I think this year is going to be much better because we have shifted the strategy to include quite a lot of euro-denominated govies. Initially they were German and French but now around 55% are Greek, and they have outperformed the market. We also have some Austrian. As well as the govies we have been adding corporates, although it is extremely difficult now to subscribe to new issues if you are a small fund. But we have Rabobank, Greek telecoms utility OTE, the Commercial Bank of Greece which is guaranteed by Credit Agricole, Credit Agricole directly and HSBC. At the end of April, bonds with fixed coupons accounted for around 80% of the portfolio, floaters just over 2% and equities 3.3-3.5% while the rest was in cash deposits, time deposits, repos and other money market instruments. Now equities should be over 4% but tomorrow who knows, and the cash has been reduced.”

He adds: “We are going to formulate a new strategy by the summer or early autumn so that it will be fully implemented by the end of the year. It will not mark a dramatic change but it will be relatively more diverse.”

Have your say

You must sign in to make a comment


Your first step in manager selection...

IPE Quest is a manager search facility that connects institutional investors and asset managers.

  • QN-2488

    Asset class: Euro Investment Grade (Enhanced) Passive ESG Credits.
    Asset region: Europe.
    Size: EUR 500 to 600 million.
    Closing date: 2019-01-10.

  • DS-2497

    Closing date: 2019-01-09.

  • QN-2498

    Asset class: Fixed Income Investment Grade.
    Asset region: Global Developed Markets.
    Size: $50m.
    Closing date: 2019-01-07.

  • DS-2499

    Closing date: 2019-01-02.

  • DS-2500

    Closing date: 2019-01-10.

Begin Your Search Here