From our perspective: Get reforming
In Greek mythology, Sisyphus was compelled to roll a boulder up a hill, continually, only to watch it roll down again and to repeat the procedure again and again.
The financial travails of modern Greece’s economy look a little like they are following a familiar and distressingly similar cycle: bailout followed by ebbing investor confidence and the spectre of a further default, restructuring or bailout.
As we report this month, some positive reforms have been undertaken even in the contentious area of pensions, but the government missed too many opportunities over the last 20 years to tackle the entrenched issue of state pension entitlements. The list of complaints is familiar - the inclusion of the media and hairdressing as “onerous” professions, over-generous entitlements, endemic fraud.
But it is not just Greece that is subject to repeat patterns of behaviour - other countries have continually replicated the same mistake in not addressing pension systems. Rating agencies frequently cite pension reforms - or lack of them - in their reports.
The equation is simple: boosting private pension savings, preferably through an occupational system that pools costs and which may include an element of risk sharing between employer and employee, is beneficial on many levels.
Not only does it allow the burden to be lifted from the state system, it also facilitates the development of liquid, functioning capital markets. In countries like Poland it has aided the development of a significant regional stock exchange and a source of funding for companies other than banks at a time when credit became scarce.
There are many economic variables within a pension system that help drive success, including the fiscal incentives and the legislation around compulsion. Here, countries like Switzerland, the Netherlands and Australia have taken the most progressive steps in creating compulsory or quasi-compulsory systems. These countries’ pension assets are large compared with their GDP.
Other countries have followed on the reform path to build up pension assets. Germany bit the bullet with pension reforms in 2001-02 and France followed with a similar mixed system of individual and workplace supplementary pensions with a fiscal incentive. Results have been mixed.
There are many reasons not to reform pensions: the parlous state of public finances in many countries means other legislative priorities have overtaken retirement issues in national parliaments. And the long-term nature of demographic issues means they can always be kicked into the long grass.
In some countries, like Ireland and Portugal, governments have actually divested themselves of pension fund assets to shore up their finances - in the case of Ireland this was a pre-condition of its bailout package. This is a clear case of short-term priorities outweighing the obvious long-term needs of governments and societies.
Fixed income investors know about public pension liabilities, and as we have seen in the unfolding of the European debt crisis, bond market vigilantes can be merciless in their punishment of the fiscally weak. It’s certain that both they and the ratings agencies know the issues of long term pension liabilities - whether they be those of European governments or US states. It’s time to get reforming.