The investment culture in Greece is highly conservative and deeply rooted in tradition, qualities that have worked against government efforts to revamp the country's heavily indebted pay-as-you-go pensions system. In fact, with social security contributions and other benefits adding some 50% to the average wage bill, it is accepted that the level of retirement pension provided by the (state) Social Security fund (IKA) is generous and more than the country can afford," comments Anthony Michalopoulos, group pensions director at Alico Insurance in Athens.

A recent report published by the Athens-based Committee for Examining Long-Term Economic Policy concluded that Greece's population was ageing at a rate that would make the current pensions system unsustainable by 2010. The thrust of the last major reforms, which date back to 1992, was to reduce the scope of some of the state benefits, says Emily Hadjinicolaou, principal at Watson Wyatt Worldwide in the UK. However, subsequent attempts to introduce privately-funded pensions have been largely thwarted by the politically powerful Greek trade unions.

With Greece on track to join Emu by 2002, the impetus for reform has been heightened by the need to conform to EU-wide standards. Greek industry officials have been closely following the debate on the EU pensions green paper and the government is embroiled in discussions with union and employers' representative to hammer out further changes, explains Bill Marghios, actuary and economist with Prudential in Athens.

Greece operates a classic three-pillar pensions system. Social security coverage for private sector employees is under the huge IKA (Idryna Koinonikon Asaliseon) fund, while state employees have their own fund. Virtually the entire workforce is also covered by a supplementary pension, either according to their profession by a so-called auxiliary fund, or, alternatively, the TEAM (Temeio Epicourikis Asfalisis Misthoton) fund which primarily covers civil servants and self-employed workers. According to the Ministry of Social Services, as of the end of 1996 IKA had assets of approximately Dr167bn ($588m), while the auxiliary funds had amassed some Dr2.3trn in total assets. An official at the Ministry of Employment and Social Security explains that IKA regularly draws down the reserves of the auxiliary funds to cover its deficits, and adds that, under the current system, the auxiliary funds themselves are also facing the prospect of shortfalls. Company plans are not the norm, and are limited to the large corporations and the multinationals. 99% of such plans are administered by insurance companies, according to an official at Prudential in Athens.

With approximately 260 auxiliary plans in operation, the monitoring of such funds has proved problematic, and there are moves to consolidate their numbers. The pensions market is regulated by the Ministry of Social Services and the Ministry of Economy. Each auxiliary fund has a board charged with investing the fund's assets, although the government maintains strict control over this process, explain industry officials. Both the main and the auxiliary pension funds must be invested in government bonds through the Bank of Greece, while the 20% balance can be invested in other instruments such as real estate (up to 8% maximum) and mutual funds. Some pension funds have equity holdings, but, explains Marghios, the necessity of securing Bank of Greece approval means that timing becomes a serious problem. Only a minute fraction of the total, some 0.5% on average and a maximum of around 3% according to industry estimates, is invested overseas. For the moment, these are in the guise of mutual fund holdings and confined to stocks listed on EU-member bourses.

Looking ahead, the proposed reform of the pension industry will include at least some of the following elements, predicts Marghios: mergers of funds, increases in the retirement ages for both men and women and possibly also the employee contributions. There is also expected to be a stipulation allowing for part-time employment in the public sector for the first time. He expects some sort of decision to be announced in the first half of this year.

Greece's mutual fund market, which is regulated by the Athens-based Capital Markets Authority, is relatively well-developed, with total assets of Dr7.2trn as of the end of January 1998, according to George Kartalis, investment manager at Alico Eurobank. While formerly dominated by government-run funds, approximately half of this market is now in the hands of private institutions. The single largest player is the Alpha Mutual Fund Management Company, with approximately 23% of the market and some $6bn in assets under management. While the handful of names that dominate this marketplace are for the time being all owned by Greek banks, the impact of foreign institutions is growing.

Short-term vehicles are currently in vogue with Greek investors, notes Kartalis, specifically the high-earning money market funds, most of which offer some form of guaranteed minimum return. Funds denominated in local currency are the norm, even though there are no real restrictions on investing overseas. Nicholas Karathanassis, fund manager at Alpha Mutual Fund Management, estimates that a mere 2% of the total is lodged in international funds. A lack of local expertise has meant that the foreign component of the mutual funds, a tiny percentage of the total, is very rarely managed locally, with the managers preferring to outsource the management function to London or Luxembourg. Most of the market's 30-odd mutual fund companies have one or two investment funds abroad, comments Kartalis.

Whilst admitting the existence of home-grown conservatism, Dimitris Maroulis, economist at Alpha Credit Bank, emphasises that the Greek investor also has a pragmatic eye on the bottom line. Equity investments, he explains, did not historically prove popular because, until 1997, the stock exchange was in "virtual stagnation". He adds that this market is very young and is viewed as risky, although last year's buoyant performance did prompt a shift, albeit negligible, from bond funds into equity products, a trend that looks set to continue. Money market and bond funds, on the other hand, have historically enjoyed good returns, and over the past five to six years, he adds, drachma-denominated investments have yielded returns superior to those gained on similar investments abroad. For example, the most recent one-year government bond issue carried a 12.7% yield, and in 1997 the money market funds returned an average 13-13.5%."

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