Greece’s highly successful Olympic Games - coming hot on the heels of its unexpected triumph in the Euro 2004 football championships - seemed to do much to lift it out of its reputation as a rather lumbering, chaotic nation best known for its Mediterranean climate, cuisine, music and dancing, and the somewhat less romantic image of its capital city’s grinding traffic congestion.
While a return to Greece’s ancient greatness may yet be a while off, the two events gave the Greeks a new confidence about what they can achieve even when, as in both examples, the odds were stacked so firmly against them at various points.
The odds have seemed to be similarly stacked against a successful resolution of the country’s pensions crisis. Deficits, draconian investment restrictions, disinterested fund officials, delicate politics - and delays - characterise Greece’s pensions system today. But there are strong signs that the country is rising to the challenge; there seems to be broad consensus that reform is urgently needed. Greece’s present government, unlike its predecessor, appears committed to pension reform. Mirroring the tempo of traditional Greek folk dancing, the slow steps of pension reform seem to be quickening, if somewhat erratically.
There are three main aims of the reforms planned for Greece’s pensions system. One is a complete overhaul of the first pillar, a second is the finalisation of legislation intended to open the way for second pillar occupational schemes and the third is an upgrading of the structure in which the two systems operate.
To demonstrate its commitment to pension reform the government has set up a special management committee to look into these matters. The members of the committee include leading figures in Greece’s investment community.
At present there is virtually no institutional asset management in Greece. There are asset managers that manage mutual funds but these are predominantly retail-focused. Haris Makkas, CEO of ING Piraeus AM in Athens and a member of the management committee, believes that the market for asset managers could be worth around E33bn within the next three to five years if the reforms are passed and the system is opened up. This would consist of the E23bn of assets which currently endow the first pillar, as well as a predicted E10bn of assets from the development of the second pillar.
Greece’s first pillar consists of two elements – one is the basic social security system and the other is a range of profession-specific auxiliary funds where membership is compulsory. Part of the overall system is pay-as-you-go, the other part is funded. Their vital statistics are shocking. “The deficit of the total system is in excess of 200% of GDP,” notes Nicholas Tessaromatis, CIO of EDEKT-OTE, the fund management arm of the pension fund of Greece’s incumbent telecoms operator OTE and a member of the government’s management committee.
Currently, the funded portion represents around E23bn of assets under management. There are very strict rules governing the investment of these monies. Up to 23% can be invested in equities, but these must be Greek equities – from the tiny Athens stock market. The remaining 77% must be invested in bonds or money market assets. “How can a pension fund do asset allocation?” asks an exasperated Tessaromatis. “Diversification is the first principle of portfolio management and we can’t have it.”
What normally happens is that the money is left with the Central Bank of Greece in cash deposits and government bonds. “There are manytrade union representatives and government appointees sitting on the boards of these first pillar auxiliary funds,” says Haris Stamatopoulos, vice-chairman of Athens-based Alpha Trust Investment Services. Stamatopoulos adds that “they tend to be very conservative, especially after the stock market crash. So they avoid placing the money where it could get a higher return. They also want to ensure that no one accuses them of taking more risk than is absolutely necessary with working people’s money.”
And those pension funds bold enough to seek professional management may find themselves frustrated. “The ministry has advised funds to stay with the Central Bank of Greece rather than seeking professional asset management,” Stamatopoulos continues. “There exists a general lack of investment culture; pension fund officials don’t understand why someone might need a fund manager.”
In fact the ministry can veto
investment decisions although, as Stamatopoulos explains, the right is not formal. “It is more a matter of
Nonetheless, as government appointees, those responsible for managing the funds, might be reluctant to disregard it.

It goes without saying that this is a source of much frustration for asset managers. “The regulations are so cumbersome and demanding in terms of the time and effort required when boards of funds want to invest,” according to Makas. “The government is the ultimate payer and because it mistrusts asset managers it adds layers of regulations to avoid exposure. So we have returns that are miserable, especially with falling interest rates.”
Part of the reason for the Government’s behaviour is the dire financial straits in which Greece finds itself. The budget deficit is over 3% of GDP – the limit required for membership of the euro. “The need to finance the budget deficit has deterred governemnts from allowing global orientation in fixed income investments for pension funds,” says Eleni Koritsa, deputy general manager at Eurobank AM in Athens.
But falling interest rates will change the dynamic. Currently, funds investing in state bonds with the Central Bank of Greece are earning a little more than inflation. As the current ones reach maturity the yields will be less. The bank will be replenishing bonds with much lower coupons while short-term interest rates and inflation are going up. So there will be a mismatch where bonds will be paying 3.5% compared with an inflation rate of 4%. “This will ease the political decision to relax the 77% rule on bonds and deposits with the central banks, says Makkas.”
But in most cases deregulation will be the only solution. For example, some pension funds do invest money in mutual funds - some specially designed for them - but there is no discretionary private asset management for the pension funds. Ordinary mutual funds cannot discriminate between the large and small investor in terms of costs by creating a dedicated sub-fund. “Because of the lack of incentive very limited amounts are invested,” says Stamatopoulos.
Insularity and favoritism mean that the main local banks are at
an advantage in cashing in on
the business IKA is the largest social security organisation in Greece. It covers over 5.5m employees including those on contract work and those not covered by any other main insurance company. In September 2000 IKA and two other social security organisations set up the Pension Mutual Fund Company in which one of Greece’s main commercial banks, the National Bank of Greece, had a 40% share with the social security instutions holding the remainder.The Pension Mutual Fund Company is managing two funds - a bond fund and a balanced fund.
Independent asset managers were not considered for this management. “This is not straight competition,” commented one industry source.
Makas goes further, saying: “There is a broad lack of recognition of independent non-affiliated asset managers. Banks are seen as solid institutions so they have the edge.”
But the situation calls for more than just deregulation and changes in attitudes. The system lacks statistical analysis, balance sheets and automated bookkeeping. “All the accounting entries are done by hand,” says a government source. “Financial control of the pension funds is among the first priorities, since most of them do not have the means to close annual balance sheets and there is no automation of the accounting and bookkeeping process.”
So those entrusted with the task
of reforming the system have
their work cut out. “It is widely accepted that the country’s social security system is in need of major restructuring in almost all areas of operation,” says the same source.
The first stage of the reform will be to examine what restructuring is needed for the first pillar and create a new legal framework. “In its present form asset management does not create an acceptable return on the reserves of the state pension funds,” the government source continues. “This is one reason for the planned creation of a new central agency whose aim will be to ensure professional management of the invested funds.”
The agency will contain representatives from government, the unions and the major pension funds.
One notable change will be that asset managers - including non-affiliated ones - will have a high degree of freedom to determine the best investment strategy for pension funds.
But the reforms will not be as wide-ranging as asset managers might be hoping for. One reason is the government’s continuing need to issue bonds. “The current role of the Central Bank of Greece and government policy regarding theh role of bonds in pension fund investments is going to be re-examined under a new structure where all the social partners - government, employers and union representatives - will be properly represented,” the government source explains.
“However, given the importance of bonds as a source of central bank financing the whole process will be carried out gradually and quite liberally.”
In terms of the effect on government finances, the transition will be managed by moving from state bonds and cash to a range of investments in public projects. “These are creating good returns,” the government source notes.
But there is some reassurance for asset managers in that the reform also aims to ensure that funds are subject to an ALM every three years; currently ALMs are carried out but in rather a random ad-hoc fashion.
“Statistical and actuarial surveillance of the various pension funds is a major need,” the government source notes. “This is part of a major and long term reform to secure current levels of pension benefits without increasing the deficits of the pension funds covered by the state budget.”
The ALM will be considered alongside any need to finance government projects. Furthermore, the government will not have the absolute majority in the new agency.

This latter point is significant given the level of control that the government has exercised to date.
The investment strategy for each fund will be subject to approval from the agency on an annual basis. So even if the government wishes to veto the investment strategy because of a public project that needs financing, it could be voted down by the other members of the agency.
As with any fledgling industry, institutional asset management in Greece will not be over-ambitious to begin with. “Once the system is liberalised the first mandates are likely to be balanced,” notes Makkas.
In resolving the pensions issue
the management committee is
performing a balancing act. Independent consultant Demetre Katsabekis is also a member of the committee. “The solution will have to be a compromise between local constraints and international demands,” he says. “We are not in the group of more progressive countries that allows relatively free legislation and gets the regulator to do the nitty gritty.”
As the management committee is still deliberating the issues surrounding pensions reform, it is understandably reluctant to say much regardimg the direction of reforms including investment regulations. “Investment rules for occupational schemes will be as liberal as in other countries, in line with the EU directive,” says Tessaromatis.
One industry source commented that the investment rules would probably be more along Anglo Saxon lines.
Given the antiquated state of the Greek pensions system, consultants would seem to be an essential part of any reform process. But Aris Xenofos, managing director at Eurobank, is sceptical: “Although government people are not very knowledgeable about investing they don’t want to hire people to help them.”
But this clearly has to change. “If we said tomorrow that the basic and auxiliary state funds could do what they wanted it would be a disaster,” says Tessaromatis at EDEKT-OTE. “Trustees will definitely not be up to the job when the market is liberalised. They need education.”
But amid the vast problems there is a fully operational example of what can be achieved with pension funds in Greece if the Greeks put their mind to it. The success of the pilot occupational scheme of Greece’s incumbent telecoms operator, which came into being through a special law passed in 1999 is outlined (see box page 49).
As in other countries, the fact that both elements of Greece’s first pillar are heavily in deficit has made the creation of a second pillar the logical way to alleviate the burden on the state. The OTE experience is a source of hope.
Legislation was introduced in 2002 to pave the way for occupational schemes. But there has been very little take-up because of a
number of outstanding issues. The legislation liberalising the first
pillar will also include a clarification of the issues that have delayed
the second pillar as part of the
overall reform of Greece’s pensions system.
The main issue impeding progress on the second pillar is a lack of clarity on the tax issue. “The tax position for contributions is based on a memo from one minister to another saying that all contributions are tax exempt,” says Tessaromatis. “People are not convinced that this is sufficient.”
The governemnt source takes a similar line: “Occupational pension funds are still waiting for a global and concrete state policy, especially in the area of the taxation to be levied on contributions,” he says. “We have expressed our views that are in favour of a system that is close to that found in other European countries but in my opinion there is still work to be done on our proposal.”
Again state finances are relevant here, as Makkas explains: “The tax incentive is more difficult in times of fiscal strain,” he notes. “The deficit is over 3% of GDP and Brussels is watching. So the tax incentive may not be dramatic but it will pick up in steps.”
One of the few occupational schemes to have been set up - in spite of the lack of clarity on the tax issue - is the scheme for the employees of the post office. The post office has made a contribution of E4m to the scheme to compensate for the fact that there is no tax incentive at present. “The initiative started at the beginning of 2004,” says Stamatopoulos, who is chairman the fund’s investment management committee. “Since then, 85% of the post office employees have decided to join the occupational scheme. The tax issue is not a problem because it has been offset by the company’s contribution.”
But other schemes have not been as fortunate. A much smaller scheme has been set up by the Economics Chamber; this has not benefited from any cash injection. “The lack of clarity on tax is a major problem for this fund,” Stamatopoulos notes.

It is hoped that once the tax issues are resolved many state auxiliary funds will be transformed into second pillar schemes. Aside from the overall deficit problem, the issue with the auxiliary funds is the status of their state backing. The government source is clear that the funds are state-backed, but Katsabekis notes that “matters are more complicated since it is not clearly defined whether the funds are guaranteed by the state or not, which may impose restrictions on pension fund investing”.
Clarification of the issue would be helpful.
But while the industry seems to be generally headed in the right direction, the challenge of changing attitudes must not be underestimated. Marina Vassilicos, manager of international affairs at the Association of Greek Institutional Investors notes: “Greece is still to a large extent geared towards state retirement schemes but in view of developments in all other European countries this is likely to be changed.” Koritsa goes further: “The mentality of the Greek people is that they will have to see evidence of pensioners living below the poverty line before they are
convinced of the need to save for retirement.”
Another issue is the generosity of the state system. Taking into account the basic and auxiliary state pensions the combined replacement ratio exceeds 100%. “Resolution of the tax issue on its own will not be enough,” says Tessaromatis. “In some cases it is not clear what incentive there is to save on top of that, other than tax. So the second pillar will struggle.”
Being relatively generous the first pillar doesn’t come cheap. Deductions from salary can reach 30% in addition to the employer contribution of up to 20% of salary. On top of this many people contribute to a third pillar scheme which has a clearly defined tax incentive. “So it is all quite costly,” says Vassilicos. “No one is keen to get into more expense.”
Opportunities for foreign managers should be plentiful. ING Piraeus is an example of a joint venture that is already well established in the market. “When the market opens up the trend among the local operators will be to join up with international players,” says Makkas.
“Greek managers claiming expertise in international products will be a hard sell. Client service and overall standards will play an increasing role and it is especially here that foreigners will have the edge. At the moment the Greek market is seen as too small for any foreign independent manager.”
There is some mistrust of foreign managers among the local client base. “Foreign managers are also invited to tender in Greece but the perception exists that they will assign a junior member of staff to the account,” says Stamatopoulos. “Furthermore the very young funds have trivial questions and they need someone who speaks Greek and is available.”
In terms of the timetable for the legislation the government is expected to present the reforms to parliament before the end of the year.
“We hope to have a workable framework for more efficient management by next year,” says Tessaromatis.
With deficits in the state system mounting and demographics moving in the wrong direction the need to act has never been greater. As Makkas notes, “the political will is there now because of the pressure.”
Greeks have experience of heroism, ancient and modern, and it’s time to work their magic again. Their pensions system is crying out for it.