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Roxanne McMeeken examines Greece's economic woes and the impact of pension reforms. There are signs that the private sector will have to play a greater role in future provision

Last July, Greece passed sweeping reforms to its social security system aimed at tackling its yawning pension fund gap of €4bn as part of an austerity package. Anti-austerity demonstrators - pensioners among them - protested peacefully outside the parliament building on Syntagma Square. Almost one year on, the general strikes and demonstrations show no sign of abating - and not all of them are peaceful. Yet the socialist government is gearing up for round two of its pensions shake-up, with further reforms due this summer.

But as Athenians go about their business picking their way through smashed bus stops in Syntagma, with the nose-tingling sensation of tear gas lingering in the air, questions are being raised over the pension reforms: as provocative as they may be, many believe they are insufficiently radical. Panagiotis Zampelis, managing director at Aon Hewitt in Athens says: "Major changes have been announced but in fact little is happening in terms of structural reform." More positively, changes to the way pension fund money is invested looks set to offer opportunities for asset managers to win mandates totalling up to €5bn (see panel).

Achievements so far
The pensions laws passed by Prime Minister George Papandreou on 15 July 2010, as part of the plan to reduce Greece's budget deficit from its current level of 13.7% of GDP to 3% by the end of 2014, contained some healthy measures. The laws were conditions of Greece's €110bn bailout from the European Union, European Central Bank and International Monetary Fund - collectively known in Greece as the Troika - yet financial commentators tend to agree that they introduced changes that were sorely-needed. Platon Tinios, assistant professor at Piraeus University, is a pension expert. He says: "These were the most significant changes to the system for 20 years and they were incredibly overdue."

Key moves, which will be phased in until 2018, included cutting state pension benefits, heavy financial penalties for early retirement and increasing average retirement ages, so that workers will have to be employed for at least 40 years to be eligible to retire, up from the previous 37. The way benefits are worked out has also been overhauled, so that most final pensions do not exceed 65% of a worker's monthly salary (formerly the figure was 70%). Plus, the calculation will be based on the retiree's average career earnings instead of the old method of basing it on average salary over the past five years.

But looking at the reforms themselves begins to throw light on just how generous, relative to other countries, the system is and thus how much of a burden on the state purse. Add to this that pensions currently absorb 14% of Greece's GDP, the almost total absence of second and third pillar systems, and one third of Greece's population (currently 11m) is forecast to be over 65 by 2050, and the picture looks even bleaker.

Lingering problems
On the question of a second pillar system, some say the current flurry of reform is missing the mark. Whilst a legal framework for occupational pensions was established in 2002 under the European Union IORP Directive, there has been negligible take up. Tinios says there are just nine schemes. This is down to the failure to introduce tax incentives to companies to set them up as well as the entrenched idea that pensions are the state's responsibility.

An element of private pension provision is desperately needed in Greece, Tinios says: "It would allow people working in sectors that are better off - the bankers, lawyers and entrepreneurs and so on - to look after their own pensions after a certain point and allow public sector to better look after those who would not be able to make use of a second pillar anyway."

Worryingly, a second pillar seems to be largely absent from the government and Troika's agenda. "The development of a second pillar was not looked at when the government brought in the reforms last year as they were in a hurry and there was little public discussion," Tinios explains.

Could this summer's reforms offer some hope? Tinios believes not: "Kick starting a second pillar would be very complicated, particularly as it would mean a large deterioration in public finances." This is due to the tax incentives thought to be required, which the government, much less its lenders, is unlikely to view as affordable.

Marina Vassillicos, general manager of the Hellenic Fund and Asset Management Association, says that despite the costs, the desperate state of the first pillar means a second pillar must be developed. "It will cost but there really is no choice." She concedes that it is unlikely this summer, though: "Everything is very fragile at the moment and you never who is going to react to what, and how much, especially in Greece."

More encouragingly, the coming round of reform will aim to address some of the complexities of the first pillar. This comprises a pay-as-you-go basic pension and some 130 supplementary pension schemes for various professions, on which the new changes will focus, the government has said.

There is no doubt this is needed. Each supplementary scheme offers a different deal in terms of employee and employer contribution rates, as well as earlier retirement dates on full benefits for around 600 professions considered more ‘arduous', including the media and hairdressing, an equality which was not fully addressed in last year's overhaul and which is widely thought to have developed for political reasons. Zampelis at AON Hewitt says: "Despite last year's changes, when you take into account all the people exempt from them, the state still provides a pension ratio average of 90% and up to 110% of final salary earnings for some people, so the government has not gone far enough and I expect serious cuts this summer." This said, Zampelis fears the coming changes will miss the mark: "Whilst the government has not announced concrete details, I am worried that the changes they are planning are not well studied." The changes are being informed by 40 studies commissioned by the government to assess the supplementary schemes, including their liabilities. The studies were tendered as single project at the end of last year and Aon Hewitt, which would have been well placed to carry out this kind of work, refused to bid, citing a lack of reliable data. The talk in the market is that other consultants felt the same so there were few bidders and the job has gone to a small local firm.

There are also questions over whether the government will be able to alleviate any of the system's bureaucratic issues. These include people illegally claiming multiple supplementary pensions, payments being made to the deceased (of which there are an estimated 300,000- 600,000 cases) and a lack of computerisation. Zampelis says: "The government has said it will modernise the system but nothing has happened yet."

Whilst their outcome of the supplementary pensions studies and the details of the forthcoming reforms remain unclear, it does not seem that Greece is heading towards the pensions revolution needed. Tinios says: "Last summer we were on knife edge in terms of pension reform, poised between some piecemeal tweaks or the first step to more thorough-going reform and unfortunately we have tipped towards piecemeal change."
 

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