A wait-and-see approach

New investment regulations have not had a great impact on Greek funds’ investments, says Reeta Paakkinen

A year after the so-called structured bond crisis gripped the Greek pensions industry, local funds are maintaining their wait-and-see approach to investments.

Last year’s crisis started with the discovery in March 2007 that the Civil Servants’ Auxiliary Fund (TEADY) had overpaid €5m for a structured bond, which it had purchased through Akropolis, an Athens-based broker. The news sparked widespread condemnation of the Greek pensions sector, a general strike, the resignation of TEADY’s chairman and setting up of a committee to evaluate the reform of local pension investment regulations.

The crisis triggered legislation in July 2007 that slightly revised the conservative investment regulations for local pension funds. The new regulations allow funds to invest 1% of their total assets in money markets, allocate funds for the first time in the euro-zone and create their own property funds in the form of real estate investment trusts (REITs). The regulations also allowed pension funds to hire managers and investment consultants for the first time.

However, they maintained the stipulation that pension funds must make their overseas investments from the 23% of their portfolio they are allowed to allocate in shares and property. At the same time the 77% minimum limit for investments in bonds and deposits remains. Furthermore, Greek funds are still not allowed to invest in non-European bonds and equities, hedge funds or private equity.

Eleni Koritsa, general manager of Eurobank Asset Management in Athens, notes the new regulations have not yet been reflected in the investment culture of local funds. “Indeed, the new regulatory framework allows investing in foreign assets and allows funds to hire managers but in reality making use of the new guidelines is not that simple,” she says.

For example, the hiring of managers is a complicated procedure. The law says that the hiring of managers requires a “common decision” on the details of the arrangement by the finance ministry and the labour ministry. And Koritsa notes that getting the common decision is, in practice, a long and arduous process. According to December 2006 figures on the asset allocation by Greek pension funds, the most recent official data, 43.14% of their assets was in deposits, 31.69% was in bonds, 17.25% was in Greek equities, 4.67% was in mutual funds, 2.42% was in real estate and 0.81% was in treasury bills.

Nicholas Tessaromatis, chief investment officer of EDEKT-OTE, the dedicated manager of a €550m portion of the portfolio of the telecommunications pension fund (TAP-OTE), agrees that there has been little change in asset allocation since last year.

The bond crisis was a key factor in the adoption of a cautious approach to portfolio management. “Since last February pension funds have been simply observing how the regulations are being updated,” says Koritsa. “The result of the crisis is stagnation in the market. Funds are in inertia.”

A government plan to cut the number of pension funds to 13 from 133 by the autumn is also contributing to the wait-and-see mood in the market. The finance ministry has set up a committee to plan the operational reorganisation of the funds. “But not much importance is being given to how the assets of the 13 funds will be managed,” notes Koritsa.

Last year’s legislation allows EDEKT-OTE to provide investment management and advice to the newly merged pension funds. It also enables IKA AEDAK, a mutual fund company that manages funds on behalf of IKA, to manage funds of other pension vehicles.

“However, not many funds have assessed the opportunity to outsource their asset management to these bodies because they are not sure how their own structure will be after the merger,” says Koritsa.

But once the industry has digested the upcoming structural reforms further changes to investment regulations are likely to take place. “The new law is a step to the right direction but [is] not enough,” notes Koritsa. “We expect the issue to be revisited once things have settled down.”

Tessaromatis notes investment regulation reforms and Greece’s pension industry does not only need revised regulations but also a new regulatory infrastructure for the system as a whole, including a regulatory body.