Taking a leap in the dark

A reform of Greece’s first pillar leaves a lot still to be done, discovers George Coats

In April the Greek government pushed through legislation intended to overhaul the country’s first pillar pension system. Under the reform, the current 133 vehicles, a mixture of so-called main and auxiliary PAYG schemes, will be grouped into 13 organisations. The mergers are to be completed by August.

The intention is to raise what is agreed to be the generally woeful level of professionalism throughout the system and cut administration costs. The law also introduces parametric reforms, eliminating most early retirement schemes and offering incentives to those who continue working after retirement age.

The publication of the 236-page bill was greeted by protests from the trade unions and street demonstrations that led to clashes with the police. A 24-hour general strike in February brought the country to a standstill.

The unions claimed the government was going about it all the wrong way. “According to our studies the social security system must have about €180bn by 2050 but it has only €30bn.” says Savas Robolis, a professor at the Panteion University of Athens and scientific director of the INE Labour Institute, which advises the GSEE trade confederation. “So it must find new money. The big question is where it should come from. When the government started consultations on the reform at the beginning of last summer we proposed to the parliamentary social affairs committee that the underground economy be enrolled into the finances of the social security system. Greece has 4.5m people in the workforce and according to our studies one million are not declared, costing the system about €5.8bn a year in 2007, enough to support it for the next 50 years. But the government did not accept this as the central issue facing the social security system so the trade unions withdrew from the dialogue process and that is why we had the strikes and demonstrations.”

So how could underground workers be coaxed into the real economy? “That’s the government’s problem, not a problem of the trade unions,” Robolis says. “We are not the government of the country.”

For the government, the restructuring of the first pillar represents something of a leap in the dark. While the initiative is intended to get to grips with a system that is known to be in deficit, nobody knows how big the deficit is. And although the reform has been mooted for some considerable time, no actuarial study was undertaken before the legislation was drafted and passed.

“If it weren’t so serious one could almost say it was amusing,” says George Kendouris, (pictured left) at the Hewitt office in Athens. “Back in 1999-2000 when the previous government began to consider pension reform it recruited the UK’s government actuaries to calculate the deficit, but the resulting report was never published in full. However, there were reports at the time that the total pensions deficit amounted to two or three times GDP.”

Greece’s GDP is in the region of €230bn.

If it is that serious, surely the ministry of labour and social protection, which oversees the system, will have a figure?

“There is not a very clear picture of this in terms of numbers,” says Dimosthenes Mammonas, secretary general at the ministry. “Some from the trade unions talk about a deficit of €200bn but we don’t have an official report on this.”

Nevertheless, the ministry did commission a study from the ILO but it was restricted to the two major ‘main’ pension institutions, the Foundation of Social Insurance (IKA) and the Organisation of Farmers’ Insurance (OGA), which cover about 75% of the population, Mammonas adds. “Amazingly enough its preliminary findings gave us a not-too-negative picture of the system. What it found was that if the state continues the current funding level of 1% of GDP to IKA there will be no problem until around 2025. In my view this seems to be rather optimistic. We know the system creates deficits, we have a lot of social taxes, especially in the funds of the self-employed, so we know the picture is not so good. But this is not reflected in the ILO study.”

But while the situation in the IKA and OGA may not be as bad as expected, the financial health of many of the other schemes is dire. And this has given rise to fears that the reserves built up by better-run plans will be appropriated to fill the holes in the less well managed.

“The trade unions agree it is necessary to rationalise the system but we do not agree with the way it was done,” says Robolis. “In our view it was necessary first to discover just what was the deficit and the economic situation of each pension fund. But the government did not accept this proposal and used its majority to pass the reforms. So now, for example, in the new pension funds the surplus of one could be taken to finance the deficit of another.”

“There was an embarrassing situation in March when the central bank employees went on strike because they did not want their fund to be merged with the bank workers’ umbrella fund,” says one observer. “The worst thing was the strike shut the stockmarket and the interbank payment system for two days.”

In fact this is not necessarily the case. “Supposedly, the new funds will pool assets and they will invest the money collectively,” says Kendouris. “But does this mean that there are assets, because we know that some of the plans have serious cash flow problems? And anyway was the purpose of the law to collect all the assets and finance the plans that don’t have any? The message from the ministry was that assets will be kept in separate accounts but that by merging the funds it would be easier to find a proper fund manager to manage the assets, to improve the administration and for it to be possible for the ministry to monitor these funds, because it has been impossible until now.

“However, those new funds will be umbrella funds, like a holding company, and underneath there will be the funds with the same rules and terms that they had just before the merger. So there is the danger there will be another layer of administration without necessarily more efficiency.”

“That’s the challenge,” says Nikolaos Tessaromatis, (pictured right) general manager and CIO of EDEKT-OTE, the dedicated manager of a €550m portion of the portfolio of the telecommunications organisation pension fund (TAP-OTE). “We haven’t seen much in terms of planning so there is a danger it could end up like this. There are a couple of bad examples from the past of pension funds that are still going through a merger after many years.

“But what makes me hopeful is that the government seems to be pretty determined. It said August and it is doing it.”

And Mammonas stresses the intention is to increase efficiency and reduce costs. “The first stage is to put the various funds under the same administrative umbrella because it is difficult, if not impossible, for the government to have an effective supervision of the system under the present circumstances,” he says. “Under the administrative reform we are creating new unified services within each merged fund to create economies of scale. To give a specific example, there will be a central directorate for contribution evasion and expenses control. This is to not only reduce expenses but also control the services more effectively because it is impossible to talk to 133 different bodies, but it is obvious that it will be a totally different situation to control 13.”

However, scepticism remains. “It is premature to say anything about what is going to happen because the committees on the operational restructuring and merging of these funds are now in the process of convening,” concedes Eleni Koritsa, general manager EFG Eurobank Asset Management, a major provider of investment products, advisory and portfolio management services to institutional investors. “But directors of pension funds tell me that their fund will not be eradicated but will become a section, a department, of the bigger fund. And nobody really knows how the board of directors will be constituted and how the decisions will be taken. There was nothing in the law about what is going to happen operationally.”

“A great number of decrees are still needed to specify all the new arrangements,” says Haris Stamatopoulos, vice-chairman of Alpha Trust Investment Services, an asset manager. “But there is no continuity. Leaving aside previous governments, during the last four years while we have had this government, we have had four ministers of labour. I presume each of them had good intentions, all have set up committees containing some qualified people, they usually do a good job but there is no follow-up on their reports. Instead the minister is changed and a new committee starts to redraft.”

However, as it stands the law has its positive points, he says. “It is a long way from introducing satisfying criteria for the management of the funds but for the first time it has introduced the requirement that a managing director, who should be a professional, be appointed and have responsibility for the running of the funds. In the past a board of directors was a politically driven body of ignorance, so that is an improvement.”

But again Koritsa is unconvinced. “I think this is unlikely to happen,” she says. “What is the ‘more professional’ approach? People in charge of the 13 merged funds will be politically appointed irrespective of the party in government. It is highly unlikely to choose professionals in the asset management of pension funds’ business.”

“I haven’t seen the details of the job description for those people,” says Tessaromatis. “That would give a sense of whether they are looking for something more professional or whether it is going to be jobs for the boys. But I know for a fact that in the past most of these people were not well paid, they were supposed to be part-timers but in fact it was a full time job because the structure is such that everything comes from the person at the top so if they are not there nothing works. And money is quite important because how are you going to get professionals if you don’t pay?”

“They have not issued a job description but they made announcements and have already appointed eight or 10,” says Stamatopoulos. “Some may not have been the best choices, retired bankers or lawyers, and so not fully qualified, but with a better understanding than the people before in that they do understand economics and the problem of liabilities and assets and how they should try to match the flows from both sides. But there are two hurdles to getting the right people. One is the salary. It will be extremely difficult to match the requirement for qualified people with the rewards the position offers for the risks they are talking. You cannot attract well qualified people if they have to sacrifice a job to become the head of funds, which is not a particularly attractive title per se, if they only get paid one-third or a quarter of their salary.

“The second is that they will have political exposure. They would be on the front page of the newspapers on an almost daily basis and whatever they do will be criticised by the opposition, no matter which party that might be. And their investment strategies will be scrutinised. If they take a conservative approach they wouldn’t be criticised but they wouldn’t be undertaking proper management because they would get very limited returns and the fund would not match the needs of the future. But if they take risks they would likely be blamed by their members.”

“The merging procedure, which supposedly has to be completed by the end of autumn, will definitely delay any activity in the investment area as for some time after it is completed the merged pension funds will have to find their path operationally,” notes Koritsa.

But what about a second pillar? “The law of 2002 implementing the EU’s IORP directive created the possibility to create occupational funds as a second pillar of the system,” says Mammonas. “But this has not had a spectacular implementation because today we have only four.”

Stamatopoulos is the head of the investment committee of one of them, TEA-ELTA, the occupational fund for postal workers. “Currently we have around €22m under management, having started from scratch almost three years ago,” he says. “We went through an investment process, all major banks participated and eventually we chose the Commercial Bank of Greece. For my investment committee it was a learning exercise. I am trying to inform the other members of the investment committee how fund management is properly run, I’m pushing the Commercial Bank to explain why it made any particular choice and why it is in the particular domain of the agreed investment strategy. So it is still an educational process.”

And is it working? “Last year the stock market went down and although we had only 5-6% in stocks there were fears that they were going to lose their money. In the second half of the year the stock market rose 20%, our equity holdings went up to almost 9.5% and they were very happy. When the stockmarket fell by more than 25% in the first quarter of this year they were less anxious because they were more acquainted with the process.”

So why are there not more occupational funds? “Since 2002 the tax framework has been completely vague,” says Kendouris. “So while employers, especially multinationals, were considering setting up occupational pensions schemes, nobody knows the tax status. There are some interpretations from tax experts but this doesn’t constitute the law and there has been no clarification from the government.”

“This specific legislation comes under the joint jurisdiction of both the ministry of social affairs and of finance,” says Mammonas. “So the law, which came from us, didn’t tackle the question of taxation at all because the finance ministry has the first role in this field.”

“The first thing these schemes ask for is tax exemption,” says Ioannis Siridopoulos, secretary-general at the finance ministry. “This intends to encourage people to change their behaviour but at the same time it reduces the state revenues. We inherited a fiscal deficit of 7.4% of GDP in 2004 so our first priority was to reduce it without depressing in the economy. We have made substantial progress and now the deficit is well below 3% and we expect the 2008 outturn to be below 2%. First we have to ensure that this situation is sustainable, so we need to expand the second pillar without reducing tax revenues. An official committee is studying this issue and will shortly present results.”