The Greek government is both lucky and unlucky when it comes to social security. On the one hand, it is lucky because it can afford to defer the unpopular measures required to tackle the problem to the future and avoid shouldering the huge political cost at present. On the other hand, it is not lucky because all polls show it is very likely to still be in power when the moment of truth comes and the problem will be even bigger. Unlike the government, listed companies have no option but to deal with the problem of their unfunded pension liabilities as soon as possible because of the introduction of IFRS (International Financial Reporting Standards) from 2005. The problem is more acute for some banks with huge pension deficits because time is pressing and their own existence is at stake. The option of converting defined benefit pension plans into defined contribution plans offers a way out and should be seriously considered. Back in June 2002, the European Commission issued a regulation, making it compulsory for all EU listed companies to adopt IAS (International Accounting Standards) for their consolidated financial statements starting January 1, 2005. Fully aware of this, the previous Greek Socialist government went a step further. It called for the introduction of IAS from fiscal year 2003. The goal was to increase the transparency of local firms’ balance sheets and financial statements and facilitate comparisons with their European peers in order to make them more attractive to eyes of foreign institutional investors. However, the majority of local listed firms were not ready for such a radical step and the government was forced to scale back its ambitions. A month or so before 2005 with the compulsory introduction of IFRS, the successor to IAS, looming, a few large listed firms, notably large old banks, have yet to find a solution to a thorny problem: the need to record their unfunded pension liabilities in their balance sheets. The magnitude of the problem, which could force companies with defined benefit plans to exit the stock market, has surprised many as unofficial leaks from the top management point to pension gaps much higher than anticipated. In the case of Emporiki Bank, the country’s fourth largest bank, the pension deficit before taxes is rumored to be higher than the bank’s core Tier I capital of 1.13 billion at the end of the third quarter. According to IFRS, plan assets are valued at market prices on the balance sheet and plan liabilities reflect the present value of defined benefit obligations. Of course, Greece is not alone. The cumulative pension deficit of the UK’s 300 largest listed firms is estimated to be well above 100 billion euros, calling for big cash outflows in the cases of some well-known companies. In France, local GAAP do not require the accounting of employee benefits on balance sheet and in Germany, local accounting standards do not require a valuation method for funded schemes. Although a number of solutions could be found to the pension problem, listed firms, especially some banks, find themselves in a difficult position because they either ignored it in the past or did nothing, betting on the state stepping in and assuming the responsibility of funding all or a large portion of the pension gap at the crucial moment. Of course, banks and others will have more time at their disposal to find a solution acceptable to both, the bank and its employees, if, as rumored, the Greek Capital Markets Commission gives listed companies the option to publish consolidated accounts under IFRS, starting from the first half of 2005. Although there are differences among bank pension plans and the exact size of the deficit has not yet been disclosed in some cases, the choices facing banks come down to three. First, they have to convince their employees to dissolve their deficit-ridden pension funds and in turn the government to accept merging them into the country’s main IKA fund and assume all or a big chunk of the liabilities. This was more or less the nature of the proposal tabled by George Provopoulos, the chairman of Emporiki Bank, which was rejected by the bank’s powerful unions, who objected to the dissolution of Emporiki’s supplementary pension fund. Even if this solution was accepted by all interested parties, it is vulnerable to being branded «state aid» by the relevant EU authorities. As was the case in the past, the EU would impose a huge fine with all its negative implications on the responsible parties. Another way out is a rights issue to increase the share capital of the bank or the company in question in order to cover the estimated pension gap under IFRS. Of course, this presupposes that all interested parties agree on the size of the pension gap. Although something like this would be unpopular with investors, it could be carried out successfully in the case of firms with manageable unfunded liabilities. It would be much more difficult, even unfeasible, if the required share capital increase diluted earnings per share substantially. Of course, the share capital increase probably would be successfully completed if one or more of the major shareholders bought the offered shares, provided there was a clause. The third solution, and perhaps the easiest to implement given the time limitations, would be to convert the existing defined benefit pension plans into defined contribution plans. Under defined contribution plans, which are being adopted by more and more European firms, the firm will contribute an amount during a particular time period. Employers can project future costs while employees can receive reasonable amounts, although the benefits cannot be guaranteed. Of course, the determination of the amount the employer will pay is key to avoiding the underfunding of the pension plan in the future. This method offers a way out because defined contribution plans do not have to be incorporated in companies’ balance sheets under IFRS. Only the amount of contribution is recognized as a cost. The problem of unfunded pension liabilities facing a few listed banks cannot be wished away or swept under the rug. It has to be confronted head-on given their implications on the balance sheets under IFRS. As time is running out, it is imperative that both management and employees sit down and seriously consider all alternative solutions. Given that transferring the pension liabilities from listed firms to taxpayers and those insured from the main IKA fund does not constitute a fair solution to the problem, switching defined benefit pension funds into defined contribution funds may be easier to implement, and fairer.