Pension reform pressing

Greek listed companies, facing difficulties in putting out their first-quarter financial results under IFRS (International Financial Accounting Standards) by the end of May, were relieved to hear a few weeks ago that the Capital Markets Commission had extended the deadline by one month to end-June. This was especially the case for some large banks engaged in negotiations with their unions to try to solve the pension problem. However, these negotiations have yet to bear fruit, prompting some top bankers to call on the government to take initiatives. Even though the authorities should do their best to facilitate an agreement between the two sides, it would be a grave mistake to accept a solution whereby the Greek taxpayers and state IKA fund pensioners end up subsidizing profitable companies in the future. The so-called bank pension problem can be considered a part of the country’s social security problem, underlined by the aging of the population, increasing life expectancy, chronic mismanagement of numerous state-run funds and others. The previous, Socialist government tried to institute some reforms and transfer a good deal of money, amounting to 1.0 percent of GDP, from the budget to secure funding for the country’s main state IKA for years to come. Little time left The conservative government also encouraged the beginning of a national dialogue among all social partners to identify and estimate the magnitude of the country’s social security problem and come up with a list of proposals to address it. Even though social partners can afford to discuss ways to tackle the problem for a year or more, listed firms, mainly banks, with defined benefit pension plans, often running huge actuarial deficits, have little time left. They will have to record these uncovered pension gaps since all EU listed firms, including Greek ones, are obliged to adopt IFRS for their consolidated financial statements starting January 1, 2005. But the step of recording the actuarial pension deficits, determined by the present value of liabilities minus the value of assets held by the funds, has serious implications for some banks, such as Emporiki Bank, because it will dramatically reduce their own equity and drop their capital-adequacy ratio to well below the level set by the supervising central bank. Of course, the banks and their employees knew for quite some time that the problem would show up with the introduction of the IFRS methodology. Notably, the Socialists’ former Finance Minister Nikos Christodoulakis had announced the mandatory adoption of IFRS by Greek listed firms from fiscal 2003, that is well ahead of the 2005 deadline set by the EU authorities. That decision was never implemented because a number of listed firms reportedly objected, seeking more time to take measures to align their financial results under Greek GAAP with the ones under IFRS. In other words, even though they had plenty of time to adjust, they did not take advantage of it and some of them, facing the deadline of end-May for reporting first-quarter financial results under IFRS, even flirted with the idea of skipping it and proceeding with the publication of first-half results. So, here we are a month and 10 days before the expiration of the new deadline, and conflicting signals are emerging on whether the representatives of Greece’s four large banks, namely National, Alpha, Emporiki and Piraeus, and the bank unionists (OTOE) are close to reaching a common solution to the pension problem. Like other top bankers before, National Bank Chairman Takis Arapoglou said last week that he did not expect the two sides would be so close to an agreement and called on the government to step in and take initiatives. Arapoglou has repeatedly stated in the past that National Bank will report under IFRS whatever the outcome of the negotiations, since its obligation to the Bank’s fund is set below 300 million euros, and it has the capacity to take the charge without materially affecting its own equity. But the bankers’ optimism is being countered by strong reservations raised by key unionists from large state-controlled banks. Shifting the burden Interestingly enough, insiders claim that the banks appear not to be demanding that employees give up on some of the extraordinary privileges of their funds, such as the right of women to retire after 15 years at a couple of banks, but instead want the consent of the unionists to seek a good deal of funding for the common supplementary fund sought for all bank employees from the state. In addition, the insiders say that some banks would like to transfer their pension funds to state IKA and IKA-ETAM funds. This type of solution was sought in an earlier law passed by the previous Socialist government, even though it failed to account for the necessary funding. Under this scheme, banks and their employees will see their pension contributions fall to lower IKA levels, but bank employees will retain the same benefits they enjoyed before. A number of people claim that such an accord – which includes the transfer of bank funds to IKA and a good deal of state funding for the common supplementary sector fund – will solve the pension problem of some large banks. It will give more freedom to banks to pursue their expansion plans in the Balkans and elsewhere. It will also facilitate M&A activity in the sector, opening the way, among other moves, for Emporiki to be acquired by France’s Credit Agricole. They are absolutely right. Provided bankers and unions agree on a solution along the lines described above – a big if, according to those following closely the negotiations – it will be a very good deal for the banks and their shareholders. After all, it is going to boost their earnings, even if it is applied gradually, and help their shares. On the other hand, it will be a very poor deal for the Greek taxpayers and the rest of IKA pensioners. This is so because they will be called upon to pay the resulting future pension deficits even if the banks’ contribution to the common supplementary sector fund leads to a lower budget deficit in the short term. It is not unusual for officials from other banks to raise the issue of unfair competition in the sector, claiming that any solution in which the state assumes a good deal of the pension burden of their competitors puts them in a disadvantageous position. This may be a serious charge, but it may also be just a bargaining chip for something else. Of course, the pension problem of the banks should be resolved one way or another in view of the IFRS. The fact that banks and their employees failed to address it for such a long time shows lack of clear judgement, and perhaps their intention or hope to share it with the Greek taxpayers. The government should help the two sides reach an agreement, if possible, and contribute on the basis of its shareholding in some state-controlled banks. It should not extend and condone the Greek statist tradition of transferring other people’s burdens onto the shoulders of the taxpayers.