Finance Minister Giorgos Alogoskoufis seems to have been convinced that the government should go ahead with a legislative initiative to solve the so-called banks’ pension problem in view of the tight, end-June deadline facing listed firms for reporting their first-quarter financial results under IFRS (International Financial Accounting Standards). But, in endorsing a legislative initiative rather than encouraging a market-based approach to addressing the problem, the government risks meeting a wall of resistance from employers and employees, as well as a probable rebuff from the European Union on fair competition grounds. The bank pension saga took another twist last week when the European Commission, in a letter signed by Joaquin Fernandez Martin, asked Greece’s permanent representative to ask the Greek authorities to respond to press reports claiming that the banks, the employee unions and the government were close to reaching an initial agreement on an industry-wide solution to the Greek banks’ pension issue. The industry-wide solution involved the creation of a common supplementary pension fund which will be funded by the banks at the outset with the state covering future liabilities. Responding to this letter, Professor George Mergos, secretary-general at the National Economy and Finance Ministry, confirmed for the first time officially that the government intends to use a legislative initiative to address the issue. Without providing all the details, he made it clear that it will involve the transfer all bank pension funds, main and supplementary, to the Social Security Foundation (IKA) and its supplementary arm (IKA-ETAM), as sought in Law 3029/2002 passed by the previous, Socialist government. It will also include the creation of a common supplementary fund, partly financed by the state and partly by the banks, open to all banks on a voluntary basis. According to other government sources, the supplementary funds of state-controlled Agricultural Bank and Emporiki Bank are going to be the first to join the common supplementary fund, with other banks following suit later on. A burden on IKA Although Law 3029/2002 calls for the transfer of all bank pension funds to the country’s largest, but financially shaky, state IKA and IKA-ETAM, it is certain that such a development will prompt the reaction of the General Confederation of Greek Labor (GSEE) and of employers’ associations. Both GSEE and the Federation of Greek Industries (SEV) have voiced strong objections in the past to the transfer of these deficits to IKA as it will augment its future liabilities. It will also create two-speed pensioners because, according to Law 3029/2002, bank employees will keep their current higher benefits but have their contribution rates – along with their employers, that is, banks – fall to the lower IKA levels over a period of time, subject to negotiations. Despite an annual capital injection, amounting to 1 percent of GDP, from the budget agreed to a couple of years ago, IKA finances appear to be deteriorating and a recent GSEE-sponsored study called for an additional injection of capital, equal to about 1.5 percent of GDP, from 2007 onward for its finances to stabilize. If this is true, and nobody has disputed this conclusion of the study so far, one does not have to have a PhD to understand that the transfer of banks’ pension funds to IKA and IKA-ETMA will further undermine their financial position in the medium to long term. The latter will not be the case if the banks fully assume the uncovered liabilities of their employees, but this is unlikely. After all, the main reason they wish to transfer their pension funds to IKA is to partly shift the burden onto others. Of course, not all banks belong to this category, as some already insure their employees with IKA under the same terms as all other IKA employees. Some bankers who favor the transfer of pension funds to IKA claim that the European Commission has given the green light to Law 3029/2002 in the past, adding that the law will be used to claim that the government-sponsored legislative initiative is compatible with EU laws. This will be more so with the common auxiliary fund to be partially financed with budget money that some analysts and some bankers think could violate rules of fair competition. Emporiki Of course, convincing some state-controlled banks, such as Agricultural, to join the new common supplementary fund may be easier than convincing others, such as the employees at Emporiki Bank. The latter appear to object to this solution, and seem to be preparing for a showdown with the management, which is thought to be in favor of a legislative initiative to change the terms of the bank’s fund unilaterally and join the new common supplementary fund. Emporiki’s management is expected to claim that it is necessary for the bank, given the huge actuarial deficit of the fund and its annual contribution of more than 50 million euros to it, as it puts at risk its existence. This claim is expected to be disputed and challenged in Greek and European courts by the employees’ union and perhaps others who believe there are other ways to tackle the problem. Some suggest a share capital increase in market terms to deal with the actuarial deficit under IFRS, preceded by negotiations between management and the union – despite their hard feelings – to limit benefits, leading to a sizable reduction in the size of the actuarial deficit. Given all the above, it is not difficult to understand that this complex issue is about to reach a climax in the next 15 days and perhaps this week when the government announces its plan. If as expected, it sides with those who favor a legislative solution rather than with those who prefer a market-based solution – where the shareholders of the banks, not the future generations, the taxpayers and IKA assume the burden of their employees’ future pension liabilities – the government will have nobody to blame but itself and its advisers on this issue for the problems.