Pension fund assets need to be professionally managed

Greece may be facing one of the most acute social security problems in the eurozone but has done little so far to take advantage of professional management of the system’s assets to generate higher income to help finance part of its liabilities. It is no secret that the two major political parties are treating the issue of social security reform like a hot potato, while the small Leftist opposition parties offer little as an alternative but to tax the rich and corporations to finance the deficit without touching sacred cows, such as the retirement age and the pensions. Since the mid-1990s when the first complete report on the status of the Greek pay-as-you-go system by a government-appointed committee was made public, talk about reform has surfaced a number of times but quickly died down as the ruling political parties realized any essential reform entailed huge political costs. Of course, the situation has not changed for the better. Corporations, especially in the greater public sector, have resorted to voluntary retirement schemes to slash personnel costs and become more competitive since rigid labor laws do not make it easy. By doing so, they have simply transferred the liabilities to the ailing social security system, making things worse. There is no question that the situation cannot go on forever, as adverse demographics are still at work and the long-term uncovered liabilities of the social security system continue to grow, threatening fiscal balances and undermining economic growth and employment. It should be noted that the European Commission has projected that the country’s public debt will rise to 255.5 percent of GDP in 2050 on higher pension and health-related spending as the population ages and there are fewer workers to each pensioner. Things may get even worse if other studies turn out to be correct. So, it is safe to say the longer reform is delayed the more painful the changes will be. However, few politicians appear to embrace this view, although a larger portion of their constituencies seems to understand the need for reforms. However, there are also other ways, less politically charged and easier to implement, that could be used to boost the revenues of the social security funds, and which have been overlooked for a good reason. The current legislative framework for managing the assets of the social security system has been too restrictive for its own good, making Greece a laggard in the eurozone. Greek social security funds can invest only up to 23 percent of their assets in securities and real estate after notifying the appropriate committee and the Labor Ministry. Up to 60 percent of the quota can be invested in stocks, while the remaining 40 percent can go into real estate. In addition, the money can be invested only in stocks and bonds listed on the Athens Stock Exchange, especially those belonging to the blue chip FTSE 20 index and the mid-cap FTSE 40. Investments in futures contracts are allowed only for hedging the stock portfolio risk. To make things even more restrictive, the labor minister and the governor of the Bank of Greece have to agree before social security funds can proceed with the sale of bank shares. In this regard, it is no surprise that Greece had one of the lowest percentage of social security assets invested in equities in the developed countries at the end of 2005. It stands at a little above 10 percent as opposed to 80 percent for Ireland, close to 60 percent for Sweden and over 40 percent for Portugal. It is not hard to see that optimum investment decisions aimed at raising returns substantially for the same level of risk cannot be made within this framework. After all, putting all one’s eggs in a single basket is not a wise investment decision. This means current and future Greek pensioners are deprived of a great deal of revenues which could have been used to cover part of the system’s liabilities. Since we are not talking about private sector employee pension schemes, regarded by some political parties as heretic here, one should attribute the inefficiencies to lack of know-how and initiatives by politicians, labor leaders and others who should have demanded them. The advantages of diversification became quite clear in the case of EDEKT-OTE, the telecom management company, established by the state, OTE, OTE’s pension fund and others to manage about 528 million euros in 2002. The company mandated in 2002 well-known international investment banks and Greek banks to invest part of the money in eurozone equities, including Greek, and part in eurozone government bonds. The initial balanced mandate was changed to something more specialized in May 2005. In December 2006 and early this January, EDEKT-OTE paid about 170 million euros from capital gains and interest income to OTE’s employee pension fund to cover its needs and is about to pay out another 60 million euros in the coming days and weeks. But this is an exception and would not have been possible had no discretionary management been allowed in a broader investment space, allowing for better portfolio diversification. Nikolaos Tessaromatis, who heads EDEKT-OTE and had served in similar positions in pension funds in the UK before coming to Greece, attributes the returns to the professional management of the initial capital. This type of professional management of social security assets is common abroad but is a rare phenomenon in Greece. Another model of professional management which has been used here is the establishment of a mutual fund management company by IKA, the country’s main pension fund. This model is not used much abroad but it is still better than the current system of managing social security assets. Liberalizing the current institutional framework for the management of social security assets is long overdue for Greece’s ailing social security system. However, the relevant Greek authorities appear to be unwilling to yield much, if recent press reports turn out to be correct. According to them, the committee looking into this matter is leaning toward increasing the quota to 28 percent from 23 percent of total assets, to allow investments in eurozone securities and help establish a commission to lay out the rules of investing. Although headed in the right direction, such changes will fall far short of those needed to alleviate funding pressures on Greece’s social security system. Merely liberalizing the institutional framework may not suffice if it is not accompanied by other measures, such as changing the structure of social security funds to make it more transparent. Equally important is establishing a regulatory body to ensure corporate governance rules are respected.

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