Pension asset management gains friends
By general agreement, Greece’s ailing pay-as-you-go (PAYG) pension system is in urgent need of reform. Nevertheless, nobody wants to assume the responsibility for its overhaul due to the high political cost involved. Instead, all interested parties, namely the government, political parties and labor unions, are content to focus on easier solutions such as increasing returns from the more efficient management of pension funds’ reserves. But the lack of experience in asset management in Greece and the restrictive legal framework governing pension fund investments threaten potential returns. Senior government and main opposition party officials admit in private that unless painful measures are taken, adverse demographics will continue to drive the ratio of employees to retirees lower in coming years, augmenting the present discounted value of unfunded liabilities of the current pension system. But the same officials, in public, advocate painless solutions. Moreover, while they, in private, advocate the introduction of some form of privately funded schemes to supplement the income of future retirees, few seem to be willing to even hint at something like this in public. Sensing the high political cost involved, the Greek government has come up with a new, long-term, guaranteed funding scheme for the main pension fund IKA running up to 2032, effectively giving up on last year’s modest proposals for pension reform, which drew fierce, across-the-board criticism. Last year’s proposals called for a gradual increase in the retirement age limits to a universal 65-year threshold, for pension benefits to be equivalent to 60 percent and 20 percent – for the main pension and supplementary schemes respectively – of the average wage in the best 10 years during the last 15 years of employment and the merger of the current pension funds into eight large ones. Faced with this situation, it is no surprise that the government is looking into other alternatives to boost the income of pension funds with professional asset management of reserve funds being one of the most popular. Already, EDEKT-OTE, the pension fund of state telecom OTE’s employees, has become the first to follow the new route by hiring the asset management divisions of four domestic banks to advise it on local investments, and two well-known foreign names on international investments. The asset allocation calls for 40 percent of reserves under management to be invested in local assets and 60 percent in international assets. No one disputes the fact that hiring professional advisers to help manage reserves in such a way as to maximize risk-adjusted returns is a step long overdue and in the right direction. It should not be forgotten that not so long ago, state pension fund reserves were deposited at the central bank and earned no interest at all. In the last few years, state pension funds were allowed to invest up to 20 percent of their reserves in the capital markets. More recently, this percentage was increased to 23 percent, of which a maximum 13.8 percent can be placed in stocks or equity mutual funds. Although many argue, including banks, which realize that institutional fund management can yield fat fees, that state pension funds should be allowed to invest a higher portion of their reserves in capital markets in line with the trend seen in other continental EU countries, few are willing to spell out the potential risks. The most important risk has to do with the lack of experience in asset management locally. It is well known that asset management is a relatively new area for Greek banks and therefore they do not have either the track record or the appropriate personnel in sufficient numbers to assume such a role. Realizing the apparent limitations, some of them have tried to deal with this problem by teaming up with well-known foreign names. Even so, this looks to be more of a window-dressing effort than anything else, especially when it comes to investing in the local markets where their foreign partners have little or no prior experience whatsoever. Instead of addressing the problem, the government, understandably interested in reviving the dormant Athens bourse, prohibits state pension funds from investing part of their freely managed reserves abroad in the new legislative framework governing pension asset management. But this way it deprives state pension funds from the benefits of international portfolio diversification and does not help local banks get some expertise from their foreign asset management partners. Pension fund asset management is not a substitute for real social security reform. It can help, however, boost the long-term, risk-adjusted returns on reserves. To that extent, it would be helpful if state pension funds were given more freedom to invest a greater portion of their reserves in Greece and abroad in the context of strict guidelines guaranteeing transparency and accountability. This way, both the Athens bourse and state pension funds would benefit.
