A Greek tragedy

At the time of writing and surely also at the time of publication, Greece is in terrible economic, financial and political trouble. Following the resignation of Prime Minister George Papandreou, the new unity govern-ment led by Lucas Papademos has begun work on a new package of austerity measures needed if Greece is to access new funds from the IMF and the EU, without which it faces bankruptcy in mid-December. At the time of writing, media reports from Greece suggest that, among other pressing problems, a €450 million hole in the budget for state pensions means that if the IMF/EU money does not materialise in time, those pensions will not be paid in December.

The Greek pensions system faces two fundamental problems. First, it is dominated by the state system pillar, funded directly – and in present circumstances unsustainably – by the stricken public purse. Public sector pensioners are paid directly by the government. State pensions for employees in the private sector and the self-employed operate on a defined benefit (DB), pay as you go basis and consist of an earnings-related primary pension, an earnings-related supplementary pension and additional benefits. Employee contribution rates are usually 6.67 per cent but can be as high as 8.87 per cent for occupations judged “heavy and unhygienic”. Employer contributions for these two groups are 13.33 per cent and 17.73 per cent, plus additional contributions for the supple-mentary pension.

State pension funds are also now trying to recoup money paid out in error or because of fraud.

The Social Insurance Institute (IKA), which manages pensions for more than 5.5 million people, is seeking to reclaim up to €8 billion paid out in bogus pensions over the past decade. Lurid news stories about fraudulent Greek pensions include reports in August that the IKA had paid €1.9 million to 1,473 pensioners over the age of 90 who, it transpired, were dead.

Reform of the system began in 2010, after Greece’s government agreed the €110 billion bailout package with the EU, IMF and ECB. Legislation passed in 2010 reduced state pension benefits, imposed penalties for early retirement and increased average retirement age so that workers must now work for at least 40 years, up from 37. Benefits can now no longer exceed 65 per cent of final salary (down from 70 per cent) and must be based on average career earnings instead of an average over the final five years of service.

The overall aim of this programme is to reduce the long term increase in spending on pensions by 10 per cent of GDP between 2010 and 2060, meaning the cost to the government increases by only 2.5 per cent of GDP over that period. That will hurt.

In the meantime, Greek pensions also suffer from the second major problem: over-investment in Greek government bonds. Both the old and the new governments have been trying to protect pension funds from the 50 per cent ‘haircut’ proposed for holders of those bonds, with methods considered including using capital derived from government property assets to make up the shortfall.

But Piraeus University assistant professor of eco-nomics and social insurance Platon Tinios believes this is actually a non-issue for most pensions, given undue prominence by a media keen to portray the government as cruel to pensioners while bending over backwards to help bankers. “Those pensions will be paid, whatever,” he says. “For the public pension system the haircut won’t have much of an effect.”

That’s not to say pensioners will be left unscathed. “The problem is that the 2010 reforms were 20 years too late and didn’t go far enough, says Tinios. Clauses were inserted to protect people due to retire in the next few years. “So people over 50 can see that if they were to retire they would get a better deal than if they stayed at work,” he adds. “As a result you have a very large number of retirement requests.

“You have contributions being squeezed and expenditure rising, so you have overrun in the pension fund,” he continues. “The country as a whole is under a big borrowing constraint, everyone has to live within their means, so you’re going to have to cut something. Over the last couple of years pensions in payment have been cut quite brutally, two or three times. This may happen again before the end of the year, maybe again in 2012.”

Before the end of 2011 the government will also need to make a decision as to which occupations should stay on the list of heavy and unhygienic occupations, from which people can retire five years early. And supplementary pensions, exempted from the 2010 reforms, will be examined as a condition of the bailout.

Those who have retired are already under pressure. Pensions have been frozen at 2009 levels and in May 2010 the government introduced a new levy on pensions, the pensioners’ solidarity contri-bution, for anyone receiving pension payments above €1,400 per month. Tax rates increase on a sliding scale from three per cent up to 10 per cent for pensions worth more than €3,500 per month.

Conditions are no more comfortable for the second pillar of the system: the small number of private pensions, backed either by private pension funds or group insurance. These include schemes set up by multinationals that were originally DB-based, but have since converted to a DC model.

There is some concern about the financial wellbeing of the insurers backing some of these schemes – in part because they also hold large numbers of Greek government bonds. As Aon Hewitt Greece vice-president George Kendouris points out, while arrangements are in place to rescue failing Greek banks, no such provision yet exists for insurance companies.

Another issue is the future tax status of benefits paid by private schemes, currently exempt from income tax. “There are rumours that new legislation will limit this,” says Kendouris.

“A lot of employers are thinking about terminating the schemes and distributing the money, or using other vehicles. Multinationals are thinking about moving employees to vehicles established in other European jurisdictions.”

So the situation is, as Kendouris notes drily, “not positive”. But both he and Sciens Odyssey manager George Elliott, a new cell on the Sciens Managed Account Platform, which has spent the past 15 months trying to develop a strategy to enable its clients to invest in undervalued Greek companies, believe further reforms are essential.

“The current situation opens the door for these markets to be liberalised,” says Elliott. “We’ll see the government give people the option to go to the private sector for pensions and not be obliged to contribute such big amounts for state pension schemes.

“At the moment the numbers just don’t work. Things have to change. In my opinion the only way [forward] is to allow people to leave the system and have private sector schemes entering the market.

I would like to have a perfect welfare state taking care of me when I get old, but unfortunately the resources are not there.”

So what next for Greece and its beleaguered pension schemes and pensioners? To some extent, their fate is no longer in their own hands, but is bound up with the political and economic consequences of the wider eurozone crisis. The hope must be that after a period of austerity the economy will eventually stabilise, making reforms easier and improving prospects for the longer term.

“In five or 10 years’ time conditions will be more stable and there will have been structural changes in the Greek economy,” says Kendouris. “Pillar one will be reduced further and there will be significant improve-ment in pillar two: more employers will establish occupational pension schemes.”

But at present such considerations seem a long way ahead, as Greece struggles to survive the economic storm and wrestles with the question of whether its future lies inside or outside the eurozone. It is excep-tionally difficult to predict what might happen during 2012. The fear is that it may well prove to be the sort of year that leaves almost everyone in the country dreaming desperately of a comfortable retirement.

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