24.2.1 Basic Characteristics of the Greek Social 24.2.2 Recent Major Reforms in the Greek Social 24.2.3 Role of Fund Reserves, Investment 24.4 International Investment Yields under Fix
Trang 124.2.1 Basic Characteristics of the Greek Social
24.2.2 Recent Major Reforms in the Greek Social
24.2.3 Role of Fund Reserves, Investment
24.4 International Investment Yields under Fixed and Floating
Trang 224.5 Em pirical Results 653
security system, in terms of risk and return, caused by the infl exible investment co nstraints u nder wh ich Gr eek pens ion f unds o perated i n the period 1958–2000 Using data on pension fund reserves as well as on money and capital market yields, we evaluate retrospectively the risks and returns of a more pro-investment fund reserve management by analyzing
an indicative number of investment scenarios in local and international money and capital markets In order to estimate local currency yields for international i nvestment, w e g enerate f or t he en tire per iod—covering both a fi xed and a partially fl oating exchange rate regime—a correspond-ing series of exchange rate variations based on the offi cial rate fl uctuations and infl ation diff erentials Our results suggest that in the 43 year period, there has been a signifi cant opportunity loss in the system both in risk and returns: fi rst, by excluding Greek bank deposits and Greek capital market securities that would have propped returns up at acceptable levels of risk and, second, by not allowing for some degree of international diversifi ca-tion that would have kept overall downside risk down Th is opportunity loss could have alleviated, to some extent, the current imbalance of the system had some of the restrictive investment rules been relaxed
24.1 INTRODUCTION
Equity investment for, and fi nancial management of, pension fund wealth, especially reserves, has been at the center of social security discussions, proposals, a nd reforms worldwide, as well as i n Europe, for t he last 20 years or so Because of the adverse demographics and a sluggish economy,
a majority of governments have taken actions by redesigning the system’s parameters a nd li beralizing fi nancial i nvestments S uch ac tions a imed
at restoring actuarial and fi nancial i mbalance have a ff ected t heir social security systems
fol-lowed, h it t he world economy a nd i mpinged upon t he issue of pension equity investment in two ways First, negative growth rates and increasing unemployment have put pension fi nance u nder even g reater st rain a nd exacerbated their imbalance Second, negative stock market returns had a
Trang 3drastic eff ect on aff ected pension reserves, at least for those funds that had chosen during the past decade to allow for a more pro-equity investment.Adverse stock ma rket de velopments have a lso had t he eff ect of con-
secu-rity r eforms i n t he fi rst p lace P aradoxically, t he m ore t he a uthorities were reluctant to liberalization and the longer the consultations between authorities and social groups, the greater the equity loss because of a “late-comer eff ect.” Perhaps healthier social security systems could be expected
to recover from the current downtrend in income and reserves once their economies begin to grow again and equity losses could be temporarily sus-tained Th e same does not apply to weak and unbalanced systems like the Greek social security system that consecutively resisted serious reforms in terms of eventually matching infl ows to outfl ows
In what position would t he Greek soc ial sec urity be , had i t adopted
a more pro-equity investment, in the right time and not in the last hour?
In what position would it be, if the existing restrictions on pension reserve investments had r eceded i n fa vor o f a r egulation a llowing f or a r icher opportunity set? Th is is in our opinion the appropriate question that one has to ask and not rely exclusively on the recent equity losses that are actu-ally being recorded Th e reason for addressing this particular question is because the older and stricter investment policy rules were imposed for most of the period since the system’s creation and only recently has it been abandoned Even today, aft er some relaxation of the restrictions, invest-ment in domestic equity, mutual funds, and real estate account for a maxi-mum of only 23% of total pension reserves
invest-ment policy on domestic money and capital market, have been recently studied by Milonas et al (2007), who found that the returns-to-risks ratio would i mprove signifi cantly, i f t he reserves had be en i nvested f reely i n the local money market and the Greek stock exchange Yet, that study fell short of investigating the eff ect of diversifi cation in foreign markets Th is chapter a ims to close t his gap i n t he l iterature a nd off er policy recom-mendations regarding fi nancial management in the Greek social security system In particular, the objective of this chapter is to provide evidence of what would have been achieved by the system, had there been a more fl ex-ible investment policy that allowed investments in both local and interna-tional markets
perils of pension fund reserves has been studied by a number of authors
Trang 4(Munnel a nd Ba lduzzi (1998), Weller (2000) a nd t he referenced a rticles therein, and Weller and Wenger (2008) ) Empirical research off ered a sci-entifi c argument to those who supported fi nancial management liberaliza-tion, and an increased number of European countries have reformed their social security systems lowering t heir restriction to equity i nvestment.* Pension fund managers and social security systems that followed suit not only greatly benefi ted in the last 15 years from the stock market boom, but also had time to build up strong capital gains that would help them to deal
Our argument must not be m isunderstood While we argue that risk exposure a lone i s not a pa nacea to t he pressing st ructural problems of unreformed security systems, we accept that a reasonable risk exposure will mitigate, to some extent, the ineffi ciencies of the system, by achieving
a higher return per unit of risk
present state of the Greek social security system, its basic characteristics, the major reforms implemented so far, and rules, regulations, restrictions
on pension investments, as well as the portfolio composition of pension
data and sources, and the methodology of balanced bootstrapping used in
we discuss the international fi nance issues in the period 1958–2000 and propose a h omogenous measure of exchange r ate va riation i n fi xed a s
comments
24.2 THE GREEK SOCIAL SECURITY SYSTEM
All pension schemes, irrespective of the mode of operation, accumulate surpluses during t he fi rst few decades since t heir inception Over time, though, pens ion l iabilities ma ture, dem ographics m ight cha nge, a nd growth rates may not be able to sustain the funds needed In such a case,
* According to OECD Global Pension Statistics, in 2006 pension fund assets in selected OECD countries were allocated almost 50% of total investments to equities and investment funds such as private equity and hedge funds.
† Over t he 15-year p eriod f rom 1994 a nd up to O ctober 2 008, t he average a nnual p ension fund returns for United Kingdom, the United States, and Sweden were estimated to be 9.1%,
10.5%, and 11.7%, respectively Source: Pension Markets in Focus, December 2008, Issue 5,
p 5, OECD.
Trang 5defi cits may prevail over surpluses.* Th is is the trend that most, if not all, developed countries are in Given that this trend will continue in the years
to come, increased macroeconomic imbalances are bound to force
especially true for the euro zone countries that share the same currency and are required to keep their budget defi cits and public debts to mini-mum set levels As a result, the European Commission demands reforms
in the social security systems so that no additional strains are added to the basic macroeconomic variables In line to these demands, many European governments have introduced reforms or are in the process of reforming
example, e specially bec ause of its u nique cha racteristics For Greece to become competitive, it is imperative that it must change the basic param-
24.2.1 Basic Characteristics of the Greek Social Security System
pri-mary system to provide health and pension stipends to eligible members
the system was not mature, the infl ows surpassed the outfl ows and there was no pressure on government offi cials to establish an appropriate base for reserves Instead, time a ft er time, the governments utilized most o f the infl ows to fi nance various state projects Th e understanding was that the st ate will acco mmodate t he o ncoming defi cits o f t he syst em w hen needed
* Pension f unds, just like a ny economic entity, a re subject to mone tary risks Th e ir outlays increase over time and one t hing that should be considered is the preservation of t he pur- chase power of the capital paid as pension stipend.
† Barr (2000) recognizes the government as the key principal in reforming the pension system, irrespective of how the latter is run He also argues that a necessary condition for a successful reform is an eff ective government.
‡ For example, see Koch and Th imann (1999) for a t horough analysis of ne eded reform for the Austrian social security system Disney (2000) analyzed the diffi culties run by O ECD countries in t heir pension systems and examined various reform options been suggested Holzmann et al (2003) presented the reform progress that has been made in European coun- tries Sakellaropoulos (2003) has presented the social policy issues surrounding the reform
in the European pension systems, including the Greek pension system.
§ A series of re forms in the last 2 d ecades in Greece illustrate the diffi culty of br inging the Greek mo del of p ension prov ision i n l ine w ith t he p olicy go als of t he “Eu ropean s ocial model” (see Vlachantoni (2005)).
Trang 6Besides being insuffi cient on an actuarial basis, reserves were restricted
to certain types of investments, such as mandatory deposits with the Bank
of Greece, demand and time deposits, treasury bills, and treasury bonds With these restrictions the governments secured the fi nancing for their own policies However, this policy provided suboptimal yields for the sys-
Another characteristic of the system is that there were multiple social security p roviders r esulting i n co mplexity, f ragmentation o f t he sec u-rity coverage, ineffi ciency, a nd i nequalities ac ross sec ured i ndividuals.*
supplementary pens ion f unds, a nd 1 33 o rganizations o f b roader soc ial
despite the approximately 20 main social security funds, 90% of the insured (4,040,870) a nd pens ioners ( 2,282,480) i n 2 008 w ere co vered b y t hree funds, i.e., ΙΚΑ (Social Insurance Institute) 46.3%, ΟΑΕΕ (Self-Employed Insurance Organization) 14.1%, and OGA (Agricultural Insurance Fund) 29.5% It is only the remaining 10% of the population that is covered by the remaining 17 smaller funds Note that the state secures all public sec-tor employees through a separate fund
When measuring pension fund assets per insured individual, an esting characteristic emerges Th ere exist two types of pension funds: those with suffi cient reserves and those with insuffi cient reserves Furthermore, the funds with the most assets are not necessarily the funds with the most members Th ere a re pension f unds w ith la rge reserves t hat ma ke t hem viable, despite all social security system ineffi ciencies In contrast, there are other f unds t hat w ill fa il to meet t heir obligations a ft er a m onth i f contributions a nd g rants a re d iscontinued Th e ba nking sec tor f unds
* Sectorial fragmentation, lack of a central executive body, and piecemeal supervision of social security organizations prevented the establishment of a common insurance perception, thus giving r ise to i nequalities a mong t he f unds of v arious t rader a nd profe ssional g roups i n terms of contributions and benefi ts (pension amount, one-off allowance, medical care, etc.).
† Social Budgets (1970–2008).
‡ Th e large number of pension funds leads to a high administrative cost Social security funds employ approximately 1% of t he labor force and spend 3% of t he GDP annually, when the average social security fund staff expenses in OECD countries is estimated to be half of this amount versus total insurance protection expenses.
§ Such discrepancies are the result of better pay for members of rich funds, special taxes levied
on the public on behalf of certain funds, generous employer or state contributions to certain funds and widespread tax and contribution evasion in other funds.
Trang 7At the other extreme, IKA is among the funds with the poorest assets per insured, although it covers most of the insured people followed by ΟΑΕΕ, OGA, etc Th e Fund of Independent Professionals (OAEE) is the third big-gest in the country in terms of members (860,000) but the 10th biggest in terms of assets value Th e Consolidated Wage Earners’ Auxiliary Pension Fund (ETEAM) is the second biggest in terms of members (1,700,000) but 23rd in terms of asset value.
Finally, one common characteristic of all pension fund organizations
is t he absen ce o f p rofessional a sset ma nagement Th e r esponsibility o f investment decisions rests upon t he boa rd of directors whose members are various state offi cials and employee representatives and most of whom are not familiar with money and capital markets Th e lack of professional asset management is another implicit cost to pension funds that contrib-uted to earning low returns
24.2.2 Recent Major Reforms in the Greek Social Security SystemEvidence of an imbalance in the Greek pension system appeared as early
as in t he beg inning of t he 1980s Th e major pension organizations had begun facing large defi cits growing rapidly in the following years Defi cits were increasing with such a rate that in the beginning of the 1990s it was feared that the social security system would collapse.* Internal factors (large administrative costs, suboptimal investments policies) along with external factors (economic growth rate, infl ation, demographic develop-ments, unemployment, etc.) had been blamed for the worsening situation
in the system
In 1990–1992, when it was widely understood that the system was viable, three laws were enacted (Laws 1902/90, 1976/91, and 2084/92) in a considerable eff ort to curtail defi cits and add rationalization to the social security s ystem Th e enac ted m easures add ressed t o bo th o utfl ows (by decreasing t he s alary-to-pension r atio, cha nging t he s alary i ndexation, applying stricter criteria on benefi ts, unifying pension rights, etc.) as well
non-as infl ows (mainly increnon-ase in the contributions, etc.)
at real prices in 1991–1993 According to OECD estimates, the total eff ect
of the changes brought by Law 1902/90 amounted to 3 percentage points
* Th e increasing defi cits were initially covered through borrowing from banks, later though subsidies were allocated from the ordinary budget.
Trang 8of t he GDP in t he fi rst 3 y ears of implementation.* However, t his tive trend was reversed aft er 1994 to the point that in 1999 the primary defi cit approximated the 1989 level at real prices Th is return to the previ-ous nonviable situation led to another reform on 2002 Law 3029/02 made additional st ate f unding i n t he s ystem co mpulsory, cha nged a gain t he parameters of the system, and introduced the second pillar of occupational pension funds Yet, these changes were only minimal and the problem of social security system reform was put on the agenda immediately aft er.
posi-In 2008, a new reform (Law 3655/08) took place with mostly trative content and no immediate economic results, since expected benefi ts were to accrue in the following years and through the gradual implemen-tation of reforms Th e new law forced the merging of the 133 existing social
age, discouraging early retirement, a nd providing incentives to prolong employment were also passed Th e major aim of this regulatory change was to limit the fragmentation of the insurance system, achieve economies
of sc ale, e stablish subst antial co ntrol a nd su pervision, o vercome ma jor administrative and organizational diffi culties, and cut down on the vast administrative and operating costs
Regarding the reserves of the merged insurance funds, the new enacted Law 3655/08 provided limited improvement since individual fund assets would r emain sepa rate a nd t here w ould be a r elevant i ndependence However, regarding the management of the reserves, it would be subject to uniform rules, that is, there would be single investment targets but returns
on i nvestment would be d istributed pro r ata to t he merged f unds Th e asset returns that may be achieved by the 13 insurance organizations are estimated to be many times higher than the asset returns that would have been earned from the 133 individual funds
Restrictions, and Regulation
pension assets to attain general economic and development targets of the country As a r esult, pension funds were forced to deposit their reserves
* See OECD (1996).
† Th is occurred by merging and integrating into existing social security organizations For instance, s everal m ajor i nsurance f unds, s uch a s t hose of He llenic T elecommunication Organization, Public Power Corporation, Banks, etc., were integrated into the largest insur- ance organization, IKA.
Trang 9with the Bank of Greece at an interest rate defi ned by t he M inistry of Economy.* Th is regulation not only prevented the funds from managing their reserves at their discretion but also led to a loss of income, as the rate
on these deposits was usually set at very low levels compared to the
the mandatory deposits at the Bank of Greece was fi xed at 4% in the period 1950–1973 In the same period, the savings interest rate was 7%–9% while
It is thus understood that pension funds suff ered signifi cant l oss o f income, which in turn led to the creation of defi cits, especially between
1972 and 1990 when there was a vast divergence between the mandatory deposit rate, the savings rate, and the price index
yields earned were set much lower compared to rates in savings and time deposits and treasury bills Mandatory deposit rates were upward adjusted
rates Only aft er 1994 when mandatory deposits were lift ed, pension funds earned market rates in the instruments they invested
In Figure 24 2, t here i s a g raphical r epresentation o f t he po rtfolio composition o f t he en tire Gr eek soc ial sec urity pens ion f und r eserves
in accommodation of t he imposed investment restrictions For most of the years since the inception of the system, mandatory deposits were the predominant portion of pension portfolios Indeed, mandatory deposits with the Central Bank accounted for more than 75% of total reserves until
1984 leaving little room for bank deposits and even less room for ing Gr eek t reasury b ills I nvestments i n t reasury b ills ha ve g radually increased since 1974 as a percentage of total reserves with corresponding decrease in mandatory deposits Treasury bonds became an investment choice s ince 1 987 j ust bef ore ba nk der egulation E quity wa s a llowed
acquir-in pension portfolios as early as 1975 and up to 10% of t otal reserves
* Th e institutional framework forced pension organizations to deposit the largest part of their reserve funds with the Bank of Greece which managed these amount on their behalf Timid emancipation steps were fi rst taken in 2001 Today new reserve funds can be invested more
fl exibly (see below in this section) Old re serves are required to b e invested under the old restrictive investment constraints.
† According to d ata of t he Bank of G reece, the reserves of p ension funds had returns much lower that the existent infl ation rates over long periods of t ime As a result their Net Asset Value had been signifi cantly depreciated.
‡ Roupas (2003, p 88).
Trang 10Mandatory Bank deposits Treasury bills Treasury bonds Equity
FIGURE 24.2 Portfolio composition of Greek pension reserves, 1958–2000
Mandatory deposit Demand deposit
Savings deposit Time deposit (1 year)
Treasury bills Treasury bonds
FIGURE 24.1 Yields on Greek bank deposits and securities, 1958–2000
Trang 11Yet, equity investments did not materialize prior to 1991 During that year equity entered into pension portfolios slowly and today it makes up pen-sion fund portfolios up to a maximum of 23% of total reserves It should
be mentioned that the 23% category, besides equity, includes investments
in any kind of domestic mutual funds Finally, none of the investments is allowed to be directed in foreign assets or foreign currency
To u nderstand t he s ignifi cance o f t he o pportunity l oss i mposed o n pension funds, it should be stressed here that from 1950 to 1980, the sys-tem had not yet entered a maturity stage As a consequence, major reserve amounts had acc umulated a nd, i f t hey had be en u sed effi ciently, they could contribute to the fi nancing of the defi cits that had emerged later as
a result of the economic crisis, the decrease in economic growth, and the deterioration in the dependency ratio
while it provided ample benefi ts to the Bank of Greece Th e latter earned large commissions from pension funds as well as the interest diff erential set in its favor Although the Bank of Greece supported all economic poli-cies of the state and provided fi nancing when needed thus producing social benefi ts, some of the benefi ts out of pension funds were funneled to private interests since a number of its shares belonged to private shareholders
24.3 DATA AND METHODOLOGY
Data on pension funds fi nance are available from three diff erent sources: the Central Bank, the National Statistical Service, and the Ministry of Labor Th e Central Bank time series covers the period from 1950 to 2000 for all pension funds and for all types of reserve investments, with the exception of equity i nvestment; t he latter i s t aken f rom t he M inistry
of L abor t ime ser ies, st arting a s la te a s 1 990, s ince i nvestment i n a restricted number of Greek stocks did not occur prior to that date Data
on the U.S dollar and German mark offi cial exchange rates are stated as local currency units per one unit of foreign currency Greek, U.S., and German consumer price indices are end of year levels and along with currency rates are retrieved from the International Financial Statistics Web site
Simulated returns a re generated by nonparametric methods of strapping.* A ba lanced s ample o f r eturn sc enarios i s made pos sible b y
boot-selecting each time the fi rst N = 43 elements of a N × N vector of randomly
* See Efron and Tibshirani (1993).