Is Greece the Future of Pensions?
In the heat of a June night, Eleni Spanopoulou found her audience at an Athens hotel turning ugly. Mutiny and violence hung in the air.As I stated in my last comment, Greek pensions got royally screwed because they were forced to invest in Greek bonds and stocks. There is no pension governance whatsoever in Greece where these funds are routinely raided for political purposes.
For hours the leader of the Greek journalists' social security fund had been chairing a meeting about disastrous losses on retirement savings caused by the country's economic collapse. "She tried to present herself as the fund's savior and asked (members) to double contributions to 6 percent of salaries," said one of those present that night at the Titania hotel. Spanopoulou, 58, did not succeed.
When she rose to leave around midnight, enraged fund members first swore, then waded in punching, kicking and tearing at her clothes, according to witnesses. A bodyguard managed to bustle her out of the room, but another group caught her just outside the hotel and gave her a second beating. She spent the night in hospital.
It was a brutal sign of the fury many Greeks feel at the way the country's debt crisis has dashed hopes of a comfortable old age. Greece's pension funds - patchily run in the first place, say unionists and some politicians - have been savaged by austerity and the terms of the international bailout keeping the country afloat.
Workers and pensioners suffered losses of about 10 billion euros ($13 billion) just in the debt restructuring of March 2012, when the value of some Greek bonds was cut in half. That sum is equal to 4.6 percent of the country's GDP in 2011.
Many savers blame the debacle on the Bank of Greece, the country's central bank, which administers three-quarters of pension funds' surplus cash. Pensioners and politicians accuse it of failing to foresee trouble looming, or even of investing pension fund money in government bonds that it knew to be at high risk of a 'haircut' - having their value reduced.
A Reuters examination of previously unpublished data from the Bank of Greece reveals the bank invested pension fund money in 1.18 billion euros of Greek bonds after the economic crisis began.
Prokopis Pavlopoulos, a lawmaker in the ruling coalition's conservative New Democracy party and former interior minister, said: "From July 2010 it was obvious that a debt restructuring would be inevitable. While foreign banks were unloading their Greek government bonds, no one moved to tell Greek pension funds to do something, that a haircut was coming."
Spanopoulou, while deploring the violence she suffered, said: "The Bank of Greece knew about the haircut on bonds well in advance and should have informed (our) fund."
The losses compound the woes of Greek pensioners, many of whom have seen their income fall; further cuts are expected as part of the latest austerity package voted through parliament in November.
The Bank of Greece rejects the criticism, arguing its room for maneuver was limited. Around the world pension funds routinely invest in government bonds, and the bank says the scale of Greece's economic meltdown was not obvious when most of its pension fund investments were made.
"More than 90 percent of the bonds that eventually suffered a haircut had been bought before 2009," said Mihalis Mihalopoulos, a Bank of Greece official who invests money on behalf of Greek pension funds.
That is not enough to assuage critics, who say the pension fund crisis is one of the most neglected facets of the Greek catastrophe. "At the very least ... pension funds were not warned," lawmaker Pavlopoulos said. "The government ... knew it was heading for a haircut and did nothing for these people, which I find hard to stomach."
HOW THE SYSTEM WORKS
Having grown up piecemeal over decades, the Greek pension system is highly fragmented with about 200 official bodies running different funds, with different costs and benefits, covering numerous occupations.
Broadly, though, the majority of people rely on schemes with an element of government funding as well as contributions from employers and employees. The state also plays a pivotal role in deciding how such funds invest, and appoints the boards on many of them.
Under a law passed in 1997 and refined in 2007, pension funds have to place 77 percent of any surplus cash in a pool of "common capital" managed by the Bank of Greece. The law requires the common capital to be invested only in Greek government bonds or Treasury bills (T-bills). The remaining 23 percent of funds can be invested in other assets, such as mutual funds, shares and real estate.
The aim of the measures, officials said, was to ensure that most of the money was safely tucked away for a steady return. In the good times, this worked. But it was to have disastrous consequences when the credit crunch that began in 2007 led to a crisis in sovereign debt.
When the incoming government of 2009 revealed Greece's finances were far worse than previously admitted, ministers initially dismissed the idea of reneging on some of the country's debts. But in some circles the prospect rapidly gained ground, according to a former Greek representative to the International Monetary Fund (IMF).
"The IMF ... was more open to securing the sustainability of Greece's debt via a writedown (than the euro zone countries)," said Panagiotis Roumeliotis, a former economy minister and Greece's IMF representative at the time. Foreign investors were not slow to see the danger.
Many scrambled to sell their holdings of Greek debt, but officials managing pension fund money at the Bank of Greece did not. Pavlopoulos claims that while foreign investors dumped more than 100 billion euros of Greek government bonds from 2009 to 2011, the country's pension funds actually raised their holdings by 9 billion euros.
The central bank disputes his figures. It says that between January 2009 and May 2011 it invested pension fund money in government bonds with a nominal value of only 1.18 billion euros, after which it stopped. It also said, in a letter to Pavlopoulos, that from the end of 2009 to the end of 2011 pension funds' total holdings of Greek bonds fell by 2.5 billion euros.
Despite those figures, Pavlopoulos remains dissatisfied. "The Bank of Greece did nothing to protect the pension funds," he said.
Amid the wrangling over exactly who bought what when, one thing is clear: when the financial storm struck, the pension funds remained heavily exposed. Bank of Greece figures show that the pension funds still held 19 billion euros of Greek bonds and 1.4 billion euros in T-bills as the country teetered on default in early 2012.
Mihalopoulos, the central bank investment manager, said selling the bonds would not have helped: "Had we liquidated the bond portfolio we would have realized a loss of 8 billion euros as prices had come down sharply."
In the end, however, the pension funds appear to have suffered an even bigger loss. In March, Greece completed the largest-ever sovereign debt restructuring as part of its bailout by the "troika" of euro zone members, IMF and European Central Bank. In a move known as "private sector involvement" or PSI, Greece replaced old bonds with new ones worth 53.5 percent less.
Bank of Greece figures show that by June the pension fund assets it controlled had plummeted to 11.1 billion euros, made up of 8.7 billion in bonds and 2.4 billion in T-bills. In the space of three months pension funds had lost about 10 billion euros.
Former Labour Minister George Koutroumanis told Reuters the losses were unavoidable. "How could we have asked to protect our own pension funds and let all the others take the blow, it could not have worked that way," said Koutroumanis, whose former department is in charge of the pension system. "The billions of euros that pension funds lost because of the PSI was a significant hit. But it has to be weighed against the need to ensure the viability of the country in the euro and the system's continued funding."
That argument does little to stem the anger of those facing impoverishment. Before the PSI, the journalists' pension fund had assets at the central bank worth 115 million euros; after the PSI they were worth 59 million euros, according to Bank of Greece figures.
Employees at ATEbank, a state-run institution that recently had to be rescued, are among others to have suffered. "The (health and supplementary pension) fund of ATEbank's employees is collapsing ... as a result of the PSI, which cost 70 million euros," said Konstantinos Amoutzias, president of the bank's employee union. "We have asked the Bank of Greece since the summer to provide us with data on the investment of our funds and they haven't answered us yet."
A senior Bank of Greece official, who declined to be named, said: "Any fund which has asked for data on transactions and market prices has received it." He added that, for reasons of legal confidentiality, the central bank could not reveal full details, such as the names of the banks from which it had bought government bonds in the secondary market.
Vaso Voyatzoglou, secretary general of insurance at the bank employees' union OTOE, said: "Eventually all pension funds will end up suing the Bank of Greece in order to find out what exactly happened and how they lost their money."
THE HUMAN COST
Among individuals on the receiving end of the losses is Constantine Siatras, 79, a retired lieutenant-general, who says his income has fallen by 33 percent during the crisis.
"We should not have illusions that our pension fund will recoup what it lost from the haircut on its government bond holdings," he said. "It's very hard to get by as a pensioner the way things are going."
Yet Siatras is one of the lucky ones: he still gets about 1,700 euros a month. Most have to survive on far less. Despite Greece's reputation for profligacy - with reports of public sector workers retiring early on fat pensions - the average pension is about 850 euros a month, according to unions representing 80 percent of pensioners.
Many pensioners have to get by on less, including Yorgos Vagelakos, a 75-year-old former factory worker, and his wife, who live in Keratsini, a working-class district near Athens. "We can barely afford to buy our grandchildren anything, not even a colorful notepad. When they ask us for one, we change the subject and then we cry," Vagelakos said in the tiny yard of his house.
His pension of 650 euros a month supports himself, his wife Anna and, when possible, the family of his 42-year old-son, who is unemployed. "Thankfully my younger son and his wife have a job," he said.
Tax increases and high prices have hit hard. "We have slashed everything by 50 percent. At night we keep the light off to save on our electricity bill. We have become vegetarians from cutting back. We can't take it anymore," Vagelakos said, talking while his wife cooked cauliflower and potatoes for lunch, a meal that would also feed the family of their elder son, who has two children.
"Out of 650 euros, at least 170 go for medicines for me and my wife, another 100 for electricity and 30 euros for water. With the rest we get by as we can." He picked up a bunch of bananas. "We don't eat these, we save them for our four grandchildren."
Faced with the plight of the retired and public anger, officials are now promising to make good some of the pension fund losses. The government has passed a law to enable it to transfer some state-owned assets, such as real-estate, into a new vehicle for the benefit of pension funds.
However, no such body has yet been established. And, as the country's debt crisis persists, the value of its state-owned assets remains uncertain.
Back in September 2010, I met up with Petros Christodoulou, the head of Greece's Public Debt Management Agency, and he confirmed what I long knew, namely, that Greek pensions are run by a bunch of political and union hacks. The system is riddled with corruption and gross mismanagement.
And it's still vulnerable to further abuse. The latest Greek debt deal does nothing to introduce meaningful reform to the Greek pension system. What Greece needs is to get rid of its fragmented pension system and start anew, following a governance model that has worked well in Canada, and even going above and beyond it.
In fact, if the Greek government was serious about introducing meaningful pension reform, it would hire David Dodge, Canada's former (and best ever) central banker, and Bernard Dussault, Canada's former Chief Actuary. Dodge is a proponent of expanded CPP and so is Dussault. They should also hire the former CEO of the Healthcare of Ontario Pension Plan, John Crocker, a staunch defender of defined-benefit plans.
As far as pension governance, the Greek government should hire yours truly. I produced a report for the Treasury Board of Canada that is collecting dust somewhere in Ottawa, one that would make the leaders of Canada's widely touted public pension funds blush from embarrassment or turn white with fear (and I had to water it down significantly because the folks at the Treasury Board got all flustered).
But the chances of Greece hiring Crocker, Dodge, Dussault and yours truly to revamp their grossly antiquated pension system is slim to none. Greek politicians and unions want to control pensions. The Greek central bank shouldn't have anything to do with pensions. There are very smart people working there but the governance is all wrong. Greece desperately needs to amalgamate its fragmented pensions and set up an independent investment board that operates at arms-length from the government.
In Canada, more and more experts are coming out to state that the CPP offers ‘economies of scale’ that make it a cheaper alternative to PRPPs, but we too have a lot of work ahead of us to increase coverage and bolster our defined-benefit plans. As more and more corporate pensions fly off course, my greatest fears are coming to fruition.
In the United States, the focus is on the fiscal cliff but they've already gone over the pension cliff. The magnitude of the catastrophe is so large that some public pensions face a meltdown. And as US and Canadian corporations offload pension risk to insurers, basically carving out the pension turkey, some retirees are rightfully enraged and threatening to sue:
Verizon retirees have sued the phone company because it's planning to transfer the responsibility of paying their pensions to an insurance company, where they will have weaker legal protection.Pay attention to this case and the one that threatens CalPERS and other US public pension funds. As CalPERS meets Greece, corporations offload pension risk to insurers, and 401(k)s get decimated, my fear is that many pensioners will get screwed but by the time they realize it, it will be too late. At that point, they'll suffer the same fate as Greek pensioners, ie. looming pension poverty.
Verizon Communications Inc. said last month that it would transfer $7.5 billion of its pension obligations, covering 41,000 management retirees, to Prudential Insurance. The deal effectively turns the company's defined-benefit pensions into annuities.
Members of the Association of BellTel Retirees sued in federal court in Dallas on Tuesday. They're seeking a court order to halt the deal, which is set to close in December.
They note that annuities aren't covered by the federal Pension Benefit Guaranty Corp. A shortfall in the assets backing the annuities would be replaced by a "patchwork network of state guaranty associations, many of which are underfunded," the group said.
"Retirees and their spouses, especially in states with the lowest protection levels, will be seriously harmed and left with as little as two years pension replacement in case of insurer default," said William Jones, president of the retirees' association.
Randal S. Milch, New York-based Verizon's general counsel, said the suit lacks merit, adding that Prudential has a long history of providing group annuity benefits.
"Prudential is providing an irrevocable commitment to make all future annuity payments, and this promise will be supported by the extra protection of assets being placed in a separate account at Prudential dedicated to Verizon retirees," Milch said.
When it was announced, Verizon said the deal lowers the risk that its pension obligations will end up costing more than projected.
Consulting firm Aon Hewitt, which helped Verizon on the deal, said it was the second largest insured annuity settlement ever in the U.S. This summer, General Motors Corp. said it would settle $26 billion in pension obligations through lump sum payments and purchases of Prudential annuities.
Verizon has a total of $30 billion in outstanding pension obligations including the $7.5 billion slated to be transferred to Prudential.
Below, euronews reports on Greek pensioners protesting cuts (no comment). And Chris Tobe, pension consultant and former Kentucky Retirement System board member, discusses why Kentucky is Greece.