Monday, 4 July 2011

A look at Greek pension funds

I don’t claim to know much about pension funds and the like, it would be more correct to say that I know nothing about them, but I put together a few charts that I ‘d like to share with you.

The Greek pension system falls under the umbrella of defined benefit plans and operates on a Pay as You Go basis, meaning that current workers insurance contributions pay for the pensions of the people that are currently retired.

In some cases (or one could say in most of the cases, at least in OECD countries) such pension plans are in deficit meaning that the obligations of said plans cannot be paid solely by the amount of funds in the plan.

Greek pension funds have accumulated some reserves, which are invested in a variety of asset classes. I’ll come back to that later.

In the case of Greece the Greek state has the obligation to cover any funding shortages faced by the state funds and the state is doing just that as you can see in the following chart.

source: Hellenic Finance Ministry, own calculations

Of course deficits were not the result of the financial crisis, since they were recorded in all the years shown in the charts. Of course due to the crisis the deficits widened significantly.

Another crucial characteristic of a pension system is the gross pension replacement rate, the % of the retiree earnings/wage that the pension he/she is entitled amounts to.

source: OECD

As you can see in the chart above Greece has the second highest gross replacement rate among OECD countries. Now, due to cuts in pensions during the past 1-2 years maybe the weighted replacement rate has declined a bit but I doubt that it would alter the picture painted above significantly. Besides, relevant OECD data are supposed to have been updated in 2011. 

The fact that the Greek pension system records funding deficits consistently speaks volumes about its viability. Of course, not all pension funds have to face funding deficits but some of them do and when these are in the order of 4-5% of GDP then things do not look rosy to me.

The Greek crisis has reached depression force and is yet unknown in what way it will be resolved and when. Well, the longer it takes to reach a solution the deeper the scars left on the Greek economy and Greek people will be.

While the crisis is raging and unemployment is in an explosive upward path things are getting tougher and tougher for the Greek pension system. I am not an actuary to know how the raising of average retirement age will affect the system’s viability but in the short term the more people are unemployed or informally employed the less people are actually paying contributions and that only increases the strain of the system. This means that should Greece go through a prolonged period of exorbitant unemployment rates this will put further pressure on the system.

source: OECD

In the chart above I have plotted total pensions contribution revenues. All the countries pictured have lower gross replacement rates than Greece. Italy, Spain and Austria have high replacement rates albeit significantly lower than Greece and their revenues from contributions are either higher or at least equal to that of Greece. You can draw your own conclusions from that.

Furthermore, demographics are another problem for the Greek pensions systems, unfortunately one that no amount of changes in legislation can solve. 

source: World Bank

One commonly used demographic measure is the dependency ratio. All of western Europe is under particular strain in this respect, but then Greece is even worse than them in the way that the following chart portrays.

source: OECD

The participation rate in Greece in particularly low and now as I highlighted above it will by now have decreased further due to exploding unemployment (the measure shown above is not exactly equal to the particioation rate but it's close). The reason for this is twofold, Greek people tend to start working at an older age than their EU peers and then maybe informal employment plays a role too. 

Finally, I want to share with you a chart about the asset allocation of Greek pension funds, meaning where the Greek pension funds reserves are invested in.

source: OECD
I’m not getting into judging their investment policy here. First a little background, with the new law introduced in 2007, pension funds are allowed to invest up to 23% in Greek equities and mutual funds and the rest into Greek government bonds and deposits. Under the new law Greek pension funds are allowed for the first time to invest in European equities and European government bonds within the 23% limit. Of course the asset allocation data date back to 2009 but the legislation is the same as far as I know. I think that it is more than obvious that the vast majority of reserves are invested in Greek instruments. Now think how these asset classes have fared during the Greek crisis.  

Does the Greek pension system look sustainable to you? You can reach your own conclusions from the charts above…

1 comment:

  1. Τα έλεγες φίλε μου, ποιος σε άκουγε... Όλοι ονειρεύονται διαγραφές χρέους...