Greece
compiled by Allianz Global Investors
Pension System Design
The pension system in Greece is predominantly based on a public pension pillar that provides comparably high statutory replacement rates. Voluntary occupational and private pension plans exist, but are of minor importance.
High replacement ratios and generous rules for early retirement, especially for women, put heavy pressure on the pension system and consequently on public finances. The huge Greek budget deficit, which is the second highest in the EU, is mainly driven by its pension system. Pension reform is urgently required; experts predict the system to collapse within the next 15 years if nothing is done.
Indeed, in November 2007 the government issued a proposal for a social security reform that passed the parliament in March 2008. The measures drafted in the bill foresee
- an increase in the statutory retirement age and harmonisation of that age for men and women,
- an increase in the early retirement age
- to strengthen the incentives to work longer
- reduce complexity and administrative costs of the public pension pillar.
Since the proposed reform was issued strong resistance from the general population and labour unions resulted in nationwide ongoing strikes. The sweeping protest induced the government to review the draft legislation. But major reform steps are required to ensure fiscal sustainability and the effectiveness of the pension system.
Public Pensions
The first pillar is of central importance in Greece and also of particular complexity. In general, it consists of three parts:
- Earnings-related primary pension;
- Earnings-related supplementary pension;
- Minimum pension benefits
The first pillar covers employees in the private sector and certain self-employed. The pension is financed on a pay-as-you-go basis and the contribution rate is unequally shared between the employee and the employer; the actual rate depends on the profession of the employee. It usually amounts to 6.67%, but increases to 8.87% for employees in arduous occupations. The corresponding employer rate is 13.33% or 17.73% increased. For the supplementary pension an additional contributions rate has to be paid.
More than 130 funds currently provide primary and supplementary pension coverage. Pension benefit rules and levels differ among the various funds. The different schemes exist along the different occupational lines. The current governmental pension reform proposal foresees to reduce the number of funds considerably in order to reduce complexity and administrative cost.
Among the approximately 130 funds available, the most important fund for the private sector is the IKA (Social Insurance Institute), which covers 5,530,000 workers and employees.
The primary pension is based on a 2% annual accrual of average earnings of the last five years before retirement for each contributing year. The formula is applicable to individuals who started working after 1993. For those born before 1993 a slightly different formula applies depending on the contribution period. The primary pension offers a replacement rate of approximately 80%. A further 20% are provided by the supplementary pension; full supplementary pension entitlement is available to beneficiaries with a contribution record of 35 years.
Employees in the public sector are directly paid from the national budget during retirement.
Besides the earnings-related part of the pension system a minimum pension is paid to those without adequate means.
Occupational Pensions
Occupational pension plans can take the form of a pension fund or a group insurance scheme.
1. Pension funds
Legislation concerning occupational pension funds was introduced in 2002. A pension fund must be set up as a separate legal entity and can be either a single-employer or a profession-wide pension fund. The appointment of an external asset manager is not legally required.
Actuarial valuations have to be performed at least once a year. A minimum funding level is imposed with the establishment of a specific solvency margin. This has to be calculated separately for pension benefits and risk benefits. If the solvency margin cannot be met, the occupational pension fund has to submit a three-year plan to the National Actuarial Authority indicating the measures to be taken for funding the deficit.
Occupational pension funds that guarantee either a certain benefit or a certain return on investments are obliged to establish adequate re-insurance for these risks.
The trend for pension funds is to offer different investment options according to varying risk preferences.
Investment regulation
Investment restrictions are in line with the Prudent Person Principle. The portfolio risk has to be measured regularly and a prudent and conservative approach shall be adopted with regard to administration of the investments.
Therefore, regular asset-liability studies have to be performed at least every three years. These studies should serve as the basis to define the investment policy in the long run, with a perspective of not less than ten years.
2. Group insurance schemes
In Greece the market for group insurance schemes is underdeveloped, which is in line with the overall development of the second pillar.
Contributions to these insurance schemes are tax-deductible up to the following limits: employer contributions of up to EUR 1,000 a year per employee are tax deductible. In addition, the employee is entitled to make tax-deductible contributions of up to EUR 1,000 an annuity, which can be used for contributions to a group insurance scheme, for individual contributions to a private insurance arrangement or for a combination of both.
All benefits paid directly by the insurance company on retirement (lump sums as well as annuities) are tax-free.
Companies frequently offer their employees the possibility to participate voluntarily in an additional third pillar pension system based on group insurance policies. The majority of these plans are based on the defined contribution approach. Employers can also contribute to these plans, but this is optional.
3. Termination indemnity
All employees are entitled to a retirement indemnity of 40-50% of between 1 and 24 months’ salary depending on the length of service. The retirement indemnities are usually funded by accrued book reserves and are paid in a lump sum. The first EUR 20,000 are tax-free with the remainder taxed at a rate of 20%.
Outlook
The aging of the population in Greece is relatively fast compared to other European countries. In 2050 the old-age dependency ratio will be among the highest in the European Union. This implies a growing pressure on the public pension system and on public finances. Public pension expenditures in relation to GDP will be noticeably above the EU average in 2050. The current reform proposal still needs legal approval while the government faces strong resistance from the population, as general pension reforms are unpopular. But they are inevitable to bring the pension system on a sustainable path.
Greece is subject to two unfortunate developments. It is not only one of those Western European countries that will be hardest hit by upcoming demographic developments, it also runs the most generous state pension system in the EU. In the medium and long term, this will seriously threaten the sustainability of public pensions. Despite this, reform efforts in Greece have lagged behind other European countries. One of the main challenges is the complexity of the first pillar, with its main schemes and auxiliary pensions as well as its unparalleled generosity. Another major challenge is the further promotion of funded pensions. While the introduction of a legal framework for occupational pensions in 2002 was a first step, more reforms may be necessary to achieve a more balanced retirement income structure.