Pension Funds under Investments Constraints: An Assessment of the Opportunity Cost to the Greek Social Security System

Milonas, Nikolaos /T and Papachristou, George and Roupas, Theodor /A (2010): Pension Funds under Investments Constraints: An Assessment of the Opportunity Cost to the Greek Social Security System. Published in: Marco Micocci, Greg N. Gregoriou, Giovanni Batista Masala (editors) Pension Fund Risk Management: Financial & Actuarial Modeling (2010)

Abstract

In this paper we study the opportunity loss of the Greek social security system in terms of risk and return, caused by the inflexible investment constraints under which Greek pension funds operated in 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 investment, we generate for the entire period – covering both a fixed and a partially floating exchange rates regime – a corresponding series of exchange rate variations based on the official rate fluctuations and inflation differentials. Our results suggest that in the 43-year period, there has been a significant opportunity loss in the system both in risk and returns: first, 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 diversification that would have kept overall downside risk down. This opportunity loss could have alleviated, to some extent, the current imbalance of the system, had some of the restrictive investment rules been relaxed.

• Item Type: MPRA Paper
• Language: English
• Keywords: pension funds; financial investment
• Subjects: G - Financial Economics > G2 - Financial Institutions and Services > G23 - Non-bank Financial Institutions ; Financial Instruments ; Institutional Investors

References

Artzner, P., F. Delbaen, J-M. Eber and D. Heath. 1999. Coherent Measures of Risk, Mathematical Finance, 9: 203-228

Barr, N. 2000. Reforming Pensions: Myths, Truths, and Policy Choices. IMF Working Paper #139

Disney, R. 2000. Crises in Public Pension Programmes in OECD: What are the Reform Options. The Economic Journal, 110: 1-23

Efron, B. and R.J. Tibshirani. 1993. An Introduction to the Bootstrap, Chapman and Hall, New York

Holzmann, R., L. MacKellar and M. Rutlowski. 2003. Accelerating the European Reform Agenda: Need, Progress and Conceptual Underpinnings. In Pension Reforms in Europe: Process and Progress, Ed. R. Holzmann, M. Orenstein and M. Rutlowski, 1-46, IBRD/World Bank, Washington D.C.

Jorion, P. 2001. Value at Risk: The New Benchmark for Controlling Market Risk, 2d Edition, McGraw-Hill

Koch, M. and Thimann. 1999. From Generosity to Sustainability: The Austrian Pension System and Options for its Reform. Empirica 26: 21-38

Kouretas, G.P, and I.P. Zarangas. 1998. A cointegration analysis of the official and parallel foreign exchange markets for dollars in Greece. International Journal of Finance and Economics 3: 261-276

Milonas, N.T., G. Papachristou and T. Roupas. 2007. Fund Management and its Effect in the Greek Social Security System. Journal of Pension Economics and Finance, 16 Nov 2007: 1-16. doi:10.1017/S1474747207002855

Munnell, A. and P. Balduzzi. 1998. Investing the Social Security Trust Funds in Equitie. American Association of Retired Persons/Public Policy Institute

OECD. 1996. Ageing in OECD Countries: A Critical Policy Challenge. Social Policy Studies No. 20, Paris

Roupas, T. 2003. The Greek Social Security System: Administration, Organization and Investment Management, Ph.D. Dissertation Thesis, Department of Economics, University of Athens

Sakellaropoulos, T. 2003. Social Policy Issues, Vol. A, Dionikos Publishers. Athens

Social Budgets, 1970-2008, Greek Ministry of Labour, Athens

Vlachantoni A. 2005. The Governance of Social Policy in the New Europe. ESPAnet Young Researchers Workshop, University of Bath, U.K, April 1-2

Weller, C.E. 2000. Risky Business? Evaluating Market Risk of Equity Investment Proposals to Reform Social Security. Journal of Policy Analysis and Management 19: 263-273

Weller, C.E. and J.B. Wenger. 2008. Prudent investors: the asset allocation of public pension plans. Journal of Pension Economics and Finance, doi: 10.1017/S1474747 20800396X