Stournaras: Εxtremely narrow margins for pensions to continue being paid out of the state budget

Private insurance can play a role in the country’s growth effort and social prosperity, Bank of Greece governor Yannis Stournaras said on Tuesday, addressing the 12th Insurance Conference in Athens.

The central banker said that this role was not negligible and that there were both reasons and room for the sector to develop. “Private insurance can contribute to a sustainable growth model for the Greek economy through increased productive investment. The strengthening of the recovery of the Greek economy in 2018, which rose by 1.9 pct against 1.5 pct in 2017, relied on increased exports and private consumption. Consequently, by focusing on the private insurance sector, the provision of pension services, complementing social security, can highlight the advantages of the fund-raising pillars: through savings and productive exploitation, a large volume of reserves can be created by providing valuable resources for financing the development of the country and the creation of new jobs,” he noted, among others.

Stournaras said that recent developments highlight several positive aspects of the development and operation of the private insurance industry. The Greek insurance market has now covered the distance that separated it from the rest of the European Union markets at the end of the last decade, he said.

He pointed out that there are no longer the disproportionate risks posed by hospital programmes with lifelong and unlimited coverage, even with no possibility of raising premiums. “Today, most hospital programmes are annual, with reasonable restrictions and exemptions on cover. Now there are no guaranteed returns of irrational – yet for that time – 5 pct and 6 pct in traditional life insurance contracts. Guaranteed interest rates reflect the prevailing market conditions, and currently range around 2 pct. Legislation limiting the margins and the degree of flexibility now exists in the past, so that each insurance undertaking can be dealt with in a supervisory fashion according to its specifications. Today, the principle of proportionality applies, and the Greek market is supervised and operated with rules that apply equally throughout the European Union, as defined in the Single European Framework of Solvency II”, he said.

Greek insurance companies nowadays have more freedom for flexible business action that ensures greater security for their clients, and the Bank of Greece has more tools to exercise prudential supervision and to contribute, within its remit, to securing financial stability, the Governor said.

At another point in his speech, Stournaras mentioned that the margins for pension funding only through the state budget are now narrower. The ageing of the population is one of the most important challenges facing the Greek economy in the long run. However, Stournaras said, there are risks to the sustainability of public finances. On the one hand, the poor implementation or scaleback of reforms increases the requirements of public funds and entails higher retirement costs. On the other hand, the implementation of the decisions of the plenary session of the Council of State, which judged earlier cuts in pensions unconstitutional, leaves open the possibility of a further rise in pension expenditure, possibly with retroactive effect.

The Bank of Greece estimates that these developments are the most important fiscal risk in the medium term and are aggravating the sustainability analysis of public debt. Furthermore, the results of an empirical investigation by the Bank of Greece show that both the rapid population growth of those aged 65 years and over and the increase in uncertainty for policies related with the sustainability of the pension system have a negative effect on per capita GDP growth rate. He noted that the pension issue could be transformed from a problem to a growth and social prosperity tool. “To ensure the sustainability of the pension system and the adequacy of pensions for a decent living of citizens, pension rights piling in the framework of the first, public pillar, must be accompanied with professional insurance systems of the second pillar and with personal pension products of the third pillar. In combination with other policies, such as extending working life, raising employment among older workers and encouraging private saving, pensioners’ income will rise and the necessary social safety net will be created, while social-political reactions will ease or even the risk of reversing reforms. This way distortions of the current social security system will be corrected, such as high contributions that act as counter-incentives to higher employment”.