28/09/2005 11:00
According to a StockWatch survey carried out recently, the loan of £3 billion allocated by the Social Securities Fund to the state equals to a deposit of few thousands of pounds in a commercial bank. The “ridiculous” yields of the SSF reserves have aroused strong feelings to the Labour Ministry, which requested by the Finance Ministry to reexamine the agreement between the Fund and the state.
Agreement
The yields of the Social Securities Fund are based on an agreement with the state in 1971, which was revised in 2001 after the liberalization of the banking system. The agreement attempts to secure satisfactory yields for the SSF capital on the one hand, and contribute to the state’s growth policy on the other. The downward trend of the interest rates acts at the expense of the insurered and in favour of the state.
Investments in 13-week bonds
And the reason is simple: Although the state borrows from the Fund with long-term yields, the SSF capital is placed on 13-week bonds, receiving the lowest possible yields. Although the provisions of the agreement are not clear, both the Finance and Labour Ministries support that these bonds receive lower interest rate than the Lombard rate (by 50 base points). As a result, the fund’s yields are lower than those of the long-term government bonds.
Gap widens
In the past few years, the gap has widened. In 2002, the gap between the SSF yields and the yields of the 5-year bonds hardly reached 8 base points, while in 2004 it reached 132 base points. Specifically, the average yield of the Fund from the state borrowing in 2004 stood at 4.57%, while the average yield of the 5-year bond stood at 5.89%. This gap corresponds to an annual loss of £35 million for the insured, which is £100 for each insured.
It is worth noting that although the Fund received interests of 4.57% in 2004, the commercial banks offered depository products with an interest rate that exceeded 5% for deposits of minimum sum.
Looking for better yields
The Social Securities Fund has also been burdened by the sharp drop in Lombard rate. Since February, it dropped by 125 percentage points and the yields of the fund’s investments fell to 3.75%, the lower level ever.
The sharp drop in Lombard rate has aroused strong feelings to the Labour Ministry, which now seeks better yields for the Fund. “Our Ministry sent a letter to the Finance Ministry recently, demanding the reexamination of the agreement of 2001 and the improvement of the yields to the benefits of the insured”, Labour Minister, Christos Taliadoros said.
The Finance Ministry, on the other hand, has expressed its reservations on the issue due to the importance of cheaper borrowing for the state’s growth policy. A Finance Ministry official stated that the Fund has no alternative investment options.
Social partners: Concerns and ignorance…
The yields and the wider investment policy of the Fund is a problem for the social partners, who have proposed certain measures to change the status quo. One of them allows the fund to invest in municipality bonds, which bear state guarantees and offer better yields.
However, ignorance is a serious obstacle to the improvement of the yields. It is worth noting that a social partner only was aware of the parameters of the agreement 2001. Nobody had the agreement in writing.
Some insist that the agreement has not been written. Mr. Taliadoros supports the opposite. Despite our efforts, however, to obtain a copy, the Finance and Labour Ministries either refused to provide a “confidential document” or ignored our letters sent in early August.
The only report we found was that of the general auditor, who in the latest report referred to two additional interpretations of the agreement (Lombard +0.5%, bonds +0.5%). According to the two Ministries, no interpretation is correct.
Competencies
It is clear that the Fund is two-headed and operates under the supervision of the Labour and Finance Ministries.
This raises questions on the competencies that each Ministry has, especially with regard to investments. This ambiguity became obvious during the survey, since the Central Bank advised us to address the Finance Ministry, the Finance Ministry the Labour Ministry, the Labour Ministry back to the Finance Ministry and the Finance Ministry finally admitted that it operates on the basis of the recommendations of the SSF Council, which is composed of members and social partners’ representatives.
The legislation is clear: the Council has an advisory role and the Fund’s cash are invested “pursuant to the Finance Ministry’s directives from time to time”.
It is noted that the Council has been put aside lately, since the issue has been undertaken by the Labour Advisory Body, which is represented by the leaders of the social partners. In their last meeting, social partners recommended the abolition of the Council.
Agreement
The yields of the Social Securities Fund are based on an agreement with the state in 1971, which was revised in 2001 after the liberalization of the banking system. The agreement attempts to secure satisfactory yields for the SSF capital on the one hand, and contribute to the state’s growth policy on the other. The downward trend of the interest rates acts at the expense of the insurered and in favour of the state.
Investments in 13-week bonds
And the reason is simple: Although the state borrows from the Fund with long-term yields, the SSF capital is placed on 13-week bonds, receiving the lowest possible yields. Although the provisions of the agreement are not clear, both the Finance and Labour Ministries support that these bonds receive lower interest rate than the Lombard rate (by 50 base points). As a result, the fund’s yields are lower than those of the long-term government bonds.
Gap widens
In the past few years, the gap has widened. In 2002, the gap between the SSF yields and the yields of the 5-year bonds hardly reached 8 base points, while in 2004 it reached 132 base points. Specifically, the average yield of the Fund from the state borrowing in 2004 stood at 4.57%, while the average yield of the 5-year bond stood at 5.89%. This gap corresponds to an annual loss of £35 million for the insured, which is £100 for each insured.
It is worth noting that although the Fund received interests of 4.57% in 2004, the commercial banks offered depository products with an interest rate that exceeded 5% for deposits of minimum sum.
Looking for better yields
The Social Securities Fund has also been burdened by the sharp drop in Lombard rate. Since February, it dropped by 125 percentage points and the yields of the fund’s investments fell to 3.75%, the lower level ever.
The sharp drop in Lombard rate has aroused strong feelings to the Labour Ministry, which now seeks better yields for the Fund. “Our Ministry sent a letter to the Finance Ministry recently, demanding the reexamination of the agreement of 2001 and the improvement of the yields to the benefits of the insured”, Labour Minister, Christos Taliadoros said.
The Finance Ministry, on the other hand, has expressed its reservations on the issue due to the importance of cheaper borrowing for the state’s growth policy. A Finance Ministry official stated that the Fund has no alternative investment options.
Social partners: Concerns and ignorance…
The yields and the wider investment policy of the Fund is a problem for the social partners, who have proposed certain measures to change the status quo. One of them allows the fund to invest in municipality bonds, which bear state guarantees and offer better yields.
However, ignorance is a serious obstacle to the improvement of the yields. It is worth noting that a social partner only was aware of the parameters of the agreement 2001. Nobody had the agreement in writing.
Some insist that the agreement has not been written. Mr. Taliadoros supports the opposite. Despite our efforts, however, to obtain a copy, the Finance and Labour Ministries either refused to provide a “confidential document” or ignored our letters sent in early August.
The only report we found was that of the general auditor, who in the latest report referred to two additional interpretations of the agreement (Lombard +0.5%, bonds +0.5%). According to the two Ministries, no interpretation is correct.
Competencies
It is clear that the Fund is two-headed and operates under the supervision of the Labour and Finance Ministries.
This raises questions on the competencies that each Ministry has, especially with regard to investments. This ambiguity became obvious during the survey, since the Central Bank advised us to address the Finance Ministry, the Finance Ministry the Labour Ministry, the Labour Ministry back to the Finance Ministry and the Finance Ministry finally admitted that it operates on the basis of the recommendations of the SSF Council, which is composed of members and social partners’ representatives.
The legislation is clear: the Council has an advisory role and the Fund’s cash are invested “pursuant to the Finance Ministry’s directives from time to time”.
It is noted that the Council has been put aside lately, since the issue has been undertaken by the Labour Advisory Body, which is represented by the leaders of the social partners. In their last meeting, social partners recommended the abolition of the Council.
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