‘The taxpayer shouldn’t be forced to foot the bill for the mismanagement of semi-states’ pension funds’
Cumulative losses of almost €180 million from bad investments incurred over the last seven years by the employees’ pension fund of the Cyprus Telecommunications Authority (CyTA) are likely to fall on the taxpayer’s shoulders if the company fails to come up with the money, DISY MP Marios Mavrides has told the Sunday Mail.
The shortfall is scheduled to be repaid by the semi-state telecoms company in 10 annual €17-million instalments. However, serious concerns have been raised because in a similar instance, the state stepped in to cover a shortfall in the Cyprus Broadcasting Corporation’s pension fund.
Dromolaxia tip of the iceberg
CyTA’s employee pension fund gained notoriety in 2014, when a case of suspected misappropriation of money – entering the vernacular as the ‘Dromolaxia’ scandal, as the investment was sunk in an office block constructed near the Larnaca village – went to court, eventually landing several former CyTA board members and others multi-year jail terms.
It turned out that the Dromolaxia case, which earned the fund a €30-million net loss, may not have been the only one. According to Auditor-general Odysseas Michaelides’ annual report on the semi-state telecoms company, discussed earlier this week in the House watchdog committee, 11 additional cases of pension-fund investments gone bad from 2009 to 2013 were identified and investigated.
“These eleven cases were forwarded to the attorney-general in order to establish whether any criminal offences were committed,” Michaelides’ report said.
As a group, CyTA’s employee unions have proven an active and militant bunch, prepared to go to great lengths to protect their members’ interests. Nowhere was this better exemplified than in the run-up to the government’s tabling of a bill creating a private-law doppelganger to the existing public-law telecoms company – a technicality that would allow for its eventual privatisation, a stated government policy. The unions embarked on a massive public-information campaign, met repeatedly with parliamentary parties and persuaded most to oppose the bill, and even turned up the pressure with strike action. The government pulled the bill last March, pledging to re-table it, but has yet to do so.
Fighting for free money
Such decisive and multi-faceted action was not forthcoming when the pension fund’s money was found to have been squandered – nor has there been any real protest against the fact that the fund is being run by a 10-man committee, with seven members selected by the (government-appointed) board of directors and only three chosen directly by the employees.
This, it turns out, is because the employees are not really worried about losing their pensions. Contrary to Milton Friedman’s universally accepted “no-free-lunch” theorem, the fund administrators might as well have been given access to free money.
“It’s state-guaranteed,” AKEL MP Irene Charalambidou told the Sunday Mail, meaning that, even if the fund money was all gone on bad investments, the state would have to cough up CyTA employees’ monthly pensions.
“It’s just the nature of semi-governmental organisations.”
While this notion of obligatory state largesse has proven true in practice, it is not technically accurate. According to Mavrides, who is also vice-chairman of the House finance committee, the onus of covering any shortfall in a semi-state’s pension fund belongs to the organisation itself – hence why CyTA has pledged to set aside €17 million a year for the next 10 years, in order to balance the pension fund’s books.
“According to the law, if the organisation fails to come up with the money, the employees are going to lose their pensions,” Mavrides explained.
But, as one might effortlessly suspect, there’s a catch.
“Of course, in such a scenario, the state would step in and pay them, even though it is under no such obligation,” the deputy said.
“This is what happened with the CyBC’s pension fund. A €120 million hole was found in it, so the state guaranteed its obligations. I believe the same would happen in this case, if CyTA were unable to come up with the money.”
In truth, no one outside of the semi-state should care what the employees choose to do with their pension money. It’s only when the notion of it becoming a collective debt on taxpayers becomes a real possibility that the matter is one of public concern.
A secondary objection relates to the fact that CyTA is, in union speak, a ‘public-good’ organisation, which raises the question of how much good the public is done when €17 million of the money CyTA makes every year is funnelled into losses it has created itself.
“These things are unacceptable – the taxpayer shouldn’t be forced to foot the bill for the mismanagement of semi-states’ pension funds,” said Mavrides.
“there will probably be no practical difference post-privatisation”
The easiest way out might have been finding a way to sever the link between the state and SGO obligations, but the absence of such a link makes the task impossible – the government is under no obligation to assume payment of pensions, but has done so voluntarily, at least in the case of the CyBC.
“Privatisation might have been the answer to this distortion, but what we see from the ongoing negotiations is that the unions demand so many state commitments [over keeping their jobs, salaries, benefits, and pensions], that there will probably be no practical difference post-privatisation,” Mavrides argued.
According to the auditor-general’s report, the administrators of CyTA’s pension fund have assigned a law firm to look into filing lawsuits against anyone who may have harmed its interests, but this seems like an exercise at band-aid treatment, instead of radical prevention measures.
In acknowledgement of the problem, new CyTA staff are no longer included in the existing pension fund, but form part of a newly created provident fund. Of course, this does little more than flip the problem on its head: it may prevent future similar instances, but does not answer today’s funding questions.