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Fiscal Council is right to query pension fund compensation

The Fiscal Council, which was set up after the economic meltdown of 2013 to monitor the government budget and ensure prudent state spending, stands out as one of the few independent state institutions that makes honest and rational appraisals of economic issues. It does not aim to please or to pander to the government. On the contrary, it has often taken public positions that were critical of government policies and decisions, warning of the risks and urging greater caution.

What is admirable is that the council’s announcements are not political but technocratic, always backed by documentation and strong arguments. They are also made public, thus offering people an objective account of economic matters – untainted by political consideration – and applying some pressure to policy-makers. The council could have kept its observations confidential, sending them only to the finance minister, but the policy of openness is much better as it encourages public debate on matters that affect everyone.

On Tuesday the Fiscal Council took a stand on the government’s decision to compensate provident and pension funds that lost money in the 2013 banking collapse, noting this would create a precedent and encourage other institutional investors hit by the haircut to seek compensation from the state. This decision was a threat, in the medium- to long-term to the economy and public finances, because it increased the systemic risk.

The government has paid €301.9 million in compensation to pension and provident funds, while this year it decided to pay another €165.99m, thus covering 75 per cent of their losses during the bail-in. As if this were not generous enough, unions have been protesting because they were not fully compensated by the state. The Fiscal Council pointed out that the compensation given was against the provisions of the law, which treats pension and provident funds as institutional investors. It was up to the managers of these funds to spread the risk of their investments rather than keep most of their money in the banks.

Why should these funds be compensated for the bad investment decisions of the fund managers or boards running them, asked the head of the council, Demetris Georgiades on Tuesday. Were any businesses compensated when they made bad investment decisions? Why were customers of Laiki bank who lost all their deposits above €100,000 and of Bank of Cyprus that lost half of them not compensated? They may also have been saving their money for their retirement years.

This may appear an uncaring line, as we are talking about people’s pensions, but is it really the taxpayer’s fault that the managers of these funds did not do their job properly? And is it wise to put the future of public finances at risk by setting this precedent?

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