IOBE: Ten new measures for the development of the second Pillar of Insurance

of Dimitris Katsaganis

The capital reserves of the professional funds could reach 10% of GDP, while accordingly, it is estimated that GDP can be higher by up to € 2.7 billion per year, in real terms.

This is reported by an IOBE study on “Occupational insurance in Greece: Challenges and prospects”, which was conducted on behalf of the Hellenic Association of Occupational Insurance Funds (ELETEA) and was presented yesterday at a special event at the Athens Stock Exchange.

In this direction, IOBE proposes a package of ten measures, among which stand out the consolidation and strengthening of supervisory bodies, the possibility of establishing multi-employer Institutions of Professional Retirement Benefits – TEA and the maintenance of tax incentives in respect of lump-sum pension benefits. by applying universal, institutionalized boundaries.

Specifically, IOBE proposes the following policy measures:

1. Modification of TEA licensing and supervision regime

It is proposed to modify the licensing and supervision framework of TEA, in the direction of unification of bodies and simplification of procedures. Specifically, it is proposed the establishment of a single supervisory body with the sole object of licensing and supervising the TEAs of optional insurance.

2. Introduction of predetermined times for licensing and supervision procedures

It is proposed the enactment of legally enshrined rules regarding the times provided for the approval of new or amendment of existing statutes but also for the general control and approval procedures that are necessary for the licensing and proper operation of TEA.

3. Introduction of the possibility of establishing multi-employer occupational insurance funds

It is proposed to establish the possibility of establishing TEA for multiple employers (multi-employer), without the obligation to have a relevant professional relationship between employers. It is proposed the establishment of multi-employer TEAs by the Institute for Economic and Industrial Research. Perspectives, policy proposals and economic impacts 73 ). It is proposed to establish multi-employer professional funds exclusively by the social partners (employers-employees) as the main objectives should remain to ensure operational independence between the pillars and the reliability of the second pillar so that there is sufficient diffusion of insurance risk.

4. Ability to introduce automatic registration of new insured (auto-enrollment)

It is also proposed the possibility of introducing the institution of automatic registration of new employees in a company or branch where TEA (autoenrollment) already operates. More specifically, it is proposed that the TEAs have the possibility to choose in their articles of association between the current opt-in regime and the auto-enrollment regime. In the latter case, it will be possible to exclude employees who do not wish to participate (opt-out), while it is crucial to adequately inform the insured about the benefits and opportunities offered by the respective professional fund during registration. The aim of this proposal is to maintain the optional nature of occupational insurance, but to enable policyholders to make a first contact and be informed about the institution in order to support and disseminate it.

5. Ensure and facilitate portabilityς

It is proposed to ensure and facilitate the portability of insurance rights both domestically and across borders. More specifically, it is proposed to clarify the terms of portability through primary legislation at system level in order to provide sufficient incentives to participate in the institution, given the ever-increasing mobility in the labor market, both domestically and internationally.

6. Investment management based on best practices with systematic information of the insured about their choices

It is useful to have degrees of freedom in investment management, active or passive, similar to those in other countries, such as offering a portfolio option based on the investment profile, including life-cycle investment products. At the same time, it is crucial to ensure comprehensive and regular information to policyholders, especially in a country with a low average of financial literacy compared to other European countries.

7. Maintain strong tax incentives for retirement benefits

In the case of one-off benefits, it is proposed to keep the tax-free under a fairly broad framework of universally defined conditions, as set out below, as well as the application of a tiered tax incentive, when these conditions are not met. Accordingly, the introduction of possibly milder tax incentives in benefits in the form of a periodic pension could be considered, by proportion and option.

8. Establish universal, legally binding limits on the application of tax incentives for one-off benefits

The country is characterized by a highly volatile tax framework, while uncertainty around it has intensified over the past decade due to the crisis and successive changes in tax legislation. In this context, a similar insecurity governs the current framework of tax incentives for TEAs. Combined with the absence of universal limits on these tax incentives, this gap reinforces the risk of stigmatizing the institution of occupational insurance as a field with opaque rules and damaging its credibility. In line with international practice (OECD countries), it is proposed to maintain fiscal incentives for one-off pension benefits but in conjunction with the application of limits. Maintaining tax incentives is considered appropriate in order to enhance the supplementary pension savings of households, but also in order to mobilize employers and employees by undertaking long-term commitments such as those created through occupational insurance.

9. Establishment of new financial incentives on the part of the employer for the creation and operation of TEA

It is proposed to consider the possibility of mobilizing broader financial instruments to adopt incentives for the financing of existing / new incentives, such as e.g. through the Recovery Fund23. Exemplary examples of such incentives include providing financial incentives to the employer (eg subsidy) to cover the management costs of setting up and strengthening the governance mechanisms of a TEA.

10. Providing legal certainty about the institutional and tax framework and consensus

It is proposed that any changes to the primary legislation regarding the institutional and fiscal status of the second pillar be adopted following a broad political and social consensus for reasons of legal certainty and a sense of stability for all parties involved. Large-scale consultation procedures will also help to overcome the chronic ideological entanglements that hinder the development of the institution of occupational insurance over time, so that there is a long-term continuity at the policy level.

Contribution to the economy

The results of the macroeconomic analysis show that occupational insurance can play a role of growth lever in the Greek economy, according to IOBE.

Specifically, the study emphasizes that occupational insurance, despite its significant and systematic growth in recent years, has great growth potential in our country, as it remains much less widespread in Greece than in other European countries.

The development of the second insurance pillar in Greece will lead to the accumulation of significant capital reserves by occupational insurance providers. The main channel therefore being considered is the effect of the accumulation of reserves resulting from the supplementary optional savings, giving impetus to new investments. Part of these new investments are domestic investments that on the one hand stimulate domestic demand, but mainly boost productivity.

Consequently, new investments through these indirect channels affect the course of the economy, with the effects of these effects becoming particularly apparent in the long run. The estimates examine the impact on scenarios with different hypothetical coverage coverage rates in the population, different pace of convergence with European practices, different average insurance duration, as well as assumptions about the percentage of total home-directed investment, and long-term return on investment.

On the basis of such alternative scenarios of assumptions, the further development of occupational insurance is estimated to lead to a strengthening of the productive infrastructure of the economy, to an increase in the productivity and GDP of the economy. At the same time, the direct budgetary costs from the expansion of the institution are expected to be limited, while it will be offset in the medium term by secondary positive effects. Indicatively, it is estimated that with the development of occupational insurance, new capital reserves will emerge in the second pillar that can exceed 10 percentage points of GDP in the long run.

Respectively, it is estimated that GDP may be higher by up to € 2.7 billion per year, in real terms (2019 prices).

The sensitivity analysis shows that these direct effects are estimated to be greater the wider the coverage of the workforce by occupational insurance and the longer the duration of this insurance.

In addition to the significant macroeconomic effects, the reform is expected to have a critical positive impact on the microeconomic level, including the incentives of households to participate in the formal labor market.

The tangible connection of the contributions with accumulated capital to a personal account can strengthen the motivation of the employees to extend their official working life as well as it can stimulate the confidence of the employees towards the insurance system, is emphasized by IOBE.

The insured will be able to watch the accumulation of an individual savings “piggy bank”, gaining a stronger sense that pension deductions and pension rights have a specific and real value.

In combination with the promotion of the level of financial knowledge (financial literacy), the insured will gradually become acquainted with more expanded and potentially effective savings options.

The reform is also expected to have secondary macroeconomic benefits, through the strengthening of domestic savings and capital markets.

Domestic investments of TEA reserves in financial securities will increase capitalization and capital market liquidity, which in turn make it more attractive for companies to raise new capital and boost investment and economic growth rates.

Read also:

-PI. Tsakloglou: “Very good situation for the development of the second insurance pillar”

-Ch. Nounis (ELETEA): Necessary substantial targeted interventions for the further development of Occupational Insurance