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Pension fund compensation could elevate systemic risk

A cabinet decision to compensate pension and provident funds could increase the systemic risk according to the Financial Council.

In an announcement on Tuesday, the Financial Council said that the compensation of pension and provident funds which suffered deposit haircuts in 2013 would likely open the floodgates of other equally legitimate claims.

“Apart from the immediate fiscal cost, in other words, the budget required to compensate the amounts covered by the decision, it creates other mid to long term dangers,” announced the Council.

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“The most important medium-term threat to the financial system and, by extension, to the economy and public finances from the above decision is the increase in systemic risk,” it added.

According to the Finance Ministry, €301.9 million has already been channeled to the funds while the new decision paves the way for an additional €166 million.

“The decision will lead to other demands,” added the Council.

European and national legislation justify why the provision of deposit protection concerns only individuals or institutions that are not considered as institutional investors.

Institutional investors have more information and know-how and are better able to recognize, manage and deal with investment risks than simple depositors, and in addition, they are required by the institutional framework to operate within these parameters.

The Financial Council believes that the Cabinet decision will effectively inactivate the control mechanism created by institutional investors working within the parameters of the reaction of their investments and their decisions and will encourage future bad practices from the financial sector with incalculable consequences.

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