If the issue of wrestling with the implications of the euro seems to be preoccupying the Portuguese investment management community, it is mere posture in comparison to the political and economical knots being tied around the country’s social security retirement system.

And when unravelled, this so-called ‘noose’ looks set to present a number of extremely contentious loose ends.

As in Italy, the legacy of former communist administrations has left its im-print in high government retirement benefits and taxation.

Social security pensions presently stand at a 60-70% level with companies traditionally topping up this level to the tune of a further 10-20% in de-fined benefit employer-only contribution systems (employee contributions to company schemes receiving no tax benefits), excepting the aforemention-ed banking/public sector systems.

And, as in the rest of Europe, the indefatigable demographic backdrop to such a system, particularly prevalent in Portugal which has seen worker to retiree levels drop from a 17 to 1 to a 1.7 to 1 ratio in 20 years, is leading the country towards biting the bullet of reduced government pensions.

However, the reality of such difficult national soul searching reform has been anything but clear and decisive.

If the Portuguese government is seeking to promote pension funding as a solution to the limited future economic life span of such high retirement provision, then its signals are ex-tremely mixed - undoubtedly a reflection of the depth of feeling such issues arouse, and the prospect of elections mooted for autumn next year. Nevertheless, calculations for social security payments were changed in 1993.

Previously, workers received 2.2% of salary from social security until a combined level with company pensions of 80% of final salary was reached, on a basis of the best five of the last 10 years. Reduction then brought the payment level to 2% per annum on a 10 out of last 15 years payment, coinciding with the linking of wages to inflation in Portugal.

And Rui Pedras, head of AEGFP the Portuguese gestora association, believes that the government white paper on social security scheduled for early next year, could see this level further lowered to a cap of five minimum wages (a minimum wage level suggested as half of the medium wage in the country) and calculated on an employees entire working life.

But Maria Vicente of the ISP says the 1994 reforms led to some employees losing pension benefits, because companies without strong trades union links did not meet the shortfall in government payments.

The solution to these problems would seem to be the pension fund system, and we believe second pillar provision should be mandatory as a first step to addressing the imminent shortfall. In reality the government needs to reduce social security levels to a two-three minimum wage level if is to maintain a healthy economy,” says Rui Pedras.

Yet the latest response being discussed by the government comes in a different guise altogether. Their bid to plug the pensions gap is a newly introduced early retirement scheme, whereby workers can retire at 55 with an annual 4.5% penalty on their state pension income, or alternatively a 10% annual bonus if they retire after 65.

Bernie Thomas at Watson Wyatt believes it is the final nail in the social security coffin, albeit a particularly blunt one: “The trend in Portugal is for retirement at 60 so this will win the government kudos points with electors, but financially it is suicidal because the figures do not add up. The penalty rate should be at least 6% per annum for early retirement, but then this asks questions about the depth of provision workers have at a company or private pension level to offset this loss.”

Criticism has also been aimed at companies in Portugal which can legally use the scheme to make workers retire early in the event of company ‘restructuring’.

Further obfuscation seems inherent in proposed changes to Portugal’s PPR (Plan Penciõn reforma) third pillar retirement scheme, according to Rui Pedras. Until now the significantly tax advantaged pension or insurance funds, with fiscal free income savings levels of Es418,000 ($2,444) have enjoyed annual growth of around 35% since their inception in the early 1990’s.

Proposals now within parliament will see a tax deductible level of 25% of PPR investment, with a ceiling of Es107,000, the intention being to prompt lower wage earners to provide for their own retirement.

“It is a ridiculous proposition though, because low wage earners don’t have the money to save and those who do are being penalised. A rate of around 30% and a ceiling of Es160,000 would be a minimum third pillar requirement,” claims Pedras.

The PPR cannot be taken until age 60 after a minimum of six years contributions - except in cases of disability or redundancy.

A further investment vehicle, the PPA (Plano Poupança Accões), a solely eq-uity-invested fund also requires a minimum five years investment before collection, but no age limit and so does not enjoy any retirement fiscal benefits.

In response to such developments, pension fund arrangements themselves have changed. A gradual move to DC plans is taking place,both to meet increasing demand for employee pension protection and to remain flexible within an increasingly fluid European pensions environment.

The shift is yet another factor in the burgeoning equity pursuit of Portugal’s gestoras and Rui Pedras says enquiries about the state of the market from foreign investment managers are increasing daily.

And most analysts in the country are hoping the whole issue of pensions/ social security reform is comprehensively tackled sooner rather than later to ease the pain that Portugal will inevitably have to endure.

As Rui Pedras concludes: “It is a bitter pill to swallow, but a fundamental economic truth. If in 30-40 years’ time we continue with today’s state retirement payments then we would have to increase present national insurance payments of 34.75% (23.75% em-ployer 11% employee) threefold. The maths just does not add up.” Hugh Wheelan”