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Market waits for reform

After a weak start to the year, Portuguese pension funds continued to experience negative growth during the second quarter, with median accounts from the country’s segregated funds falling to –3.2% from 0.3% in the first quarter. This data, released by Watson Wyatt, added to the –2% median returns for 2001, has increased concerns among professionals in this still small and underdeveloped pension fund market.
The growth of the pension fund market in Portugal is still awaiting the much-needed reform of the social security system, but few developments in that area have been seen this year.
A new law partially reforming the system was due to be published earlier this year, but remained in limbo after prime minister António Guterres resigned in December, following local election defeats for his party in the main cities and towns. The law contemplated that people joining the social security system would move to a pension benefit system based on a career average, instead of the average of the last 10 years of employment now in place.
However, that legislation was not going to solve the financial problems of the system, so it would not have been sufficient to bring about a real improvement in the retirement provision system.
Better news came from the state-owned reserve fund FEFSS, which closed 2001 with positive returns of 3.3%. The FEFSS created to fill the gap between social security contributions and pensions payments that was expected to appear around 2015, has assets of around €4bn. It managed a positive investment result thanks to the high proportion of assets invested in fixed income, around 90% of the total portfolio. Subjected to restrictive rules under which the fund has to invest at least 50% of its portfolio in Portuguese bonds and no more than 20% in equities, the fund grew more than €700m in 2001, and is expected to grow to €7.5bn by 2005. The IGFCSS, the state-run investment management organisation that runs the fund, has became Portugal’s largest pension fund manager, ahead of Pensoesgere which at end-2001 had assets under management of €3.6bn.
Early this year the fund started plans to outsource 20% of its assets to external managers, and the first mandates, if they get the go-ahead from the ministry of finance, could be awarded next year.
The developments around the FEFSS have been among the most discussed issues in a market that is only starting to take off. According to the Istituto de Seguros de Portugal (ISP), at the end of 2000 there were 244 authorised pension funds operating in the country, including individual third-pillar plans, with combined assets of €13.7bn. Insurance companies managed around €500m of this total, with the remaining assets being managed by pension fund asset management companies.
The closed-end occupational pension funds, a total of 84 at the end of 2000, are mainly defined benefit (DB) schemes, covering around 180,000 workers. Only a small proportion of these participants are covered under a defined contribution (DC) scheme, representing only 0.22% of total pension assets, and this proportion is not expected to grow in the near future.
The shift from DB to DC systems taking place in many European countries will not happen in Portugal. This is because, when the very large Portuguese companies set up the first pension funds a decade ago, the workers joining the schemes were no longer entitled to a pension through the social security scheme. So these occupational pension funds really work as first-pillar pensions, making the shift to DC plans impossible. Only multinational companies are considering this option.
Even though the DC route is the approach that almost every new pension funds takes, the number of new pension funds created in Portugal during the past few years is so small that the DC market has remained tiny. On the other hand PPRs, the personal pension plans, have been quite successful. Sometimes employers offer these vehicles as an alternative to or in addition to corporate DC plans.
More tax incentives for employers and employees and the reform of the social security systems, are the key factors behind the development of the Portuguese pension market, but only political will can make it happen. Until then, the market will remain small but preparing for future growth. Consultants and asset managers believe in the potential of this industry and it seems that the local players will be in control of any asset flows.

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