Two options will be available for funding company pension promises to meet the requirements of the 1995 pensions law - qualified pension plans (QPPs) and insurance contracts.
Since QPPs were permitted in 1987, a large majority of the investments have been in relatively short-term fixed-interest assets and cash. This partly reflected the situation of high interest rates in Spain and partly the conservatism of the control committees.
However, things are starting to change. A lower interest rate environment is forcing plans to look elsewhere for decent returns and an increasing number of companies (led by the multinationals) want to invest a much larger proportion of their pension plan assets in equities.
A higher equity component has important implications for defined benefit plans in a number of areas. Contribution rates may become more volatile as investment returns fluctuate more and there will be implications for the minimum solvency position of QPPs. By law, all QPPs must demonstrate that they satisfy a minimum level of solvency - broadly they must hold a 4% margin in addition to the normal mathematical reserves, subject to a minimum margin of Pta37.5m. This level in itself can prove onerous for small funds where the minimum level bites”. (For instance, for all funds with assets of less than Pta937m the minimum solvency margin will automatically be more than 4% as the minimum limit will apply).
A few control committees have started to become interested in asset/liability modelling studies, and it is likely that many more will be undertaking such studies in future.
An asset/liability study provides much more information than is available from a traditional actuarial valuation, which only considers the position at one point in time. An asset/liability study involves projecting results into the future and providing an estimate of the range of likely outcomes, indicating the effects of changing the investment strategy.
The main purpose of such an asset/liability study is to help the control committee understand whether the current investment strategy (or one to be adopted in future) is likely to incur an unacceptable risk of the funds falling below the minimum solvency level. The risks involved will differ from plan to plan, and what is unacceptable to one control committee may be more acceptable to others.
Given that changing the investment strategy may affect the level and volatility of contributions, a number of company finance directors will also be taking an interest in the results of such studies.
Ian Hinton is a senior consultant with Aserplan, the Woodrow Milliman member firm in Spain