Professionals in the Spanish pensions market will remember this month as the end of a long process during which Spanish companies were forced, by law, to externalise their pension reserves by establishing a pension fund or an insurance contract. Previous deadlines regarding this outsourcing were postponed due to disagreements among the parties involved and the complexity of the externalisation process itself, but this month’s deadline will be the final one.
Although most of the companies forced to externalise their pensions, obligations had already done so by the beginning of this year, the last few months have registered significant activity among medium sized companies to finalise negotiations and complete the process. To date, around E15bn of pension assets have been externalised through pension funds or insurance vehicles.
So now the externalisation process has come to an end it is time to evaluate the impact that this has had on the development of the pensions industry. Although the long negotiations between employer and employee representatives has undoubtedly helped to promote the debate about the much needed changes in retirement provision in Spain, in terms of figures, the externalisation itself hasn’t been translated in huge asset flows into the market. Moreover, the companies that have completed the process were those that already had some kind of pensions reserves for their employees and only represent a small proportion of the Spanish corporations.
Although some large pension plans have been created, most of them coming from the big financial institutions, today only around 500,000 Spanish workers are covered under occupational pension plans. So the future should be more about starting pension funds from scratch rather than moving pensions money from book reserves into external vehicles.
Volatility in the financial markets is not helping the pensions market at all. Taking into account that a high proportion of Spanish institutional investors entered only a couple of years ago, at the worst time possible, concerns among employers and scheme members regarding the future of the newly set up vehicles have escalated into panic and disappointment.
“During the last couple of years, around 600 companies have externalised their pension obligations,” says Diego Valero, managing director at Madrid-based consultancy firm, Novaster. “These investors have only experienced underperformance in the market which means there today we have 600 disappointed companies. On top of this, moving from a defined benefit system into defined contribution, where employees take all the risk, has increased unhappiness among scheme members,” he adds. “In general, things have been pretty difficult for the newcomers.”
Although exposure to equities among Spanish pension funds is lower than that of some of their European counterparts, around 35% of total assets, down markets have impacted badly on the industry performance. According to data from Inverco, the Spanish pensions and investment funds association, at the end of June the size of Spanish pension fund industry represented E43bn, 1.47% less than the figure registered six months earlier. This has also been reflected in the number of scheme members, with the occupational system loosing 4,000 members during the first two quarters of the year.
Growth forecasts for the near future are not too optimistic as the continued development of the industry depends on a radical reform of the still too generous social security system and this is not likely to happen soon.
“The government has showed its willingness to promote the second pillar pensions in Spain, with new regulations including fiscal advantages for companies setting up new plans,” says Valero. “But until the social security system is reformed and people realise that they need to somehow complement their retirement income, the market won’t grow.”
The Spanish pension gestoras, the asset management and administration institutions that manage the pensions market have also suffered from this situation. At the moment, because gaining new clients is more difficult than ever, maintaining their existing accounts has become their most important target. Competition is fierce, but not many changes in terms of market share have been registered. The market remains as concentrated as ever, with the country’s large banking institutions controlling the largest proportion of pension assets. The two giant financial groups Banco Bilbao Vizcaya Argentaria (BBVA) and Santander Central Hispano (SCH), still control around 35% of Spanish pensions assets. According to data from Inverco, at the end of June BBVA’s market share represented 22% with around E9.6bn under management. SCH manages 12% of pensions assets, accounting for E5.3bn In third position, Catalan group La Caixa has managed to attract around 10% of pensions portfolios with asset under management of E4.2bn. And then comes Fonditel, that manages pension plans for the workers of Spain’s largest company, Telefónica, with a market share of 9% and assets for E3.8bn.
Fonditel’s role in the Spanish pension fund industry has, without doubt, been significant and unique. In a market dominated by the financial institutions, this gestora’s approach to pension investment has proved to be successful and their philosophy quite refreshing. Lead by charismatic figure Santiago Fernández Valbuena, who has recently left his position as CEO to become the chief financial officer of Telefónica, Fonditel is Spain’s second largest gestora for occupational pensions managing 20% of the total assets of this segment of the industry.
Luis Peña, who replaces Fernández as Fonditel’s CEO, says: “Unfortunately, I don’t feel that we are going to see a strong growth in the second pillar in the near future. Trade unions that have always supported the first pillar are starting to understand the need for complementary pensions, and could even agree on putting a proportion of salary into pension plans. But I think the problem is more with the companies than with the employees.” He adds: “Regulators have also been trying to promote the second pillar by announcing fiscal advantages and so on, but further reforms are needed to really convince companies to set up pension schemes.”
Fonditel, which currently invests two thirds of its total assets in fixed income vehicles, haven’t made significant changes in investment philosophy as a consequence of current market conditions, but its asset allocation is now more defensive than before. “Every professional has felt panic when seeing the markets falling so rapidly. But we have to continue investing in the market and try to protect ourselves with very defensive strategies, and this is not the easiest way to manage money.” Peña adds: “We have been very prudent with equities, and invested our fixed income part in government bonds. At present 90% of the assets are invested in traditional asset classes, with the remaining 10% going in alternative strategies.”
Regarding this, he comments that hedge funds are useful vehicles to allocate a small proportion of assets. “Our exposure to hedge funds does not represent more than 3 or 4% of total assets, and I think this is the right proportion we should have, because when something goes wrong with these products, it can go really wrong. You need comprehensively research before you invest in hedge funds and be very prudent.”
At Mercer Investment Consulting in Madrid, consultant Constantino Gómez says: “Spanish pension funds have been diversifying their portfolios significantly during the last few years. It is true that the equity proportion is still lower than in other European countries, but 10 years ago was close to zero.”
Regarding alternatives, Gómez comments that their presence in institutional portfolios is still very small although it should increase, but with investment consultants playing a major role in introducing investors to these non-traditional products.
Apart from hedge funds, real estate investment is also attracting investor’s interest. Although at the end of 2001, property investment didn’t represent more than 2% of the total pension assets some investors are starting to study the possibility of increasing the proportion of this asset class in their portfolios. However, important investment restrictions regarding property investment, the lack of the administrative capabilities to handle direct real estate holdings and the still underdeveloped market for property investment funds makes it unlikely to see a real growth in property investments in the near future.
“We have been analysing the possibilities behind this asset class for quite some time,” says Fonditel’s Peña. “The current prices are too expensive and even though we have studied many different projects we haven’t, as yet, found the right opportunity. But once the market conditions improve, real estate could be an interesting asset class to consider.”
Whereas the outlook for the development of the second pillar in the near future is not too positive, the third pillar system seems to have a more interesting potential for growth. Today, around 5m Spaniards have signed up for individual pension plans – attracted by their fiscal advantages. The banking sector has used its distribution networks to sell these products all across the country. Foreign financial companies have also found a way to penetrate the still quite difficult Spanish market with third pillar pensions.

Competition among providers is tough, and will soon get tougher once legislation comes into force to make it easier and more flexible for members to change providers. “Soon it will be easier for members to swap gestoras and this will significantly increase competition in the market,” says Manuel Álvarez, director of pension funds at Madrid-based gestora Caser. Caser manages E1.8bn occupational pension funds assets and a further E700m in third pillar pensions.
Álvarez believes that the individual pensions system will continue growing, whereas the occupational segment will remain in a stand-by position for quite some time. “Spain is a country with a very high proportion of small and medium size companies for whom setting up a pension fund is not that easy.” Industry-wide schemes could be one of the solutions for these type of companies, “but so far, we haven’t seen many developments in this area”.
However, there is currently discussion regarding the creation of some kind of pension plan for one of the largest sectors in the country: the civil servants. Some local institutions have already taken the first step towards setting up pension plans for their workers. But the establishment of a national structure to provide pension for this segment as a whole could definitely be the most significant push for the development of the second pillar in Spain. Taking into account that only half a million workers are members of an occupational pension plan, and that there are around 750,000 civil servants in Spain, this move could more than double the current size of the market.
The debate is still ongoing and so far no decisions have been made.
While asset managers wait for the market to grow, foreign managers are getting prepared for what the future might bring. At the moment their presence in this market is very small. Although pension gestoras are allowed to outsource 20% of their assets to other investment management firms, the truth is that the very few which have actually done so have presented a much smaller proportion.
“Our experience is that some Spanish gestoras are outsourcing some specific asset classes to third party providers,” says Mercer’s Gómez. “Foreign presence is still small, but it will increase in the future. It is possible that the market hasn’t developed as fast as some international houses expected. In general though, I think these companies are being patient and are waiting for the market to grow.”
It is not only more assets in the market that asset managers need in order to see their business grow in Spain. A more flexible framework than the current pensions gestoras system would be encouraging. Today pension funds are not allowed to choose more than one gestora to manage their assets and provide them with administration service. Doors to other providers could open after recent law proposals to change this go through in the near future .
“This would make the market more flexible allowing investors to work with more than one gestora, and also choose different investment strategies depending on the risk profile of scheme members,” says Novaster’s Valero. “Also, there is a discussion regarding the introduction of performance fees among gestoras that could improve competitions and increase transparency in the market. ”
Valero adds: “All changes in regulation are taking the Spanish pensions system towards a more Anglo-Saxon approach where investors can freely choose different asset management providers.”
For this to materialise it will be necessary to separate the investment management side from the administration side, that today comes together in the same package directly from the gestoras. “This won’t happen in the near future, but we are moving in that direction,” Valero adds.
For the time being the next year is expected to be complicated for the Spanish pensions industry that has just finalised an important period of development, the externalisation process, and will now face a new stage full of uncertainties.