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Impact Investing

IPE special report May 2018

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Bolstering the pillar

One of the most significant events to take place in Spain’s small but growing second pillar pension system was the awarding of a mandate to run public sector pensions. A syndicate led by BBVA was chosen to run the pension scheme for civil servants in the General State Administration.
Three other groups were short-listed: La Caixa, Caser and Fonditel. Analysts commented that the principal benefit of the mandate is not the margin on the business itself, but the potential for cross-selling other products.
The scheme will be run by Management of Pensions and Provision, a joint venture between BBVA and Spain's two biggest unions, the UGT and the CCOO, in which BBVA has 70% and the unions 15% each. The scheme is the largest yet in Spain's occupational market. Its 530,000 participants will increase the numbers in
occupation schemes overall by around 75%.
“The growth of our customer base by more than half a million will give us the capabilities, reputation and the opportunity to manage even more pension funds in the future and create economies of scale in the management and administration of members because it will be easier for us to get more funds that will behave the same way,” says Pedro Garibi, director, BBVA pensions in Spain. “Town councils and public administration can join same the same agreement as the employees of central the administration, so this year and next will be very interesting for the development of the second pillar in public administration. We are investing a lot to bring the whole thing together.”
He adds: “The fund will take contributions of around E55m a year so it will take a couple of years to get to a reasonable size.” The plan will receive its first tranche of funding from the state in November.
On average BBVA invests approximately 70% of total assets in fixed income and 30% in equities. “Our asset allocation has not really changed much,” says Garibi. “We have been very conservative in the past years because of the negative returns in the capital markets, but little by little customers perceive that there are opportunities in the capital markets, so we are talking to them and taking action to increase the range for equities, but step by step.”
He adds: “Our customers are becoming increasingly concerned with absolute returns and reducing the volatility of the fund rather than having expectations of huge returns. Customers would prefer a 4-5% return and beat inflation when the market is returning 10% if there is no bad news and no surprises, thus minimising volatility. Our customers represent 24% of the market which is a good
sample.”
Looking ahead to BBVA’s asset allocation in a year‘s time, Garibi notes that “allocation to alternative investments like hedge funds or real estate will increase. But I don't yet foresee big investments in private equity at the corporate pension fund level. If we offer this asset class to our customers then they will have to appreciate it. I think they have some concerns regarding the liquidity and time horizon.”
One of BBVA’s main strategy aims is to penetrate small and medium sized companies. “To make it work you need a big group of small companies to achieve a decent scale,” says Garibi. “Many of them are independent, they don't know each other and they are geographically dispersed so it is quite a challenge.”
All of BBVA’s assets in the pensions unit are invested in defined contribution (DC) schemes.
Santander is one of Spain’s pension gestoras: not a pension fund but an asset management company that manages corporate and individual pension schemes. The company leads the third pillar pension sector with a share of around 18% of the market. Private pensions represent 80-85% of its total business, with close to a million plans accounting for E5.8bn.
Ernesto Gallardo, director of private pension schemes at Santander, notes that “last year, with interest rates at 2%, we needed to generate more yield, and increased our investment in corporate bonds. But the move to equities was slower because the performance of equities over the past few years has made us cautious”.
He adds: “Our investment approach is more aggressive than that of our competitors in that we invest more of our funds in equities than the market as a whole.”
Gallardo highlights an important product innovation at Santander: “We are developing a new product where the asset profiles used will reflect a given customer age group. This is a new idea in Spain, and we hope to launch it in a few months. It’s a very good idea because it is more tailored to the client.”
Garibi notes that on the whole asset allocation in Spain is cautious, with no more than 30% in equities on average: “It depends on the company, but from my experience Spanish companies are quite conservative, especially after the negative returns of 2000 to 2002. We have had to build up confidence and trust in the system. Spanish subsidiaries of multinationals from advanced pensions markets like the UK or the Netherlands for example, tend to be more adventurous, with 40% to 60% in equities.”
Sanchez Cano of Endesa points out that it is very common for Spanish investors to prefer domestic equities and bonds. “They need to diversify. The Spanish market is too small.”
But generally Spanish investors are becoming more sophisticated, with an increasing level of interest in alternative investments including hedge funds and real estate. Interest in real estate is also on the increase. “People are becoming more knowledgeable as they have more access to information,” says Garibi. “Alternatives and real estate offer diversification and enhance returns; they are not correlated with pure fixed income and equities.”
But in terms of sophistication there is still some way to go. “In Spain the board of trustees is pretty much controlled by the social side of the company, the workers and their representatives” says Garibi. “You have to take into account that on the board of trustees you have workers who also do their normal job and in their free time supervise and control the fund manager. They’re doing a great job but you can’t expect people with advanced investment knowledge.”
Legislation came into effect in February which is aimed at offering additional scope for investing and encouraging greater focus on investment performance. “The new law gives us enough space to do what we need to do in terms of investing,” says Sanchez-Cano of Endesa. “So we are satisfied with the regulatory system.”
Garibi takes a different view. “There is always room to improve in the investment arena for pension funds but we can't go from zero to 100 in three seconds,” he says. “The new law represents a big improvement although on the investment side we still have a way to go; we have to take it step by step. We are not ready to get very flexible about investments in terms of products and limits but will be soon.”
He notes that one of the challenges of the new law is that it has increased the level of dealings with third parties, notably consultants. “One of the key issues is the amount of information that we have to send our clients. Every three years the pension plan has to produce a mandatory investment report issued by an external and independent consultant. As fund managers we have to work with both the consultant and the board of trustees. There are more stakeholders getting into the system which increases the information requirements.”
Gallardo sees the main change brought in by the new law as the possibility to fix variable fees depending on the performance of the pension fund. “We think that this change offers a big advantage to the clients,” he says.
This year the market will not experience the huge growth rates of three to four years ago. Garibi: “But the market is becoming more stable so with a positive return this year and last year corporations and workers are feeling more comfortable and confident in the new system.”


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