Article 41 of the Spanish constitution makes a public system of social security obligatory and also allows a free supplementary pension system schemes.
In April 2001, the Spanish government reached an agreement with one of the main trade unions and the employers’ organisations containing specific rules for the development of the ‘Toledo Agreement’ approved by the Spanish parliament in April 1995 and now being revised. The Toledo Agreement is a declaration of principles with 15 recommendations to guarantee the public pension system in future. One recommendation is the improvement of the promotion of supplementary funded pension schemes. Parliament afterwards approved a related law.
q Law 14/2000 (29 December 2000). Outsourcing date has been postponed from 1 January 2001 to 16 November 2002.
The obligation of minimal financial reserves for pension fund managers has been modified by this law: pension fund managers must have a stated capital of Ptas100m (E601,000) as a minimum, invest in financial assets dealt in organised markets, recognised and open to the public, as property, securities or treasury.
q Law 6/2000 (13 December 2000). This law establishes a new tax treatment for contributions to a pension fund. The employees must include the contributions made by participants as well as by their employers in their taxable base for personal income tax purposes. The limit of this deduction is the lower of the following amounts, and these limits have been raised by this law: 25% of the sum of the net salary income and income from business and professional activities received individually in the year (previously 20%); for those participants 53 years old and above, 40% of the salary income or income from business and professional activities received a year (new), or Pta1.2m (previously Pta1.1m).
Second and third pillar
Law 8/1987 of pension funds regulates, for the first time, a supplementary funded system, through the pension fund instrument.
q Basic features of pension plans: non-discrimination, fully funded, unattachment of the consolidated rights, fund management and with financial limits (the annual contributions may not exceed Pta1.2m or, for those participants aged 53 and over, gradually increasing from Pta1.2m to Pta2.5m).
q Types of pension plans. Depending on the constituent, these are: employment system’s pension plans; associate system’s pension plans (those where the promoter is an association, syndicate or labour union, the participants being its associates or members); individual system’s pension plans (those for which the promoter is one or several financial entities.
This system represents the third pillar pension plans. Depending on the agreed commitments: defined contribution plans, defined benefit plans or hybrid plans.
q Investment restrictions. Spanish law provides, in general, an unrestricted framework for pension funds. There are no restrictions on equity or foreign investment. Pension funds have among others the following limits: no more than 5% of the assets in securities issued or guaranteed by the same entity; no more than 10% of the assets in the sum of the securities issued or guaranteed by the same entity, plus the credits granted or guaranteed by it; no more than 10% in the sum of the securities issued or guaranteed by entities belonging to the same group, plus the credits granted or guaranteed by them; for securities issued or guaranteed by the state, autonomous communities and international organisations of which Spain is a member, the above-mentioned limits will not be applied.
There are also limits by types of assets and markets: the funds have to invest, as a minimum, 90% of their assets in financial securities dealt in on regulated markets that operate regularly and are recognised and open to the public, or at least open to financial entities (mortgage market, Spanish AIAF market); in banking deposits (with not more than 15% of total assets); in credits with mortgage guarantee, and in property.
Furthermore, they can invest in foreign assets without any limits.
q Supervision. Pension funds are submitted to the supervision and inspection of the Dirección General de Seguros y Fondos de Pensiones (DGSFP), part of the Ministry of Finance, both at their inception (previous authorisation from the DGSFP is needed) and during the development of their activity (they have to send it their annual report and can be inspected by the DGSFP).
The financial and actuarial system of the plans have to be devised by an actuary and revised at least every three years.
q Management companies. These are companies with the sole exclusive aim of managing pension funds. Pension funds can also be managed by insurance companies authorised to operate in the life insurance area, whenever they have minimum required financial reserves and without having to set up a management company. Their functions are book-keeping of the fund, determining the amount of the different pension plans’ assets and controlling the depositary of the fund. Furthermore, if the fund’s supervisory commission decides, they can select the investments to be made by the fund and order the depositary to purchase and sell assets.
q Depositaries. Any deposit financial entity domiciled in Spain can be depositary. Its functions are custody and deposit of transferrable securities and other securities integrated in the fund and to look after the management company’s relations with the promoters, participants and beneficiaries.
q Tax treatment. Contributions to pension plans made by employers on behalf of their employees are deductible expenses for corporate income tax purposes in the year in which they are paid.
The benefits received by pension plan beneficiaries (regardless of whether or not the beneficiaries are also participants) must be included in the beneficiaries’ taxable base for personal income tax purposes as regular salary income (if received in the form of annuities) or also as regular salary income but with a 40% tax free (if received in the form of lump sum benefits). These benefits are in both cases subject to personal income tax withholdings.
Pension funds are levied corporate tax rated at 0%, and taxes withheld on dividends and interest payments must be reimbursed by the Spanish Treasury.
q Externalisation of pension commitments. Private Insurance Law 30/1995, which amended the Pension Funds and Pension Plan Regulatory Law 8/1987, established the obligation for all companies, except banks, insurance companies and brokers to place existing or future pension commitments to their employees in group insurance policies, pension plans or through an employee welfare mutual insurer.
It imposed a prohibition that pension commitments could be covered by in-house pension funds or similar instruments that enable employers to retain the ownership of the allocated resources.
Having externalised the funds, the responsibilities of the companies are confined to include all their employees with pension rights in the scheme and to paying the appropriate contributions or, in the case of insurance policies, premiums. Consequently, companies are absolved of any liability not provided for in the insurance policy or pension plan arranged.
Entities that had pension commitments which were not implemented through a pension plan or a group life insurance policy must adapt to comply with the requirements of new legislation before 16 November 2002.
Although there is no obligation for banks to outsource pension commitments, almost all banks and saving banks have.