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Spanish government in talks with pensions industry on bond rules

SPAIN - An informal consultation process led by the Spanish government could see the introduction of a proposal allowing local pension funds to value parts of their sovereign bond portfolios at market maturity instead of mark-to-market.

IPE has learned from a number of consultants based in the country that the government earlier this summer entered into an informal consultation process with pension funds, trade unions and other industry representatives with the view to modifying schemes’ investment strategies.

Under the proposal, pension funds would reportedly be able to value part of their Spanish sovereign debt portfolios at market maturity.

The decision to switch from mark-to-market to market maturity would rest with pension fund managers and trustees, who would determine whether such a move were appropriate for their schemes.

The proposal, despite being optional, has already cause some divisions between pension funds and trade unions, according to consultants familiar with the situation.

While social partners have backed the reform, pension funds believe it would have a big impact Spanish funds.

Unlike the mark-to-market valuation, which takes into account the potential risk of a Spanish default by valuing the bond issued at a lower price and higher yield, the market-to-maturity valuation implies that the coupon on the bond will remain exactly the same as the yield, ignoring the potential risk of default.

The government’s proposal would therefore aim to incentivise local pension schemes to hold a large portion of their investments in sovereign debt.

Pension funds, however, pointed out that this would lead them to prioritise Spanish sovereign debt over other fixed income products such as corporate debt, which traditionally provides a greater risk/return profile.

This, in turn, would create new sources of risk at a time when most Spanish pension funds’ portfolios already lack diversification.

Pension funds also argued that the government’s proposal would curb market mobility, and that few asset managers would adapt their product ranges to investments valued at market-to-maturity.

The awarding of mandates to new asset managers might also therefore prove more costly and time-consuming, they said.

Talks between the government and the pensions industry are still ongoing, but a number of consultants based in the country told IPE that, if a deal were made in the coming weeks, a formal proposal could be tabled as early as this autumn.

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