The electricity sector in Spain is among the industries that historically have always provided a benefit to complement the social security pension system for their employees, and Unión Eléctrica Fenosa is no exception.
Until 1993, the company itself was responsible for looking after this complementary benefit which was provided directly on its balance sheet. In that year, and following new regulations establishing the creation of pension funds in the country, Fenosa decided to externalise its pension commitments through a pension plan, and chose a pension gestora to manage the plan’s future assets.
The creation of the new pension fund was discussed during the negotiation of the company’s collective agreement between the employer and the employees which covers the labour conditions within the corporation.As a result during which the structure of the new plan was agreed.
“At that time, among other things to do with salaries, working hours and other issues, we negotiated the creation of a pension plan under the newly passed law,” says Ángel Fernández, president of the comisión de control of Unión Eléctrica Fenosa pension plan in Madrid. “And the company gave all employees who where part of the top-up pension scheme the option to join the new plan.”
The characteristics of the new scheme were agreed with the unions taking into account the guidelines set up by the law, and it was decided to create a occupational pension fund system, promoted by the company and following a mixed defined contribution (DC) model for retirement and a defined benefit (DB) system to cover death or disability during service. Since joining the plan was optional, only around 50% of the total workforce switched to the new scheme that has now 2,400 affiliates.

Once the new occupational pension plan was approved and registered with the regulatory body, the Direccion General de Seguros (DGS), the first contributions were made.
“The compulsory contributions to the plan basically involve that the company contributes 3% of salary and the workers another 3%,” says Fernández. “These are the basic contributions for all new employees joining the plan, but those who already had years of service when the fund was set up only contribute with 1% of their salary and, on top of the compulsory 3%, the company has to contribute and extra 0.45% per year of service up to a total of 12%.”
The Spanish law requires pension assets to be managed by a pension gestora, the only fund management companies that can look after pensions money. For Fenosa choosing the right gestora to manage its pension plan was not a difficult task. “The basic criteria we followed were related to costs and service,” says Fernández.
But there were other important factors to take into account. As it happens in many other European countries, the electricity industry in Spain has strong links with some of the largest financial institutions, and this is also the case for Fenosa. The fact that the then Banco Central Hispano (BCH) - now part of the financial giant group Banco Santander Central Hispano (BSCH) - was, and still is, a major shareholder within the company, made it very unlikely for the pension fund to choose a gestora not linked with this organisation. This way BCH Pensiones was selected as the fund’s gestora, and it seems they have no regrets about this decision.
“We have been with them since the beginning and we are not planning to make any changes regarding this issue,” Fernández comments. “We wanted a gestora that was responsible and could show solvency and good conditions in terms of costs and service, and BSCH has been able to provide us with this.” He adds: “It is quite common among Spanish companies to choose a gestora linked to financial institutions who they have strong links with.”
“Our gestora is offering us attractive investment products at very good prices and there is a sense of trust about what they do,” Fernández says.
In terms of investment strategies, the basic guidelines in terms of portfolio split is given by a investment sub-commission within the comisión de control and the gestora. “This sub-commission has a close and direct relationship with the gestora, having regular meeting to discuss how things are going. Together they design the investment plan but when it comes to stock picking and investment in specific assets this is ultimately up to the gestora,” Fernández says. “They are the investment experts and since our size is still limited, our assets are invested as part of the gestora’s global package including money of other investors.”
This is also a common rule among most pension funds in Spain, whose comisiones de control, are still not sophisticated enough to get more thoroughly involved in the investment process. Also, it is important to take into account that pension gestoras in Spain not only look after the assets of institutional investors but also take care the administration tasks related to the functioning of the scheme. The role of the comisión de control, that at present has a majority representation from the employees side, is more about supervising and analysing developments than getting actively involved in the investment strategies. “It would be good if the members of the comisiones de control in Spain had a better knowledge about the way financial markets and investments work, but this would never replace the role of the gestora. The gestora’s role is to look after our interests and act as our representative in the investment field,” Fernández says. “However it is true that there is interest among the members of the commission to improve their knowledge about these matters and we organise courses and training for them to increase their understanding.”
The fund, that started from scratch with no more assets than those coming from the monthly contributions to the plan, has now around Ptas10bn
(e60m) and has seen its portfolio significantly change since its creation in 1993. “When we started investing we had quite a conservative investment strategies, with the largest proportion of our assets allocated in fixed income,” Fernández explains. “At that time, fixed income was giving good returns but the market has changed and our strategy has been adapted to the new conditions.”
The pension fund has now a 30/70 proportion in equity and fixed income respectively, although the exposure to equities has been up and down during the last couple of years but always staying around that percentage. “We have had around 35-40% of our assets invested in equities, but this has been reduced to the current exposure which is 29% of total assets,” Fernández says. “The most recent reduction, of around 5% of our equity investments, was decided after the September terrorist attacks in the US. This was a decision of the gestora who thought it was necessary to sell stocks in, for instance, insurance companies and airlines, as many other investors have done, but we haven’t considered making any other significant changes to our portfolio distribution.”
“The investment returns of the last couple of years have been bad, but we, and our gestora, do not think the exposure to equities should be reduced further. We have to focused in the long term and this is this strategy our fund should follow.”

Fernández comments that the gestora keeps them up-to-date about any changes or developments with quarterly and annual reports, and especial information statements every time they consider it necessary. “This information is available to our members but in general they are not too concern about the way the assets are being invested,” Fernández says. “ For the time being, their priority and main incentive for joining a pension plan are the fiscal advantages that they have on their monthly contributions, and in general, they are not too bothered about investment strategies.”
Although still small in size, the plan is now eight years old, and now seems it’s a good time to look back and analyse how it has progressed since its creation. In order to do this, the plans are now working with Madrid-based consultancy firm Novaster in assessing the developments of the last few years to pinpoint those aspects that should be improved. “We want to understand better how the fund has behaved since it was established and what has been its reaction to different market conditions, to take the necessary steps to improve things for the future,” Fernández notes.
And thinking about the short term, the months ahead will be a challenge for all parties involved. The company and the unions will have to find a solution for some 2,000 employees with an average age of 55 who didn’t join the new scheme in 1993.And the clock is ticking. Now, it is not about the company voluntarily setting up an externalised pension fund as happened eight years ago, but about the compulsory legal requirement for all Spanish companies to externalise all their pension commitments by November 2002. The law sets out that this can be done through a pension fund or insurance contract but after extensive and long negotiations with the unions, it is still unclear which vehicle will finally be chosen.
“The company has given these employees the option to switch to our pension plan, but the unions do not agree because they consider the contribution regime as not favourable for these workers with long services in the company,” Fernández says. “We don’t know what the final decision will be but if an agreement is not reached before the deadline expires, we will have to opt for establishing an insurance contract. We are still negotiating and the unions do prefer the idea of establishing a pension fund to the insurance solution, but we still don’t know what is going to happen.”

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