During the first half of the year pensions was one of the most discussed issues in Spain. However, this debate wasn’t about the future of the domestic pensions market but of the European one. The Spanish presidency of the European Union, from January to June, will be remembered among pension professionals across Europe as a period when the introduction of quantitative investment restrictions and solvency tests into the pensions market where intensively discussed at a EU level.
So many discussions about the future of pensions in Europe left little time for Spaniards to concentrate on their own, and still underdeveloped, pensions market. However, during the past few months the November deadline for companies to externalise the pensions obligations held in their book reserves has forced professionals in the industry to focus on their home market again.
The law forcing companies to externalise pension commitments in their book reserves by establishing pension funds or insurance contracts was introduced in 1999, and since then the deadline to complete the process has been postponed more than once. Disagreement between employers, trade unions and the government concerning what should be outsourced and which vehicle should be implemented have made the externalisation process slow, complicated and, as a consequence, still continuing.
Nevertheless, most of Spain’s large corporations have already externalised their pensions obligations during the past couple of years. Only the small and medium-sized companies still have to complete the process. So, even if the remaining externalisation processes are completed by November, no large amount of assets will flow into the market.
To date, Spanish companies have externalised a total of €15bn, of which €7.5bn has gone into pension funds, and the rest into insurance arrangements.
Although the remaining externalisations will not result in a huge amount of assets flowing into the Spanish pensions market, what is true is that this process has had a very important impact on the development of retirement provision in Spain as a whole. In a country where most people still rely on state pensions, the fact that both employers and employees have been forced to discuss the issue of pensions intensively has been an important step towards the development of a much-needed second pillar that could fill the gap that the public system will face in the near future.
Further changes in social security and better tax incentives are what the industry needs to really take off, but a new attitude towards provision for retirement and savings in general by Spaniards is also crucial. But disappointing investment returns from the existing schemes are not helping to attract interest in private schemes.
During the first two quarters of 2002 Spanish pension funds lost a total of €644m. According to data from Inverco, the Spanish pensions association, the total size of the pensions market amounted to €43bn at the end of June, 1.47% less than the figure registered in December 2001. The total loss between June 2001 and June this year amounted to around 4% of pensions assets.
These results have also had a negative impact in the number of scheme members. The occupational pensions sector lost around 4,000 members during the first two quarters of the year, representing 4.5% of the total, although the individual pensions sector attracted around 170,000 new members.
However, recent reforms announced by the government regarding tax incentives for both employers and employees could help to increase the number of companies considering the possibility of setting up a pension fund to cover their employees’ retirement. The new framework includes fiscal reductions for companies and more flexible limits to contributions to pensions plans. As part of the reform, a 10% tax reduction for contributions made by employers into pension funds was also announced.
All these measures could prove to be crucial for the future of an industry that depends on the creation of new pension funds from scratch, and not so much on assets coming from the externalisation of pension obligations from companies that only represent a very small percentage of the total Spanish corporations.
To date fewer than 6m Spanish workers have some kind of private pension provision, most of them covered under third-pillar individual pensions, so there is still a long way to go. Taking into account that small and medium-sized companies represent the majority of the country’s industry, finding pensions solutions that could fit with this sector’s specific requirements is crucial. Regarding this, talks about the possibility of introducing sector- and industry-wide schemes are gaining importance and have the support of the country’s powerful trade unions.
Next month’s deadline should therefore not be seen as the end of a period but more as the beginning of a very important process that should result in the creation of a stronger second pillar.