The past two years have seen spectacular take-up of private pensions in Spain, encouraged by a government concerned about the cost of one of Europe's more generous welfare states. However, the government's confused approach to taxation and incentives, remains the biggest hurdle to the development of the industry. Amendments to legislation and withdrawal of some benefits have made it increasingly difficult for investors. The treatment of fund entities themselves also needs new legislation.
As far as the first pillar of the system is concerned, the right to a public pension is enshrined in the Spanish constitution under Article 41, which also allows for supplementary pension schemes.
There is no opt-out from Spain's basic and graduated pension, and the minimum pension is payable to all workers with a 15-year contribution record. The proportion of the national insurance contribution, which provides a whole range of benefits, which is dedicated to the state pension is 4.7% for the employee and 23.6% from the employer, and the retirement age is 65.
The limits of these contributions are set across different professions so there is no single limit. At the upper end, professionals’ salary ranges are from Pta120,000 (e720) to Pta400,000 a month to which the above percentage contributions apply. For the low paid the bottom end of the range is Pta80,000 a month.
The total number of contributory pensions paid at October 1999 was 7,546,000, with non-contributory pensions totalling 460,651. The minimum pension is around Pta70,000 a month, and the average state pension amounts to Pta74,600. The average contributory pension was Pta83,500 a month.
In 1987 Law 8 on Pension Funds provided the first regulation of a supplementary system of pension fund instruments. These plans are deemed non-discriminatory when all employees with over two years’ service in the company are covered by the plan. Under legislation passed in 1995, and recently amended, companies are required to externalise pension commitments with their employees. These commitments must now be met through a pension plan, an insurance contract or, in certain circumstances employee welfare mutual insurance company. In-house pensions are now prohibited. This move to qualified plans was originally to have been completed last year, but recent legislation postponed the deadline for companies to comply until January 2001. Such plans may be defined contribution, defined benefit or a hybrid of the two, although there is an increasing sentiment for the former.
All pension funds are subject to the supervision and inspection of the Dirección General de Seguros (DGS), part of the ministry of finance, both at their inception (previous authorisation from the DGS is needed) and during their development. The financial and actuarial system of the plans have to be revised by an actuary and checked at least every three years.
The contributions made by the promoter are irrevocable. Such contributions, together with those, if any, made by the participant, plus the net returns obtained, constitute vested rights of the participant, regardless of whether or not his or her labour relationship with the employer remains in place. Participants whose employment relationship is terminated are titleholders to the funds constituted and are entitled to transfer them to a different pension plan without a tax penalty.
Employment plans are generally financed by the plan’s promoter, although it is not unusual for the participants themselves to be allowed or obliged to make contributions. Both promoters’ and participants’ contributions must be transferred to a pension fund managed by a pension fund management entity with the assistance of a deposit-taking entity under the control of a supervisory commission. The supervisory commission is made up of representatives of the promoter, beneficiaries and participants, with the representatives of the latter making up the majority. This last requirement has been criticised as limiting the flexibility of the investment strategy.
The annual contributions to a pension plan for each participant made by the promoter and the participant together may under no circumstances exceed Pta1.1m (e6,611). A recent decree allows participants aged over 53 to contribute gradually more than Pta1.1m up to Pta2.2m when they are 65 or over.
With the funds externalised, the companies' responsibilities are limited to including all their employees with pension rights in the scheme, and making the relevant contributions. Companies that do not have pension commitments channelled through a pension plan or group insurance policy have until January 2001 to comply with the requirements of the new legislation.
The funds may be managed by designated management companies or insurance companies authorised to operate in life insurance area, whenever they have minimum required financial reserves and without having to set up a management company. Competition has been intense, although the consolidation of Spain's financial sector is a limiting factor on choice.
Registered management companies must have a stated capital of at least Pta100m invested in financial assets dealt in organised markets, recognised and open to the public, such as properties, securities or treasury. The reserves will be increased by 1% of the total assets surplus of the fund or funds managed over Pta1,000m.
In comparison with other European countries, Spanish law provides, in general, a liberal framework for pension funds. There are no restrictions on equities or foreign investments, though there are certain limits.
The move to externalise pension commitments has led to a dramatic increase in assets under management . According to the latest figures from Inverco, the Spanish association for collective investments and pensions, managed pension funds now stand at e31bn, up from e12.6bn in 1995. Exposure to foreign bonds and equities have increased, with a significant move to equity investment following the negative performance of bonds last year.
Although Spain is close to the bottom of the European league in terms of pension funds as a percentage of stock market capitalisation (9%) and of GDP (5%), there is now some momentum behind the development of private pensions and a growing awareness of funds as a suitable means of diversification.