With the establishment 12 years ago of its own pension fund management company, Fonditel Pensiones EGFP (Fonditel), telecoms group Telefónica claims to be the pioneer model of the new second pillar pensions industry in Spain. Fonditel’s mandate was to implement its own autonomous investment policy with the objective of ensuring maximum profitability as well as quality of asset management and pensions services.
Since then Fonditel’s rate of return has grown by 150% a year and its services have expanded to include 30 different complementary pensions plans for the various companies that comprise the group.
Fonditel is divided into three main operating divisions: investments, operations, and risk and internal controls.
All of Fonditel’s asset management and its associated administration are carried out internally. Indeed the only outsourcing the fund makes use of is performance attribution. Fonditel says this has become necessary since performance attribution is a growing and ever complex phenomenon.
The operations division regroups three key areas: pension fund management, assistance and systems. The pension fund management teams look after fund valuations and accounting, contributions, loans and payouts. The assistance team takes care of member and beneficiaries’ administration and the systems team is responsible for the group’s entire IT base.
Fonditel doesn’t use external consultants in the way this would be understood in the traditional sense but does liaise very closely with Telefónica’s own independent pensions management company, whose teams were recruited from the investment management industry for their knowledge and expertise.
The complementary schemes offered by Fonditel are the result of a collective bargaining agreement and they cover incapacity benefits as well as straightforward retirement provision. Members may also nominate their spouses or other beneficiaries to receive their pensions if they die.
Being complementary plans, member participation is optional. But members have to decide at the moment they join a participating Telefónica group company whether or not they want complementary provision. If they do, both they and their employer are committed to making contributions.
Fonditel says its flexible approach means aside from obligatory contributions, employees may top up their pensions with voluntary additional contributions and can transfer their pensions if they leave the company. Moreover, they may carry on making voluntary contributions to their complementary Fonditel plan before joining another scheme elsewhere.
Given the plans’ defined contribution structure, Fonditel cannot make any guarantees covering profitability or rate of payout. However, it has looked at contributions from an actuarial perspective to try to estimate the level of contributions needed to ensure a certain degree of profitability. Supplemental periodic contributions from both employee and employer will usually be needed to make this possible. But Fonditel is keen to point out that thus far the fund has easily exceeded its year-on-year profit targets, with a surplus of 60% reported at the end of 2002.
However members opt to take their money when they retire, Fonditel does at least guarantee a minimum rate of interest.

Asset liability modelling
As is normal for pension funds, Fonditel undertakes asset liability matching to determine the state of its liabilities. It does this each year and considers the demographic situation of its members’ industrial group as well as an overall historical review of members and beneficiaries. This is the best way, it believes, to be able to make assumptions about the future state of its pensions liabilities with respect to its investment and return objectives.

Investment strategy
The investments area is headed by a general manager who runs a team comprising four asset managers who are each responsible for one of the following asset classes: fixed income, derivatives, specific investments and Spanish equities. Fonditel says its investment committee meets on a daily basis to review the fund’s positions, both in terms of actual management and market evolution, and to take any action it may deem appropriate.
The investment policy calls for a balanced strategy between equities and bonds that allows for flexible tolerance margins of +/–20% depending on market conditions.

Risk management
The risks and internal controls division looks after risk control management for the fund’s investments. The teams basically prepare and produce weekly risk control analyses and reports using value-at-risk. But the actual risk management process is somewhat more complicated. Fonditel evaluates its funds daily at market prices according to VAR methodology. Furthermore, each plan has its volatility levels set according to its investments before these are actually made. Again this is measured on a daily basis, though adjusted weekly. Currently the level of VAR varies between 2% and 3.5% depending on the plan it relates to.
The risk control division reports directly to the chief executive officer and adjustments are made to the stipulated risk levels if and when necessary.

Highlights and achievements
Despite impressive growth , Fonditel has not been immune to the volatility and problems affecting financial markets in recent years, particularly with respect to the risk it has been exposed to. However, it believes by adding flexibility and new products it has provided the perfect solution that has led to results that far outweigh benchmarks.
Part of this solution was Telefónica introducing an early retirement programme that allowed it to avert risk and ease the employers’ monthly contributions burden. In addition, the fund managers encouraged Fonditel to design its pensions products so that they could be customised or adapted to individuals’ or group needs since the overall investment policy didn’t suit all Telefónica’s group companies equally.
Fonditel claims this is all the more impressive since it coincided with a fall in company profitability and the decline in the global stock markets.