The discussions regarding the introduction of the European Pensions Directive have passed almost unnoticed by Portuguese fund managers.
Like those in Spain, large Portuguese corporations do not possess many subsidiaries across Europe and, in any case, the market for occupational pension funds is still very limited.
The very young pension fund market, which finished 2002 with negative investment returns of –3.3%, is more concerned with changes in local legislation and the much-debated social security reform than with the new Directive – although regulators know that any changes within Portugal will have to follow the same lines as those happening in other European countries.
Getting an opinion on the implications of the directive for their pension schemes from Portuguese pension fund managers proved difficult. The reason is not lack of interest regarding the new EU legislation but mainly the fact that they don’t expect any changes to happen in the near future.
“The directive does a great deal in helping multinationals operating pan-European pension funds but as Portugal lacks such corporations its effects will be reduced,” says Carlos Ravara, consultant at Watson Wyatt in Lisbon. “The way I see it the biggest challenge for pan-European pension funds is local tax legislation. If this is changed and Portugal has to change its current EET status or indeed any other structure, the local impact could be significant,” Ravara says.
Portugal is among the member states that have been warned by the European Commission about their different tax approaches to non-domestic pension. “If this warning results in changes to taxation then there could be widespread effects on our local market,” Ravara says.
On the investment side the directive has already impacted the market. As Ravara explains, most of the changes in investment regulation put forward at the end of last year do incorporate most of the Directive’s provisions. “Regarding this we are witnessing a fundamental shift from quantitative and prescriptive restrictions to qualitative guidelines,” he says.
The changes include a more flexible approach to investment, increasing the limits for investment in equities from 50% to 55%. No euro-denominated asset may now represent up to 30% of total pension assets, a significant increase from the previous 20%.
On the communication and reporting side, for segregated and pooled pension funds that finance collective membership plans, the new legislation says that financial assets must be valued at least monthly.
Apart from changes in the way pension funds can invest, 2002 also saw significant changes in the benefit calculations applied by social security, including the move away from a final salary average approach to a full career average salary structure, as well as the introduction of earnings caps for contributions that will reduce benefits for people under the age of 35.
“This move started when the last government changed the basic benefit formula. Then the new government introduced salary caps whereby those earning above the upper limit have to decide for themselves what to do with those monies that will not be diverted to social security.”
Although the full effect of the introduction of these measures will not impact the market significantly before the next five to 15 years – unless citizens and corporations start planning in advance – the truth is that every piece of regulation being put together at the moment very much follows the lines of what is happening across Europe.
For those involved in the reform process these changes are a major step forward in the making of the future pensions market for Portugal. The next step will be to see how changes in the first pillar would promote the growth of second-pillar occupational pensions that, taking into account the small size of the vast majority of Portuguese corporations, will be a big challenge. Only when this happens, through the creation of new corporate or sector pension schemes, will it be possible to measure the real impact of the Pensions Directive on the Portuguese market.
For the time being disappointing performance of pension funds has been translated into lack of interest among employers in setting up new schemes. They usually prefer to cover their employees under insurance contracts.
Whatever happens in the local market in the months to come, the new directive provides Portugal with a reference framework that will help it to adapt its pension fund market to European standards by adapting local structures and asset management practices similar to those in place in other European countries.