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Impact Investing

IPE special report May 2018

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Overview of new regulatory framework

There have been a number of recent developments from a legal perspective relating to pension funds.

In respect of the implementation of the IORP European pensions directive, the Law 11/2006, 16 May 2006, published in the Spanish Official Journal on 17 May, implemented article 20 of the IORP directive relating to cross-border activity.

Although investment issues were implemented in February 2004, at the moment INVERCO is debating with DGSFP, the Spanish pension fund supervisor, about the possibility of enlarging the scope for investments.

Specifically, investment in collective investment schemes (funds of funds), private equity assets and non-harmonised collective investment schemes, will probably be accepted as eligible assets. The draft decree relating to this could be presented to a consultative panel before the end of the year, and the publication in the Official Journal is expected during the first quarter of 2007.

Royal-Decree Law 16/2005, which modifies the transitional regime of the composition of the Control Commission (equivalent to trustee boards) of occupational pension schemes, was approved last year. This regulation changed from equal representation of employees and sponsors (with weighted majorities on investment issues) to employees for defined contribution (DC) plans or to sponsors in the case of defined benefits (DB) schemes, to one of majority representation of employees for all types of schemes.

About the pay as you go (PAYG) system, the government debated and approved with social partners, both unions and employers, some specific amendments. Specifically, the issues refer to promoting later retirement, but it does not focus on parametric reforms, as other countries have already introduced. This agreement will be sent to parliament for approval.

Tax changes have been introduced as a result of two laws. First, Law 22/2005, of 8 November, was approved by parliament last year. This law incorporates into Spanish legislation provisions for equal tax deduction treatment for contributions made to an EU pension scheme on the same basis as applies to a Spanish pension scheme. This equal treatment comes after a European Court of Justice claim by the European Commission directed not only at Spain but also to eight other countries.

Second, at the beginning of November 2006 parliament approved the Personal Tax Income Law which will come into force 1 January 2007, following publication of the Official Journal. The main new elements related to pension schemes are the new tax limits on contributions. The previous law permitted contributions of up to 24,250, using age scale limits. The new law will establish this limit at 12,500 (flat limit) for those 50 years old and upwards. For those up to 52 years of age, the previous limit was E8,000, while the new law sets the limit at 10,000 for those up to 50 years old.

Moreover, the new law eliminates a 10% deduction under Corporate Tax Law, which was introduced five years ago, for companies in respect of contributions made to occupational pension schemes. Additionally, from next year onwards lump sum payments at retirement will not benefit from the 40% exemption. However, a more flexible approach will be introduced, as retirees under the PAYG system will be able to make contributions to pension schemes for their own
retirement and not for their survivors as the previous law provided.

Personal Income Tax Law also provides, in line with the previous one, that contributions made to second and third pillar pension schemes have the same tax treatment. Long-term insurance products in both the second and third pillar will from 2007 have the same tax treatment as pension schemes.

On pension fund governance, the government has proposed several rules with the objective of ensuring better internal control mechanisms, administrative organisation and best practice rules. In fact, the majority of these proposals are being followed by the Gestoras (pension fund management companies), because the proposals have been copied from UCITS management companies, most of which have the same promoter. For this reason, the new rules, which could be in place by spring next year, will not have a significant impact on these institutions.

Looking at statistics, the assets managed by second pillar pension funds at September 2006 amounted to29,257m, with an increase of 68% over the same period of the previous year. The number of members increased to 1,607,522, which represents 8% of the active population.

Contributed by Inverco, the Spanish Association for Pensions and Investment

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