In 1995 a new law came into force in Spain amending extensively the Pension Funds and Pension Plan Regulatory law approved by the Spanish government in 1987. Under the new law and in an attempt to protect workers interests in the event of company insolvency, companies were required to implement existing or future pension commitments to their employees through an external pension fund, an insurance contract or an employee welfare mutual insurance company. Having externalised the funds, the companies have to include all their employees with pension rights in the scheme and pay appropriate contributions or, in the case of insurance policies, premiums. Consequently the new legislation prohibits pension commitments being covered by in-house pension funds or similar vehicles.
In November 1999, the Spanish government set the deadline for this process to be completed by January 2000, but pressures from employers and unions forced the government to postpone it for a further two years. Some believe that this new deadline will translate into companies’ relaxing and that not new pension schemes will be created in the next couple of years.
During last year most companies did very little to externalise their pension commitments. The reason behind has not been the lack of interest from employers in facing these issues but a too complicated legal framework that has made things much more difficult than the regulatory body, Direccion General de Seguros (DGS), had thought.
In February 2000 the DGS had received 20 externalisation projects for a total of Ptas100bn (e600m) assets affecting 25,000 employees. These figures are not that high if one takes into account that the amount total amount of pension reserves to be externalised amount to somewhere between Pta2trn–4trn.
Negotiations between employers and unions have slowed down the pace of the externalisation process. Some companies are still now trying now to decide which commitments have to be externalised and those who have done so are now trying to decide which external vehicle is going to be put in place.
The unions are playing a very important role in this story. They have the majority in the comisiones de control – boards of trustees – and also they have recently agreed with the Spanish government on lowering the inflation rate from 4% to 2% expecting concessions in other areas. In terms of pension arrangements important concessions have already been made, with the delay of the externalisation deadline being an obvious one.

The extra two years that the government has given to companies to externalise pension commitments are seen by the unions as their opportunity to change things and see their aspirations of a developed Spanish pension fund market and the creation of more employment system schemes come true, but the reality is that until the regulation is changed and the extremely high contributions to social security are reduced, the chances to see new pension funds being set up in the near future are still limited.
The unions are strongly promoting the establishment of pension funds as opposed to choosing an insurance vehicle because they bring for benefits for workers. “From a fiscal point of view in Spain it is better to set up a pension fund because, although there are still significant limits to the annual contributions that could be made into a pension fund, these are deductible when it comes to taxation,” says Alfredo Rey, senior consultant at Buck Heissmann in Madrid. “When pension plans cover all employees the law allows you to choose between a pension fund and an insurance policy vehicle but if it only affects certain groups of a company’s staff, employers cannot opt for a pension fund,” he says. By promoting the creation of pension funds, unions achieve their objective of covering all employees and offering better conditions for them. “When our clients want to externalise their pension reserves of all their employees we always recommend to use a pension fund vehicle not only because it benefits workers but also because brings fiscal advantages for employers as well,” says Rey. He explains how unions are playing a crucial role in the externalisation process which in some cases could be described as being “a bit radical” causing delays and sometimes even breaking up advanced negotiations.
“The old defined benefit plans, which were conceived as a complementary pension to social security benefits were becoming extremely expensive for companies so they had to move to defined contribution systems,” Rey notes. “The big issue is that employees have to agree to join these new plans because the law allows them to stay in the old ones if the wish to do so. To attract their workers into the new plans, employers have to make promises and concessions such as a comittment to try to achieve similar pension benefits to the old final salary coverage and so on.”
Although under the law financial institutions do not have the obligation to externalise their pension reserves, the most important and large externalisations have come from the financial sector.
In 1999 and after long negotiations with the unions, Caja Madrid finally reached an agreement to externalise its pension commitments, creating the first employment system pension fund of the financial sector using a defined contribution system. The agreement established that the contributions to the pension funds will be the same for all employees, not only for those working for the ‘caja’ but also for all the staff employed by other institutions within the Caja Madrid group, regardless when they joined the company.
The pension fund had an initial size of around Ptas50bn to covered past services of around 10,000 active employees, to which it would be added annual contributions of 7% of fixed salary and 3% of variable earnings. For those over 50, the group will make more generous contribution of 8% , which will go up to 9% for employees over 55.
Apart from the external fund, Caja Madrid will count with a further Pta19.4bn to cover passive workers making a total amount dedicated to employee pensions of around Pta70bn. At the time the agreement was signed, Spanish unions with representation in the comision de control defined it as being very positive.
La Caixa, the third largest financial institution in Spain, agreed the externalisation of its pension reserves last summer, creating an external pension fund with Ptas 259bn assets, for its 17,000 employees. The size of this fund puts it in second position in the Spanish market after Telefonica. The assets will be managed by VidaCaixa and the custodian institution will be La Caixa itself. La Caixa will contribute with 7.5% of pensionable salary amounting to Pta7bn a year. Previous to that, La Caixa had a insurance contract with its subsidiary Rentcaixa.
Most recently, Banco Bilbao Vizcaya Argentaria (BBVA), also reached an agreement to externalise the pension reserves of those employees coming from the former BBV, representing around 21,000 workers. “The new plan is a total move from a defined benefit system to defined contribution,” says Luis Buey, actuary consultant at Madrid-based BBVA Consultores de Pensiones, wholly-owned by the BBVA group. “We agreed with the unions on the externalisation of 100% of the pension commitments related to past services and on an annual contribution of 6% of the pensionable salary of the BBV employees.” Those working for Argentaria before the merger between the two financial institutions already had their own pension schemes and achieving a greater balanced of pension arrangements between ones and the others it’s not part of the merged group’s plans in the near future. “There are a lot of differences in salaries and salary composition between the two and I don’t think will achieve a greater co-ordination in the near future. You have also take into account that Argentaria is an conglomerate of different groups and currently has 17 different pension schemes in place, ” Buey says.
During the negotiations to establish the BBV pension fund, the bank started offering to cover 90% of past services but the unions asked for 100%. “Also the bank had to agree on establishing a 6% contribution to the plan for employees which clearly benefits those with lower salaries, instead of setting up different levels of contributions taking into account salaries and other factors,” he says.
The pension fund assets of the BBV scheme will be managed by the group’s two gestoras and considering current investment strategies among Spanish pension funds, the portfolio will be a conservative one. “You have to bear in mind that the comision de control is dominated by the unions who, especially taking into account last year’s negative returns, are very conservative when it comes to investment. Changing this approach is going to be difficult and it will take time,” Buey says.
The other big player in the Spanish market, Banco Santander Central Hispano (BSCH) has not yet agreed the externalisation of its pension reserves, and it seems that we will not see a signed agreement in the coming months. However, because BBVA has externalised their pension commitments, the unions want now to force BSCH and all the medium-size financial institutions, a very important sector within the Spanish market, to do the same. Recently, Comisiones Obreras (CCOO), the largest Spanish union with more than 800,000 members, made public their wish of creating a single pension fund for the small financial institutions operating in Spain. The fund would affect around 11,000 employees with approximated size of Ptas 40bn and would also make possible for the unions to carry out all negotiations at the same time, easing the process and increasing the chances of achieving more concessions from employers.
“I don’t think they will be able to do this,”says Buey. “The medium size banking sector belongs to different groups, many of which are multinationals, so externalising all their pension reserves in a single, centralised pension fund would be something extremely difficult to effect.”
At the end of last year Caixa Catalunya also signed an agreement to externalised pension reserves through a pension fund vehicle open to its 5,000 employees with assets of Pta60bn. The employment system pension fund will be a defined contribution scheme to which Caixa Catalunya will contribute 5.5% of the pensionable salary of each employee, with a minimum annual contribution of Pta180,000. The agreement also contemplates the possibility to maintain the current defined benefit system, using an adapted insurance contract for those employees wishing to do so. “The externalisation was agreed at the end of December last year and now we are undertaking all the information process with the employees so they can decide whether they want to subscribe to the new plan by the end of June or they rather remain members of the old defined benefit arrangement,” says Josep Maria Pon, deputy director at Caixa Catalunya Pensions, the group’s gestora, in Barcelona.
“The pension fund assets will be managed by ourselves but the investment strategies have not been set up as yet because we’ll have to take into account the age of the members and their average income,” Pon says. “It’ll be a mixed portfolio of equities and fixed income but the percentages have not yet been decided.”
Outside the financial sector, Spanish companies are progressing towards externalisation very slowly. It true, however, that the size and the difficulties of the externalisation process among institutions has attracted more attention and headlines than other transformation that have taken place within smaller companies. The DGS has not yet published figures on those Spanish companies which have chosen a pension fund vehicle to externalise their pension reserves in 2000 and information on up to which extent negotiations and agreements have been completed are still very vague.
But gestoras, consultants and in general everyone linked to the pensions industry have been following with great interest the developments with the big names of the Spanish industry.

Electricity company Endesa, which represents around 45% of the Spanish electricity industry and has an important presence in the telecommunications field, is now planing to externalise Pta400bn representing the pension reserves of most deferred members an pre-retirees of the group, around 25,000 people, using insurance contracts and will transform the mutual covering its active members into a pension fund in the near future. Other major Spanish companies have also started the externalisation process setting up external insurance contracts to cover their employees. Last October, the Sociedad Estatal de Participaciones Industriales (SEPI) started its externalisation plan through three insurance contracts to cover employees working for three of its companies. In January Renfe, the Spanish railways company, also signed a contract with Vitalicio Seguros, part of the Generali group, to externalise the pension reserves of its 40,000 passive members accounting for around Pta44bn. Correos, the Spanish post office, it’s also negotiating the externalisation of its pension commitments and will without doubt be a very interesting case to follow during the coming months.
Although postponing the deadline for externalisations to be completed until 2002 will definitely make some companies to sit back an relax and despite complaints from actuaries who have seen their workload dramatically reduced, it is also true that many employers who had already started negotiations will try to complete as soon as possible. “In those cases where companies were in the process of setting up a pension fund before the deadline was postponed we encourage them to carry on negotiations and finalised when they have already started,” says Rey. “But it’s true that in other cases, especially in those where employers were thinking about establishing an insurance contract, companies have decided to wait and see what happens in the following months.”