The year hasn’t brought dramatic changes to the Portuguese pension fund industry and the possibilities of growth for the near future still remain low.
At the end of June, the whole Portuguese pension fund market amounted to around e13bn, with only a few companies offering additional pension plan arrangements to their employees. Today around 60% of Portuguese pension funds belong to banks, with the remaining assets coming from the electricity and telecoms sectors and other ex-state owned companies, and only around 8% of the total industry’s assets coming from the private sector.
With a still too generous social security system, the growth of the pension fund industry in Portugal has been slow and only an adequate reform of the public system could increase the size of the market further. In some cases the social security retirement benefits represent 100% of the final salary, thus making very difficult to increase the interest from both employees and employer in the creation complementary funded pension schemes.
Discussions on the reform of the social security system started long time ago, but continuous disagreements among the different political parties have prevented the needed changes from going ahead.
Concerns about how the proposed pension directive by the European Commission could affect Portugal has also been in the news during the last months. If the directive is only to apply to those plans with more than 100 employees, the consequences for Portugal will be important, due to the fact that some 90% of the Portuguese labour force would be excluded on this basis.
Most funded pension plans are having a hard time planning how to deal with potential underfunding and accounting losses. According to report on pension fund investment performance by Lisbon-based consultants Watson Wyatt, the median performance of all segregated funds that are managed on a balanced basis was 0.3%, whereas the median for the last 12 months -2.9%.
This survey covers 178 pension funds - including segregated funds, pooled funds and third pillar personal savings plans - with asset of e12.bn, this is 92% of the total market value of all pension funds in Portugal. According to Watson Wyatt investment in Portuguese equities by segregated pension funds decreased from 10.4% of total assets in June last year to 8.2% 12 months later. On the other hand, the exposure to the euro equities zone increased during the same period from 13.9% to 15.9%.
Without doubt, the most important development in the Portuguese fund industry came earlier this summer with the announcement of the outsourcing of a proportion of the assets of the social security reserve fund. The fund is designed to plug the future hole in the country’s social security system, and has assets of e3bn which until now have been management entirely in house. The fund is to now outsource 20% of the total assets, and although no decisions have been made so far, the selection of managers is expected by the year end.
Another development has been the amendments to the 2001 government’s budget which included a significantly increase on capital gains. Although the amendments made by the government didn’t change this new capital gains tax regime much, the fiscal benefits for third pillar retirement and savings products - PPRs and PPAs- were increased significantly. The new fiscal rules will effectively remove the constraint that obliged PPRs to have 50% of their portfolio invested in Portuguese public debt. Occupational pensions, that already had tax exempt status, were not affected by the new budget.
Also, the social security minister, Paulo Pedroso, announced new calculation methods for the basis social security pension. The new formula will move from the current one, the best 10 of last 15 salaries, to a full career average pension, thus reducing considerably the benefits payable.
These reforms show a political will to improve provision, and the months to come could see further steps forward.