The start of the year in Portugal was marked by political uncertainties marked by the resignation of prime minister António Guterres following local election defeats. This, added to the disappointing performance in the financial markets and the unhealthy Portuguese economy, has resulted in a difficult period for the development of the pensions market.
The former government had taken an important step towards the reform of the country’s social security system by introducing a new law changing the previous final salary benefits to a career average system. After the general election held in March, the new goverment lead by social-democrat, José Manuel Durão Barroso, introduced new proposals based on a three tiered approach to social security. “Under the goverment’s proposal, those with low to medium wages will get social security benefits,” says Carlos Ravara, consultant at Watson Wyatt in Lisbon. “Those between the first and the second layers will be given the option of staying under the social security system or making contributions into private pensions. Those above the second layer will not have social security benefits and will have to go into private pension schemes.”
This law, that is currently being discussed in parliament, will no doubt have quite an impact on the development of complementary pensions in Portugal. It is still under development and very much depends on significant changes on the way the public system operates.
However, while waiting for these measures to come into force, the truth is that, at present, the interest among Portuguese corporations in setting up new schemes to provide employees with retirement benefits remains low. “This is mainly due to issues related to the underperformance in the financial markets and the Portuguese economy,” Ravara adds. “Disappointing performance in the equity market means that sponsoring companies do not find the idea of setting up a pension fund for their employees very attractive and prefer to remain under insurance contracts, even though they know that pension funds can provide better returns in the long term.
“As well as this, the Portuguese economy itself has not been in very good shape and companies are reducing their budgets with employee benefits being one of the areas employers are cutting costs.”
Because of this, the creation of new pension funds has been postponed, thus affecting the asset management industry as a whole. At insurance firm Vitoria in Lisbon – part the insurer group ERGO – financial manager Francisco Campilho shares this view. “In the past we have had requests from clients wanting to move from their insurance contracts into pension funds. This led us to consider establishing a pension fund company, separated from our insurance business, to satisfy the demand,” Campilho says. “But we have decided to postpone our plans for the time being because during the last year we have seen this demand for creating new pension funds decreasing. Months ago, clients wanted to move away from the guarantee rate structure of insurance contracts, but today, after what they have seen in the market, they are quite happy to stay where they are.”
At asset management firm Futuro, general manager Jose Mendinhos comments: “With poor investment returns, sponsoring companies are finding it difficult to match their assets and liabilities. Short term accountancy requirements makes keeping a long-term oriented investment strategy quite a difficult task.
“People expected a recovery of the financial markets during 2002, but in fact this year will end up being another bad year. So we have seen some moves away from equities into bonds and cash,” Mendinhos says. “This has been a good year for bonds and we are happy we are following this investment approach. However, the near future is full of uncertainties. We are concerned about America in the Middle East, about the consequences of a war against Iraq, and so on, and we are trying to protect ourselves as much as we can.”
So where investors are moving into safer positions, alternative strategies are also being discussed. But, so far, the presence of alternative asset classes in institutional portfolios is still very small. “It’s is only a question of timing,” Mendinhos adds. “We were about to start using hedge funds but in the end we decided not to do so. And I think it was a very good decision to wait because we have achieved better returns investing in bonds.”
On the same lines, property investment are also being looked at. “Investors are starting to consider having more exposure to real estate investments because they have compared the good performance that property funds have had in the recent past,” Vitoria Campilho says. “However, I don’t think the returns in property are going to continue being as good as they have been for the last couple of years.”
The market situation and the lack of new mandates coming into the market has meant that competition among asset managers is getting tougher. “There hasn’t been any important changes in terms of market share,” says Futuro’s Mendinhos. “The total volume of assets hasn’t changed much in the last year and everybody is fighting for the same money. At times like this, keeping our existing clients is our main priority.”
According to data from the Instituto de Seguros de Portugal (ISP) at the end of 2001, the total pensions assets under management in Portugal accounted for E14.7bn from the E13.7bn registered in 2002. Pensõesgere continues being the country’s largest pension manager with E3.6bn under management at the end of last year, followed by Previsão with E2.7bn and CGD Pensões with E2.2bn. Futuro was in sixth position with E929m under management.

Regarding foreign presence in the market, some international houses have managed to gain business during the last few years, especially on the third-pillar individual pensions where the move towards open architecture and white labelling has helped international houses to attract money from Portuguese investors. “Many international houses are selling their funds to local distributors and this is definitely a growing trend. On the occupational pension market, foreign asset managers continue visiting potential clients but I am not sure whether this is being translated into new business for them,” says Watson Wyatt’s Ravara.
At Schroders in Lisbon, managing director Leonardo Mathias says: “In relation to the role that foreign names are playing in the Portuguese institutional market, most of them have been around for a while, whether they are based in Lisbon or abroad.” He adds: “We strongly believe that the only way for international houses to be sucessful in this market is by having a local team that undertand legal, fiscal and operational issues in place here. You cannot enter the market trying to push a product and this is something that many managers are doing. Our approach is to identify the righ solutions for our Portuguese clients and not trying to sell strategies that do not fit with this market’s requirements.”
Interest among international asset managers in the Portuguese market has also grown aftet the E4bn state-owned reserve fund, FEFSS, announced its plans to outsource a proportion of its assets to external managers. Changes in the government have meant that nothing has yet been materialised, but there is still expectation in the market about the decisions that the authorities could take in the near future. The fund, that in the past was critisied for following a too conservative approach to investment closed 2001 with positive returns of 3%, so the goverment might wait some time until the market recovers before taking further decisions in the future strategy of the fund.
For the months to come, the developments related to the FEFSS will definately be discussed among professionals in the industry who will also be focused on new investment rules affecting pension fund investment that could be introduced soon. The rules will include a more flexible approach to equity and foreign investment.
The expectations for growth in terms of assets during next year are not too high especially in the occupational system. “I don’t see growth in the near future on the corporate pensions arena and we don’t expect major developments in terms of creation of new pension funds. However, there is significant potential in the third pillar individual pensions because people will start saving more than they have done in the past,” he says.
Although changes in the social security system are already under way, current discussions regarding the reform of the labour market could also affect the final shape that the system will take.
The new government now has the difficult task of finding the right way to combine the reduction in social security benefits with the flexibility in the market so that it doesn’t cause major disagreements among the social partners.

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