PORTUGAL -- Tax incentives on employee contributions to defined contribution occupational pension schemes will be reintroduced.

A fiscal incentive for second pillar schemes of up to 25% of the total employee contribution to a maximum of €500 was scrapped at the end of 2004 due to pressures on the budget.

Fiscal strain is a major issue in Portugal, which has a budget deficit of 6.2% -- more than double the 3% limit required for membership of the euro.

However, the decision move has been reversed because of a realisation that government finances will not be adequate to fund the state pension system, according to BPI Asset Management portfolio manager Martim Guedes. “So the government will reintroduce the fiscal stimulus to increase the savings rate,” he said.

“This will be a great boost for the industry,” Guedes added.

The new stimulus is less generous than the one it replaces with a tax allowance of 20% of the total employee contribution, up to a maximum of €400 per year for employees up to the age of 35, a maximum of €350 for those between 35 and 50 and up to €300 for those over 50.

João Pina Pereira, head of private and institutional clients at ESAF, the fund management unit of Banco Espirito Santo in Lisbon, sounded hopeful: “Second pillar pension assets under management could increase by 25% if there was a proper incentive.”

The Association of Investment Funds, Pension Funds and Asset Managers (APFIPP), which has lobbied for the reintroduction of the tax break, was less enthusiastic. “The reintroduction of the benefit is important and needed but it must be complemented with other measures such as the education of savers,” said an APFIPP spokesman.