Although the leading political parties agree they should revisit the Toledo pact that is the basic text of Spain’s pensions reform, they have yet to agree when. And pensions are just not on the current government’s agenda, writes George Coats

The governing socialists and the conservative opposition Popular Party are gearing up to make further parametric reforms to the state pension system. But reflecting the supposed Spanish proclivity to put things off until manaña, there appears to be no urgency in the move.

In mid-October prime minister José Luis Rodriguez Zapatero announced that a parliamentary committee would begin to consider a reform of the social security system.

“There is no date but they have agreed that they have to sit together,” says Luis Vadillo, senior consultant at Mercer in Madrid. “They have launched some messages into the market saying that all the interested parties have agreed changes must be made but there is no indication of what they intend to do. But both parties have their ideas and the good thing is that they are both convinced that they have to do something and that they have to do it together.”

Even this below-the-radar action represents a turnaround for the Zapatero government, which was elected in 2004 and re-elected in March this year. Its desultory approach is due to factors not of the government’s own devising - including a delayed baby-boom effect as a result of the Spanish Civil War’s suppression of the birth rate - that have postponed the fiscal impact of the demographic decline.

“The social security budget has an annual surplus of close to 1% of GDP,” says Diego Valero Carreras, president of Madrid-based consultancy Novaster. “This is due first to the development of the economy, which meant that salaries were higher, and second to an inflow of immigrants paying social security contributions, which in turn was due to the growth in Spain’s economy. But this is changing and according to projections the future looks horrible. Now pensions account for around 9% of GDP. In 40 years it is expected to be 15% to 16% of GDP. It is an important increase.”

There have been some moves to defuse the demographic time bomb. The first of Spain’s parametric reforms were agreed by all parliamentary parties and ratified by the trade unions in 1995 and enshrined in the Toledo pact.

“Over the last eight years the government did next to nothing, only minimum cosmetic changes to the system but nothing in-depth - not in the problems of the social security,” says Valero.

“The trade unions have called for a re-examination of the Toledo pact, and they have been backed by some politicians in Cataluña and the Basque Country,” notes Andrés Martín, senior consultant at Watson Wyatt in Madrid. “They did this because the long-term outlook of the social security system is not healthy. The maximum annual payment from the state pension is more than €32,000 and this is unsustainable. But no politician has emerged to take ownership of this issue and to say that in the long term we have to reduce future payments or increase contributions. And because no politician is willing to accept the responsibility to reform the social security system that is why it is taking so long to rerun the Toledo pact.”

“There is talk about changing the formula used to calculate the public pension,” says Martín. “Some years ago it was proportional to the last year’s salary up to a ceiling, now it is based on the last 15 years’ salary and they are discussing making it the whole career.” Of course, the more years used for the calculation the lower the pension, because normally people get a larger salary the longer they have been working.”

Elsewhere in Europe, governments introducing parametric reforms have combined them with the introduction of legislation and regulations to encourage the development of private provision. But not in Spain.

New regulations expanding the assets available to pension funds came into effect in January but were quickly overtaken by the market turbulence and have had little or no impact. And there are those who believe that the government’s measures have not gone far enough.

“In my opinion they should promote occupational pension plans,” says Martín. “But they are not doing anything.”

“There are no measures to develop occupational pension plans in Spain,” agrees Valero. “Some 20 years ago a pension law allowed companies to move away from book reserves and externalise pensions through either a pension plan or an insurance contract and after 15 years it was compulsory. At the same time there was a move from DB plans to DC plans. Since then no companies have set up new pension plans for employees. Large companies like banks and power utilities have had pension plans for many years, but small and medium companies have no pension plans and there are few possibilities to develop new plans. I don’t think there is a framework to develop new commitments for 80% of the companies in this country.”

And recent changes appear to have moved in the opposite direction. In 2006 the government set a common ceiling on the tax incentives given to private pension contributions. Previously, the upper limit was €24,000-25,000 a year but now the combined limit to second and third pillar funds is €10,000, rising to €12,500 for those older than 50.

“The motive was clearly ideological, and upheld by the current coverage of the social security, which is close to the 90% of the last salary,” says Valero. “But it is difficult to understand because the government knows it needs to change the first pillar, to develop the second pillar and perhaps to change the retirement age.”

“The fact is that people are not saving that amount,” says Vadillo. “The average annual contribution is below €1,000, and we need to change that. We think that the pensions market in Spain will grow but we think we need government reforms to do that.”