The European Commission is concerned about the lack of political progress on making the pension system sustainable
• DC pension funds can pay pensions directly, signalling a move away from lifetime annuities
• Early retirement rules amended to protect long careers and repair early market entries
• Deeper political consensus needed to put in place a strategy to secure the long-term sustainability of the system
In October 2017, a decree-law that defined new rules for Portugal’s insurance companies, pension funds and pension fund managers, was approved.
Under the previous regulatory framework, members of defined contribution (DC) schemes had to use their pension pot to purchase a lifetime annuity from an insurance company on retirement. The new regulation brings greater flexibility to the sector, allowing DC pension funds to pay pensions directly to members.
The move is expected to have a positive impact on the future growth of Portugal’s still underdeveloped complementary pensions sector. The new legislation will give beneficiaries freedom to decide on the timing and structure of the pension benefits they will receive in old-age.
The precise terms under which DC benefit payments might be processed is now the responsibility of Portugal’s insurance and pension funds supervisory authority, the Autoridade de Supervisão de Seguros e Fundos de Pensões (ASF).
In April, the ASF launched a consultation on proposals intended to define the procedures, calculation rules, and the different payment options to be made available to members.
The proposals also covered the importance of effective communication from pension fund providers to pension members, making sure accurate and timely information is shared in relation to the value and evolution of individual accounts and investment updates. The consultation has been completed and a decision on the final terms to be adopted is expected this year.
The sector has welcomed the change.
In the past it has raised concerns about the negative impact that expensive annuities were having on pension savers’ income on retirement.
However, it has been emphasised that the right communication channels need to be put in place. They should prevent scheme members from opting for an initial pension that is too high and therefore risking running out of money during retirement.
More flexibility when accessing retirement benefits could result in a boost for DC pensions, a sector that has been growing steadily over the past few years but remains small, both in terms of assets under management and number of participants.
According to the ASF, the size of the Portuguese complementary pensions market, including DC and defined benefit (DB) pension schemes, was €19.7bn at the end of 2017, with growth of 6.6% from 2016.
However, out of a labour force of five million people there were only 330,000 participants in the complementary pension sector. The number of new pension funds being launched is small and often related to multinational companies operating in Portugal, which want to offer employees similar benefits to elsewhere across Europe.
According to ASF data there were only five more pension funds at the end of 2017 than there were in 2016.
Most of the population still relies exclusively on the first pillar pension system. The Portuguese state pension system pays retirement pensions under two different schemes: a statutory pay-as-you-go pension scheme, and a non-contributory regime subject to means testing.
Over the last few years, the system has been reformed several times to improve its long-term sustainability. The 2007 reform introduced a sustainability factor in the pension calculation formula, adjusting pension payments to the increment in average life expectancy. The sustainability factor was redesigned in 2013, changing the reference year of the average life expectancy at 65 from 2006 to 2000.
The normal age to access a retirement pension has increased steadily, standing at 66 years and three months in 2017 – it will be 66 years and five months in 2019. Last year, among other measures affecting state pensions, new legislation came into force amending early retirement rules to allow individuals with 48 years of contributions – or 46 years if they began contributory employment at the age 14 or younger – to receive full benefits as early as age 60.
Also, an extraordinary rise was agreed for those receiving pensions below or equal to one and a half times the social support index, or €632 per month.
Improving communication has also been a priority for the department of social security. A new online pension tool was launched this year, providing an estimated value of the state pension on retirement, based on contributions made to the system and planned retirement age. Those using the programme can make adjustments to see if there are any penalties, or bonuses, related to delaying retirement or changing the level of contributions.
Despite the progress made, the European Commission has warned that there is no clear strategy on how to create a sustainable pensions system.
In its 2018 Pension Adequacy report, the Commission said that the absence of such political consensus and strategic guidelines had resulted in the introduction of ad hoc reforms dictated by situational economic conditions. These included the suspension of early retirement between 2012 and 2015, and of the indexation of pensions between 2011 and 2015.
Some of the most recent reforms reflect the more benign economic environment as the Portuguese economy continues its path to recovery. The OECD projects that GDP growth will remain at about 2% in 2018 and 2019 as a result of past reforms, favourable external trade, and positive domestic demand. However, demographic trends and the lack of diversification of funding sources – the system is reliant on budgetary transfers – will continue to put pressure on the long-term sustainability of the state pension system.
Social security reserve fund goes from strength to strength
The Fundo de Estabilização Financeira da Segurança Social (FEFSS), Portugal’s social security reserve fund, was created in 1989 as a safety net that could be activated to pay pensions in the event of a shortfall in the social security system.
The fund has been growing gradually thanks to an annual share of social security contributions, returns on investment, and tax transfers – last year a percentage of the country’s real estate tax was transferred into the fund.
At the end of 2017, the fund had €15.7bn assets under management, two thirds of which were invested in Portuguese public debt.
In January, the government announced changes to the fund’s investment policy affecting investments in private debt, in line with a regulatory update by the European Central Bank.
Unlike in neighbouring Spain where the government has tapped into the country’s reserve fund several times to make pensions payments, Portugal’s social security fund has remained untouched.
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