Spain: Sustainability quest continues

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Several strategies are being considered to ensure the country’s statutory pension scheme remains affordable 

Key points

• Recommendations to strengthen Spain’s statutory pension system will be published this autumn.
• The social security reserve fund receives cash injections from the government’s general budget.
• Employers have suggested accelerating the transitional arrangements for implementing the rise in pension age to 67 by 2027.
• Another idea to strengthen the statutory pension system is to introduce notional individual accounts, similar to the Swedish model.

Earlier this year, after several months of deliberation, the parliamentary committee for the assessment of the Toledo Pact agreements finished its latest review of Spain’s pensions system.

The review, which takes place every few years, is an in-depth, long-term analysis of the statutory pensions structure. However, its recommendations to government, expected last July, will not be published until this month, at the earliest.

The committee’s main objective was to propose measures to protect against the potential bankruptcy of Spain’s social security system. In particular, the social security reserve fund – Fondo de Reserva de la Seguridad Social (FRSS) – has a virtually chronic shortfall and receives occasional financial injections from the government’s general budget to meet state pension payments.

The FRSS was set up in 2000 to invest social security surpluses in times of economic growth to fund future shortfalls in the state pension scheme. At its peak in 2011, its portfolio was worth nearly €70bn. Since then, however, the fund’s value has fallen substantially.

spain country facts

There are two particular crunch points every year – in July and December – because in those months Spanish pensioners receive an extra month’s payment. In July, the fund received a €10bn loan from the general budget. After provision of this loan, the FRSS portfolio now amounts to just €12bn.

The Toledo committee reviewed the basis of calculating the sustainability factor which adjusts the level of the state pension so it is affordable over the long term.

Changes in this calculation were introduced in 2013 and combine two formulae. There is an intergenerational equity factor based on an individual’s age, reducing future pensions according to increases in longevity and net inflows or outflows of the social security system, to take effect in 2019.

There is also an annual revaluation factor, which no longer uses inflation in the standard calculation for the amount of uplift. At present, there is a 0.25% minimum for annual increases, and a maximum of consumer price index (CPI) inflation plus 0.25% (the formula recommended by the International Monetary Fund). This came into force in 2014 and has, in practice, cut the monetary value of state pension increases.

“It has been heavily criticised because, with inflation at about 2%, an increase of only 0.25% would seriously impoverish pensioners,” says Rosa di Capua, a partner at Mercer Spain. “However, it is also clear that social security costs need to be reduced. One way to do this while avoiding pensioner poverty is to increase the level and quality of employment – the real issue is that workers are not paying in enough contributions.”

top 10 spanish pension funds

There have been suggestions about making some specific pension payments from the general budget instead of from the FRSS. These include the final pension bonus – intended to help companies hire more young employees and those with disabilities – and part of the minimum pension, to which an individual is entitled after paying 15 years of contributions. This latter payment would be equal to the minimum pension, less the pension actually earned.

A further proposal put to the committee was to pay widows’ and orphans’ pensions from the general budget instead of social security. However, Di Capua says: “The suggestion appears not to have been accepted because of fear that payments from the general budget could be subject to political influence.”

But the question of whether to split some pension payments between the FRSS and the general budget, which could be used for electoral advantage, is likely to be a hot topic for some time.

Meanwhile, employers have suggested accelerating the transitional arrangements for implementing the rise in pension age to 67 by 2027.

One idea is to complete the age rise before 2027. Another is to raise the age even higher. A further suggestion is to reduce the minimum pension after 15 years’ worth of contributions, and to extend the period taken into consideration for the calculation from 25 years to the individual’s entire working life.

To ensure the viability of the social security system, one mooted strategy is to introduce a model similar to the Swedish system of notional individual accounts. Each state pension contribution would be split into two parts: a payment to buy units in an investment fund, building up the individual’s state pension pot within an individual account; and a much smaller amount invested in a private pension.

The requirement for social security to send all employees over the age of 50 a letter telling them how much total pension, both statutory and private, they could expect was included in a bill in 2013 but never passed.

However, the top priority for politicians at present is how to maintain a sustainable public pension system. But there is no general agreement between the different political parties. 

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