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Top 1000 Pension Funds: Reform full steam ahead

The government plans to boost company pension plans while further reforming state pensions, writes Cécile Sourbes

Reforming pensions is a cornerstone of Spain’s strategy to reduce public deficit. With a shortfall of 10.6% of gross domestic product (GDP) – much higher than the 3% originally allowed for each member state by the European Commission – the country has no other option but to adapt quickly.

The government is now planning to take action on the second pillar. An OECD report in October 2011 emphasised that private pensions were a “major alternative” for diversifying sources of retirement financing. “Although Spain’s private pension system was set up over 20 years ago, it is one of the least developed in the OECD area, and its accumulated assets represent only about 7% of GDP, well below the 60% average in the rest of the OECD,” the report said.

The government was expected to present its own report to parliament this summer, detailing measures to further develop the second pension pillar, currently based on voluntary contributions from Spanish workers. The final outcome of this report remains unclear.

The original idea set out in the first draft of the report was to base the second pension pillar on the auto-enrolment system similar to the UK’s. Companies that have not yet established a pension plan for their employees would have been required to do so. However, the idea of compelling companies to offer pension schemes was not mentioned in the second draft.

According to industry experts, the government would then most likely “recommend” companies to establish pension plans for their employees but would no longer oblige them to do so. This move is due to the country’s current economic situation. With an unemployment rate of 27.2% in the first quarter of 2013, according to the government, employers have argued that they could not afford to set up company pension plans without economic recovery.

On the public pension side, the situation continues to deteriorate as high unemployment means only 17m workers are paying into the system. And contribution levels will certainly decrease further if the government fails to address unemployment.

In August 2011, José Luis Rodriguez Zapatero, prime minister at the time, sought to reform the first pillar. His measures aimed at extending the legal retirement age from 65 to 67 – currently one of the highest in the EU – and changing the methodology for calculation of pensions.

The government of Mariano Rajoy, elected in December 2011, launched a ‘call of last resort’ in September 2012. And for the first time, the government tapped into the social security reserve fund, which was launched in 2000 to finance the pensions shortfall. It took €3bn from the fund to cover “unspecified treasury needs” before withdrawing another €4bn two months later. The latest withdrawal took place in June this year when the government took €3.5bn.

However, the reserve fund’s resources are not inexhaustible. The fund, which accounted for €67bn in 2011, is now worth €59.3bn, according to the Spanish labour minister. In order to avoid a shortfall, the government will have no other option but to revive economic growth and tackle the pension situation to avoid indefinitely tapping into the fund.

To that end, Rajoy’s government has taken action to reform the first pillar. At the beginning of this year, the government launched a pension-steering committee to put forward reform scenarios that would ensure the balance of Spain’s public pension system in the coming decades.

In a report sent to parliament in June 2013, the group suggested the introduction of a ‘pension sustainability factor’, which would aim to replace the traditional inflation-linked pensions. Instead, benefit increases would be based on the balance of revenues and expenses of the social security system in prior years. As a result, if Spain failed to revive growth, pension incomes might be frozen or even decreased.

Beyond that, the report suggests taking into account life expectancy at retirement, so that those retiring earlier would receive a lower pension for a longer period. Although conceding that pensions will shrink in the long run as a proportion of average wages, the report argues that the average pension will grow in real terms.

But the government has not decided anything yet. The remaining months of 2013 will show whether or not Rajoy decides to stick to the measures proposed by both the pension-steering committee for the first pillar and the insurance authority for the second pillar.

 

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