Spain currently has one of the most generous state pension schemes in Europe, and in common with its neighbours, the long-term sustainability of the scheme is under threat. Recent years have seen reform of the system, but much work remains to be done. The process is slow however, mainly due to the policy of requiring a consensus of government, opposition and the unions under the recently-renewed Toledo Pact, the framework for pensions reform. To mitigate the problem, the government has taken steps to encourage long-term savings, and to promote the establishment of occupational pension schemes.
Over the past four years, long-term savings have grown steadily, thanks to tax reforms and updated investment legislation, closing the gap with EU averages. Assets held within long-term savings vehicles grew by 12% over 2003, reaching E362.3bn as at the end of the year. Some 54% of these assets were held within mutual funds, with 30% invested in life insurance contracts and 15% within personal pension plans. Despite this growth, investors continue to be relatively risk-averse, with 42% of household savings invested in short-term assets such as currency and deposits at the end of 2002.
Following successful lobbying by the insurance industry, the 2003 tax reform introduced a new pensions product. The Plan de Previsión Asegurado (PPA) is an insurance contract for retirement saving, and shares the same favourable tax treatment enjoyed by personal pension plans, although it must include an investment guarantee. PPAs have been slow to get off the ground however, and insurers are now pushing for legislation to allow the PPA to fund occupational schemes.
This comes on the back of the recent move from book-reserving to external funding of occupational schemes, under which some E17bn of pension funds were externalised. The vehicles allowed for external funding are group insurance arrangements and tax-approved pension plans. The latter offer tax advantages relative to the former but require a level of employee participation in the running of the scheme that has been seen as unacceptable by many employers. This has led many companies either to opt for insurance arrangements where they can retain more control and flexibility, or to change from defined benefit to defined contribution plans.
Measures to encourage retirement planning underline the great potential for further development of the long-term savings and investment market in Spain. Individual and corporate pension schemes currently cover only around 16% of the population, leading to calls for the government to promote the development of occupational schemes, especially within small- and medium-sized businesses.
An important first step came recently when a defined contribution occupational scheme to cover state employees was announced. This covers over 500,000 civil servants, and is the largest occupational scheme in Spain. The scheme design is likely to represent a benchmark for occupational schemes, and the plan is seen as a strong green light from the government for the development of occupational provision. Many challenges remain however, and further changes to pension legislation will be needed to convince employers to follow the government’s example.
Dominic Clark is with Milliman and Partricia Tejero is with Morgan Consultancy, both in Madrid, part of the Miilliman Global Network