Spanish firms prepare themselves for a fully funded future, says INVERCO
The Spanish constitution makes a public social security system obligatory and also allows supplementary pension schemes. The ‘Toledo agreement’ is a declaration of principles with 15 recommendations to guarantee this public pension system in the future. In 1997, the government reached an agreement with the two main trade unions, containing specific rules for the development of the ‘Toledo agreement’, which became law. The Law on pension funds was regulated for the first time in Spain in 1987, a supplementary funded system, through pension fund instruments.
These instruments are non-discriminatory, fully funded and without attachment of the consolidated rights. Annual contributions may not exceed Pta1.1m (e 6,611).
There are three main types of pension plans:
p employment pension plans;
p association pension plans:
p individualsystem pension plans: where
These plans can either be defined contribution, defined benefit or hybrid.
Spanish law provides, in general, an unrestricted framework for pension fund investment. There are no real restrictions on equities or foreign investment. Pension funds have some maximum investment limits, however. They can invest no more than 5% of their assets in securities issued or guaranteed by the same entity and no more than 10% of their assets can be invested in the sum of the securities issued or guaranteed by the same entity, plus the credits granted or guaranteed by it. No more than 10% can be invested in the sum of the securities issued or guaranteed by entities belonging to the same group, plus the credits granted or guaranteed by them. For securities issued or guaranteed by the state, autonomous communities and international organisations of which Spain is a member, the above-mentioned limits do not apply.
There are also limits by types of assets and markets. Funds have to invest a minimum of 90% of their assets in: financial securities dealt in on a regulated market that operates regularly and is recognised and open to the public, or at least open to financial entities (mortgage market, Spanish AIAF market); banking deposits (with not more than 15% of total assets); credits with mortgage guarantee, and in property.
Pension funds are subject to the supervision and inspection of the Dirección General de Seguros (DGS), part of the Spanish ministry of finance. This applies both at their creation (previous authorisation from the DGS is needed) and during the development of their activity (they have to send it their annual report and can be inspected by the DGS). The financial and actuarial systems of the plans have to be devised by an actuary and revised at least every three years.
Gestoras are companies whose sole function is to manage pension funds, but funds can also be managed by insurance companies authorised to operate in the life insurance area, if they have the minimum required financial reserves and without having to set up a gestora.
The manager’s functions are the fund’s book-keeping, determining the pension plan’s asset allocation and controlling the depositary of the fund. Furthermore, if the fund’s supervisory commission so decides, it can select the investments to be made by the fund and order the depositary to buy and sell assets. Any deposit-taking financial entity domiciled in Spain can be the depositary.
The supervisory commission (SC), supervises the functioning of each pension plan. The SC’s functions are to supervise the application of the plan’s rules; select the actuary/actuaries who must certify the situation of the plan; represent the interests of the participants to the management company and approve the financial statements of the fund, presented by the management company.
The SC is composed of representatives of the promoter(s), participants and beneficiaries, with the total guarantee of all interests maintaining the absolute majority of participants’ representation. However, the adoption of qualified majority agreements is permitted, whenever it is specified in the plan.
Contributions to pension plans made by employers on behalf of their employees are deductible expenses for corporate income tax purposes in the year in which they are paid. For employees, there is a reduction in the individual income tax taxable base for contributions made by both participants as well as by their promoters. The limit of this deduction is the lower of Pta1.1m a year or 20% of the sum of the net salary income and income from business and professional activities received individually in the year.
A draft decree, published during 1999, would make it possible for participants aged 53 or more to contribute gradually larger amounts, up to Pta2.2m when they are 65 years or over.
The benefits received by pension plan beneficiaries (regardless of whether or not the beneficiaries are also participants) must be included in the beneficiaries' taxable base for personal income tax purposes as regular salary income (if received in the form of annuities) or as regular salary income but with 40% tax free (if received in the form of lump sum benefits). These benefits are in both cases subject to personal income tax withholdings.
The pension plan participant is the owner of the funds constituted. Therefore, although such funds are frozen until the benefits are received, it is possible to transfer consolidated rights from one plan to another, without paying any taxes.
In any case, consolidated rights will be integrated in the plan or plans proposed by the participant. Since January 1 1998, the vested rights can be received in the cases of serious ill or long-lasting unemployment.
The Private Insurance Law has significantly amended the Pension Funds and Pension Plan Regulatory Law. Companies are now obliged to instrument existing or future pension commitments to their em-ployees in group insurance policies, pension plans or through an employee welfare mutual insurance company.
The general principles of the new system are as follows:
p externalisation of pension funds;
p pension commitments must be instrumented through a pension plan, an insurance contract or, in certain circumstances, through an employee welfare mutual insurance company, which means that the ownership and management of the resources that companies have to assign to cover their pension commitments will be transferred in all cases;
p prohibition of in-house pension funds.
The new law prohibits pension commitments to be covered by in-house funds or similar instruments that enable employers to retain the ownership of the allocated resources. The law's transitory provisions exclude credit entities, insurance companies and brokers from this prohibition.
Having externalised the funds, responsibilities of the companies are confined to including all their employees with pension rights in the scheme and to paying the appropriate contributions or, in the case of insurance policies, premiums. Consequently, companies are absolved of any liability not provided for in the insurance policy or pension plan arranged.
All companies (except credit entities, insurance companies and securities companies and brokers) must implement existing or future pension commitments to their employees in employment system pension plans and/or group insurance policies.
Entities which had pension commitments which were not implemented through a pension plan or a group life insurance policy, must adapt to comply with the requirements of new legislation before January 2001.

Asociación de Instituciones de Inversión Colectiva y Fondos de Pensiones
Association: INVERCO
Contact: Angel Martínez-Aldama
Chairman: Mariano Rabadán
Address: Príncipe de Vergara, 43
Madrid, Spain
Telephone: +34-91-431 47 35
Facsimile: +34-91-578 14 69
Email: inverco@tsai.es
Date formed: 979
Number of members: 558

Spain
Population: 40m
GDP: Pta83trn (E498.8m)
Funded retirement assets: Pta4.7trn (E28.3m)

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