SPAIN - Finance Minister Miguel Ángel Fernández Ordóñez has said the tax privileges for contributions to pension funds should be scrapped in favour of financial neutrality.

The comments come against the backdrop of Spain being referred to the European Court of Justice over pension taxation.

Fernández Ordóñez has criticised the regime that makes contributions to pension funds tax deductible as unjust. Fiscal perks are considered as currently the strongest incentive to save for pensions, but the finance minister said the government should not lay the rule over individuals’ savings.

The system especially benefits higher–earners, Fernández Ordóñez said in a keynote address at a conference, organised by the insurer Winterthur.

Tax neutrality, on the other hand, would help smooth over the “economic irrationality” he argued.

In its efforts to change the system, the government would not seek “radical changes”, the finance minister has also assured.

In July the European Commission referred Spain to the ECJ saying it was “because pension contributions paid to non-Spanish funds are not ax deductible while contributions paid to domestic funds are”.

Fernández Ordóñez ‘s declarations have fuelled speculation as to whether the government would bring forward such changes in the fiscal reform scheduled for next year.

Deputy prime minister María Teresa Fernández de la Vega, however, said today that the government had reached no decision and stressed the finance minister had only expressed his own opinions.

“I would like to reassure those who are in the process of joining a pension fund,” she said - arguing that next year’s pension reform would be “for the benefit of the citizens”.

Economy minister Pedro Solbes added it was not “a matter for today nor for tomorrow” but also said the Socialist Party had included the possible elimination of the tax perks in its election manifesto, in “a very clear fashion”.

The Spanish press has reported that in 2002 annual contributions to pension schemes for incomes up to 12,000 euros have increased 23% since 1996, while contributions for incomes up to 120,000 have gone up 96% in the same period.

Subscriptions to pension funds in 2002 have also doubled since 1996.

The International Monetary Fund has recently said that the country’s pension reform needs to be placed “upfront” on the policy agenda - as progress on pension reform has been “disappointingly slow”.