Spain: Social security still rules
Ninety per cent of Spanish workers do not have access to a secondary pension fund, and are reliant on the first pillar social security pension. Nina Röhrbein looks at the measures taken by the Spanish government as it seeks to readdress this imbalance
For most Spanish people, the first pillar social security state pension is still the only means of providing them with a pension.
Less than 10% of employees - and only those employed by large Spanish companies or multi-nationals - have complimentary occupational pension plans, and 80% of Spain's employment is provided by small and medium companies, which do not have pension plans, according to Diego Valero Carreras, CEO and chairman of pension consultancy Novaster.
A social security pension in Spain currently means around 85% of final salary. But in the future this rate will be difficult to maintain, even though Spanish salaries remain lower than the EU average "Spain has a rapidly growing ageing population and therefore is likely to have a 60% dependency ratio in 40 years time," says Valero.
Spain's first pillar pension system is based on the Toledo agreement, which was agreed by all political parties and unions in 1995.
It is managed by a parliamentary commission. The latest one was set up in 2008 to analyse the future sustainability of the pay-as-you-go system and is currently working on the future of the social security law.
"Due to unemployment, contributions to social security are decreasing, making it more difficult to maintain the balance in social security," says Valero. "We have a reserve fund with close to €60bn assets but it is only there to cover shortfalls in cash."
Some meetings have taken place this year, which might lead to proposals for change, but it is unlikely that the commission will publish its recommendations any time soon. Some expect them as early as February, while others do not expect them until next summer. And as of today it is still unclear which measures could be proposed.
Among the topics, the commission has been discussing whether the widow's pension should be means-tested, universal or contributory and whether the minimum state pension should come from the state or be based on social contributions. "I spoke to the commission about notional defined contribution and the development of complimentary pension plans," says Valero. "But I am not confident about the success of my recommendations."
And after the introduction of the new GAAP accounting rules in 2008 and the ceiling on tax incentives in 2006, no new regulations concerning the second or third pillar are expected to be introduced in the short to mid term.
"Private pension plans used to be the best financial product in Spain in terms of tax treatment," says Valero. "But as pension plans did not develop at the speed the government hoped, it decided to cut the tax relief, especially as occupational and individual pension plans had two different ways of achieving the tax relief. As a result, less than a handful of occupational pension funds have sprung up over the last two years."
Nevertheless, pension fund trustees, promoters and the government have been analysing the need for change in the second and third pillar system.
"They have been discussing how to incentivise the third pillar as the second pillar is becoming less of an option due to falling contributions to occupational pension plans on the back of growing unemployment," says Andrés Martín, senior consultant at Watson Wyatt.
He believes that the government's focus in the future will be on the second and third pillar but does not expect any news on these until late 2010, just over a year ahead of Spain's next general elections in 2012.
"There is a lack of confidence in everything now - banks, pension funds, government - and the main worry is an unemployment rate of close to 18%," says Valero.
The regulatory response to the financial crisis has focused on supervising the valuation of the more illiquid assets, while at the same time pension fund management companies introduced more internal controls. Legislation established some investment limits - or diversification coefficients - in order to reduce the risks.
But 2008 also saw a new regulation come into force, which allows pension funds to invest in some fixed income structures and other special investment vehicles, which were previously restricted, according to Martín.
And the Spanish Investment and Pension Funds Association INVERCO has proposed several measures in order to introduce changes such as the removal of the double registration system (mercantile and supervision) for pension funds and schemes, and less stringent capital requirements for pension management companies. This is in addition to a reduction of taxes for benefits and more flexible rules for occupational pension scheme promotion by small and medium sized enterprises.