Cécile Sourbes interviews Angel Martínez-Aldama, director of the Spanish investment and pension fund association (INVERCO)

IPE: News last month that the province of Catalonia would require €5bn in credit from the Spanish government led to great concerns among investors. Could the Social Security Reserve Fund be one option to provide that?

Angel Martínez-Aldama:
This could be an option, but the government has not mentioned any move as yet, and the use of the Social Security Reserve Fund remains only a rumour at this stage. Therefore, I do not believe the fund will provide any financial support to Spanish indebted regions.

IPE: But the government was exploring the option of using the Social Security Reserve Fund to invest in regional public debt last year. Is this initiative still as topical as it was then?

AMA: To comply with its own investment policy, the Social Security Reserve Fund, which was launched in 2000 to finance Spanish pensions, currently invests 80% in Spanish national bonds and around 20% in bonds issued by other European governments such as France, Germany and the Netherlands. This investment policy has not been amended by its advisory committee, and to my knowledge, there is absolutely no intention to change it.

However, it is true some regional governors previously asked the central government to use the Social Security Reserve Fund to invest in regional public debt. The government has not acceded to that demand. Even if the central government decided to use the fund to invest in local debt, nothing would guarantee investors would regain confidence in the country's solvency.

The priority now is to wait and see whether the government manages to reduce its deficit and meet its EU-agreed target of 6.3% of its GDP in December this year. If the deficit target is not met, the government will then have no other option but to implement further reforms.

IPE: The government is currently in talks with pension funds, trade unions and other industry representatives with the view to modifying schemes' investment strategies. The proposal made by the government could allow local pension funds to value parts of their sovereign bond portfolios at book value instead of mark-to-market. What are your views on such proposal?

AMA: INVERCO is not in favour of these proposals. If approved, there would be a number of issues. Switching from a mark-to-market value to a book value method would mean that such a valuation would not reflect the real value of assets held by workers moving in and out of schemes. If sovereign debt were valued at amortised book value, members leaving a scheme would have notional capital gains, which does not exist in reality. This also means some members would end up subsidising each other.

The government's idea is to avoid volatility, especially taking into account the current speculation in the markets. But we have to bear in mind that pension funds' liabilities are long term, in contrast to short-term market movements.

Finally, using a mark-to-maturity valuation would not necessarily encourage Spanish pension funds to invest in local debt, since such measures would be applicable to any government bond within the European Economic Area (EEA). Spanish pension schemes could therefore be tempted to give priority to any sovereign debt outside of Spain.

IPE: Talking about Europe, you told IPE in October last year that the future of Greece in the euro-zone was questionable. A year later, what are your thoughts on the future of the euro-zone? And how should Spanish pension funds adapt to this uncertainty?

AMA: The recent move made by the European Central Bank, and the willingness of the Frankfurt-based institution to buy short-dated bonds in the secondary market - together with comments made by European member states and European institutions in recent months - is an extremely strong message to the market. The euro-zone will not fail. Therefore, it would seem that the confidence of investors and European representatives in the reforms undertaken by Greece is coming back on track.

Following those encouraging signs, Spanish pension funds have now decided to shift their investment strategies more towards short-term assets, especially government bonds.

However, this exposure to fixed income assets is not new. While their exposure to equities has never been higher than 30%, even during the bull market period between 2003 and 2007, their allocation to Spanish debt and euro-zone bonds has always been a priority. And this is not set to change.