Santiago Fernandez talks to John Lappin about the challenges of keeping Fonditel as an independent operation
Fonditel, Spain's largest company pension fund and the subject of recent speculation that it was to be bought by a Spanish bank, was never for sale according to its chief executive, Santiago Fernandez.
Speculation had arisen because of disagreements between the company which is 81% owned by Telefonica, the national telecoms company and its two union shareholders each of which own 9.5%.
According to Fernandez, who took over as chief executive in January this year, the banks' interest was prompted by the fact that if any of Spain's top five pension management companies had taken on Fonditel's assets it would have been firmly established as the market leader. Fonditel itself is currently in second place covering 65,000 employees, with assets in September of Ptas 390 bn ($2.6 bn) (11% of total private pension assets and 25% of company assets in Spain). The banks BBV and Argentaria, which manage funds for a number of companies, are number one and three respectively.
The disagreements at Fonditel centred on decision making structures employed by the fund, although Fernandez stresses that these did not include investment making-decisions.
"Because technically the board of trustees (which has 12 union representatives out of 17) is the one that appoints the management, I think that instead of selling a company we would have been selling a management contract," Fernandez adds.
However, he does not believe that any such award was likely. "It is safe to assume that we will come to an agreement on how to progress jointly. There have never been any negotiations on a sale with any of the banks," he adds.
Company pensions in Spain are still dominated by the banks who usually provide both the administration of the schemes and the bulk of the asset management. However Telefonica, notable for its size and for having set up its own administration and management company, looks set to break new ground under Fernandez' management.
"We are very proud to have kept Fonditel independent, meaning not belonging to any major banking group," he adds, while suggesting that initially funds with Fonditel's structure were not envisaged by the original legislators and that the banks, in a country where they dominate the financial sector, were sceptical about its chances of success.
Fernandez would also like to expand by offering services to employees of other Telefonica subsidiaries, of which there are 54, and to consider offering unit trusts to existing members although the Fonditel board of has expressed caution about these proposals.
The company is also considering the possibility of offering investment services in "a large or small way" to Telefonica employees in South America, where the parent company has made substantial investments.
However the main focus of Fernandez' ambitions is Spain where he aims to make Fonditel the "pension fund of reference for Spain".
One change that has been provisionally agreed by the trustees is the establishment of a ratio of 33% equities to 66% in bonds and a similar ratio between domestic and international assets.
Significantly under this agreement 'domestic' describes equity across the whole of Europe post EMU. Up to 15%, taken in proportion from the main asset classes will be devoted to other assets such as direct investment, property and derivatives.
Fernandez adds: "We will not get there in two months - that would mean prophesising what different markets will do - but we will set ourselves a rather brisk pace."
To this end he has appointed two new managers, one covering international equities and the other derivatives. They join a team of 21 of which 10 are focused on investment strategy.
The plan has already moved under his stewardship from just under 10% in domestic equities and 90% in Spanish bonds to 20% in equities of which 3.5% is international.
Long term, Fernandez says that asset allocation decisions will be retained while decisions on securities selection will probably be left to people who are more knowledgeable while employing a proper balance of passive and active management.
The fund came into being in 1992, prior to which Telefonica had run its own internal version of a pay-as-you-go social security system. The company did not contribute to the state system but instead paid its retired workers a very generous package of 100% of final salary linked to pay rises for the other workers.
The company set up the defined contribution plan under the 1987 law, with contributions of 6.7% for workers employed before 1992 and 4.7% for those employed afterwards.
"Those contributions are rather hefty at least by Spanish standards," says Fernandez.
Workers' contributions stand at 2.2%. On top of this, the company is also contributing funds over 20 years (from 1992) to make up the deficit arising from the PAYG plan based on amortisation tables calculated before the current plan was set up.
The average return since its inception has been 13.5% to 13.6% almost eight points above inflation with a very low risk profile but Fernandez stresses that this must change as investment in domestic bonds is proving increasingly unprofitable.
Hence the fund's move to equities. He does however have some problems with the current legislative and regulatory framework.
For one thing, the fund must retain capital of 1% of total funds under management. "The capital requirements are completely unnecessary. Our peers internationally require only 30% of our capitalisation and they look like they are running their businesses marvellously."
The second restriction, of some importance considering the plans for international investment, is the prohibition under the current legislative wording of the award of external mandates although Fernandez notes that the Directorate General for Insurance and Pension Plans is working on the issue and a draft has been circulated.
Action on this issue has also been promised by the government - although as yet no date has been set for the change. The change, as reported in December's IPE, would increase the autonomy of the controlling committees of pension funds.
Plans are also only permitted to have only one investment policy which prevents Fonditel tailoring different investment strategies to different age groups.
With the aim of changing certain aspects of the law, Fernandez has been involved in lobbying through Inverco (the Spanish funds association) but even here he has an agenda for change.
"I have become an active member of Inverco, lobbying for change but also looking for a neat separation within the organisation between pension funds and unit trusts," he says.
Fernandez believes that Fonditel by dint of its size - the second largest company fund is 40% of its size by assets - encounters many of these regulatory restrictions first.
He also believes that despite these restrictions Fonditel can show the same level of sophistication as funds in countries such as the UK while possessing the advantage of a defined contribution set up.
"We can reasonably envisage that current contributions will exceed current benefits up to 2008 to 2009 so this is a young plan by all standards. We need a different profile of investments taking on more risk," he says.
The plan does not as yet measure success according to a benchmark but purely on the basis of investment return while the trustees are still most concerned about volatility although Fernandez is seeking to change this attitude.
However despite significant legal and cultural obstacles, Fernandez believes that other challenges may prove more important.
"Spanish legislation is a major issue but it is not the main one." Citing EMU and the moves to increase employee mobility across the EU he adds: "The main issue facing pension funds is change in Europe."