Three years on from the original declaration that domestic companies and multinationals with offices in Spain had to externalise their pensions assets by law, the Spanish government has finally released the rules and guidelines which enable the schemes to be put in place. Now the long-awaited regulations have arriv-ed, companies have a grand total of 11 months to restructure their entire employee benefits provision. The May deadline as a result has become synonymous with panic.
Since the original law -Ley de Ordenación y Supervisión del Seguro Privado - was passed in November 1995 which essentially outlawed the book reserve system, companies have been, not surprisingly, slow in their efforts in putting together a funded scheme. The deadline was reaffirmed in De-cember last year, no doubt intended to stir up some public reaction, and to kick companies into gear, but little has been seen since then.
Under the Spanish book reserve system individuals receive a pension of 60% of final average earnings over the last eight years of service, based on a minimum of 15 years of service with an additional 2% per year after that*. In the past year alone there has been a 25% growth in new participants and a 24% increase in pensions assets with 87% of pensioners actually receiving a final pension of 92% final salary.
Every member of the Spanish work force by law has to be in some form of pensions plan by next year. Individuals can choose between a tax qualified pension plan (QPP),a collective insurance policy or a mutual benefit society, with the option of splitting contributions between vehicles.
Current figures by William M Mercer estimate that company QPPs account for Pts1.5trn ($9.8bn) of total Spanish pension assets. Individual plans amount to more than Pts2.5trn. The Spanish mutual fund industry as a result, already valued at around $180bn, is bracing itself for a flood of new money from individuals opting out of the company scheme for individual plans, where they have more control over their investments.
Many providers suspect employees are likely to go the personal pension route, either opting out of the company scheme altogether or splitting their maximum Pta1.1m annual contribution between the two. The tax qualified plan in either case carries the main advantage for the employee that current assets which have been tax-deductible can be carried over to a tax qualified scheme. From a tax point of view, the qualified scheme is a better vehicle for both individual and company pensions," says Ana del Solar, senior consultant at Buck Consultants in Madrid.
QPP plans suffer a zero rate of company tax and withholding taxes can be recovered altogether. Fund management charges are also more than reasonable often reaching no more than 1% pa. But one of the main attractions for the employee who opts for a QPP is largely based on the returns which the fund manager - the gestora - has achieved over the past five years. In a survey of Spanish qualified pension funds carried out by Mercer, returns average at 11% per year. And according to figures relating to BBV Pensiones' corporate plans, the average return over one year on corporate pension plans has been 23.66%, over three years 17.83% and over five years 14.67%. The top 10 gestoras in Spain currently run approximately 80% of the pensions market and on first glance look to be the likely recipient of the explosion in assets over the next year, be it through company schemes or personal plans offered through their vast distribution networks.
But according to Mercer, it has been the insurance companies to date who have been bullish in seizing pensions assets from those few companies who have since set up funded plans, as "many companies in Spain have been reluctant to set up qualified pension plans," says Henry Karston, head of pensions at Mercer in Madrid at a recent conference.
The benefits of a non-QPP plan for an employer is that it avoids the pensions committee requirement. With a non-qualified scheme the employer has more overall control and can avoid the conflict of ideas which can manifest themselves, where committee member have different agendas. In the draft rules set out for a non-QPP, the employer decides which insurance company will run the scheme whereas in QPPs, the first selection is a combination of employer decision in accordance with the plan committee which may be majority employees, but then any changes to the fund manager from there is decided by the committee taking the decisions out of the em-ployer's hands. However future regulations are expected concerning the make up of committe members. It is anticipated that a QPP which chose the defined benefit route would have an employer-ruled controlling committee and those who opted for defined contribution would have an employee-dominated committee.
It has been suggested that the very existence of control committees, have served as one of the single most factors in delaying the Spanish government from pushing forward the regulations since the law was first introduced three years ago. In essence the pension reforms go against the Spanish trade union's interest, who currently sustain powerful positions on the control committees of Spanish schemes. Prior to the regulations it was in doubt whether the government was "strong enough to take this reform," says Pablo Plaza, marketing and business development director at William M Mercer in Madrid. "There are other priorities I would say and pensions do not seem to be number one."
The arena surrounding the control commission has been one of the main subjects of debate since the law was introduced. The role which has traditionally been held by the trade unions is now expected to be amended by future regulation . "It is not reasonable when you the_company are holding the risk to rely on participants," pointed out Javier Sánchez-Moreno, head of Mercer's Spanish legal practice at the conference, which leads to the assumption that the eventual responsibility will be handed over to the company itself.
* Sedgwick Noble Lowndes: The Guide to Employee Benefits and Labour Law in Europe 1997/98"