Spanish-funded pensions legislation has always been regarded only as a complement to the state first pillar pay-as-you go system, said Santiago Fernández Valbuena, chief executive of Fonditel, and added: “This has never been questioned.” He was speaking at the Annual European Asset Management Conference in Madrid last month, organised by Cadogan International.
“Funded pensions are seen as ‘add-ons or supplements’ – there just to enhance the quality of life,” Fernández Valbuena said. As the pension-to-final pay replacement ratio in Spain for average earners is 85 to 90%, not much is needed by way of funded pensions if these ratios continue into the future.
“Occupational plans, like the ones we manage at Fonditel, are very few, despite the fact that if you run down the lists, there are over 1,000 occupational plans in Spain. This is misleading as some of these are under E1m in assets and are set up for reasons other than providing pensions for old age.”
One plan had one third of one person as a participant, he noted. “There are three of these plans with less than a third of a person in them. As we don’t split people in three, it is just one person covered in the three plans.”
Occupational plans accounted for about 45% of funded pension assets in Spain – the rest being in individual defined contribution (DC) type plans, Fernández Valbuena said. “These have become popular because people are conscious about tax benefits, not because they are keen on pensions.”
The asset management industry in Spain is not a pensions management industry. “It is a very short term oriented, high turnover, bank dominated mutual fund management business.”
Pension fund mangement companies, such as Fonditel, must put up roughly 1% of the total value of the assets they manage as capital. “So if you run E1bn, you put up E10m of capital.” He pointed out that for DC plans, such as the ones Fonditel ran, it resulted in an awkward situation, since no explicit guarantees were made. “We run E4bn and we have E40m in capital, but we need that capital for nothing – my fixed assets are less than E2m. We give no guarantees about investment returns as an insurance company would.”
From an Italian perspective, Giovanni Palladino, president of Arca Vita International, said “a clear picture of the old Italian culture, dominated by ‘mamma-state’ and old fashioned socialist ideas” came from figures that showed that only 10.5% of private pension fund holders were under 30 years, while they made up 23% of the workforce. “This meant over 50% of young workers believe the mamma-state will have enough milk for their retirement.”
But, he was confident that “in a few years the ‘surgery’ on the Italian social security system would be over and we will have a very promising pension fund industry”. However, the tax reforms introduced this year, to take effect in 2001, were not enough to stimulate a growing number of workers to join pension funds. “Bolder measures are necessary, such as higher deductions, a lighter taxation of final benefits and above all, lower rates of state contributions, which take away 33% of workers’ salary.”
The state-run social security system in Germany has around 35m contibuting members and 21m pensioners. The volume of all assets of the system came to DM30bn, investment consultant Hans Karl Kandlbinder of Gräfiong near Munich told the conference. “This means around DM550 per member or DM1,500 per pensioner.”
He contrasted this to the position of the funds accumulated by the liberal, or free professions, such as doctors and dentists. “At the end of 1998, these had 557,000 members and 86,000 pensioners in the 73 funds, with total assets of DM108bn (E15.3bn).” This was equivalent to DM 190,00 per member. “The conclusion is almost unbelievable. Only 1% of the social security members in the instiutional funds possess about 3.5 times the asset volumes of the whole social security funds.”
In his view, some kind of third pillar pension legislation would come later this year or early next. The social security pay system would be given the opportunity and the obligation to start building up capital stock. “This will be tiny at the beginning, but growing”. Fennell Betson