SPAIN - The Spanish government has paved the way for the country's pensions reserve fund to start investing some of its €40bn of assets in equities.

No official figure is given at this stage as to how much of the fund will be invested in equities.

At present, the entire capital of the Fondo de Reserva de la Securidad Social is held in government debt, with 55% in Spanish bonds, 17% each in German and French bonds and 11% in Dutch bonds.
The Council of Ministers approved a bill proposed by Jesús Caldera, minister for work and social affairs, which would allow a broader spread of investment. The bill still has to be passed by Spain's parliament before it becomes law.

"The bill takes account of the evolution of reserve funds in other countries in the last few years," the Ministry for Work and Social Affairs said in a statement.

Other reserve funds in Europe invest in equities as Finland's State Pension Fund has a 40% allocation and Ireland's National Pensions Reserve Fund invests 77% in shares.

The Ministry said the strong growth of the Fondo de Reserva had called for the reform, to give its management more flexibility to combine investment security with higher profitability, by means of risk diversification.

Octavio Granado, the secretary of state for social security, told a conference yesterday that the asset allocation for the fund would not be established within the law, but in the subsequent rules, to allow the flexibility to make future adjustments, according to Jose-Luis Masferrer, consultant at Buck Heissmann in Barcelona.

The geographical spread of the reserve fund's future equities allocation is still unclear. But, Masferrer believes diversification will be crucial.

He points out the reserve fund will be needed most when the former baby boomers reach retirement as, by that stage, GNP is unlikely to keep growing at current rates. This and other factors could well put pressure on domestic equities too, he says.

"So using professional procedures, a broad geographical diversification is necessary to obtain a reasonable long-term return with low volatility," suggests Masferrer.

The Ministry said government and the social agencies agree the planned law must control the investment principles as specified in regulatory development, and should follow the tendency in other countries towards diversification by allowing the inclusion of equities.

It should also maintain the current investment management model for fixed-income, and outsource the management of equity investments, while establishing limits which guarantee security and risk diversification.

The Ministry continued by stating the bill made it clear this change could never lead to any significant influence being exerted on a single entity through the fund, and it takes account of the principles of responsibility -- socially, economically and environmentally.