A year ago Spanish companies were working against the clock to meet the government’s deadline for externalising their pension reserves through a pension fund or an insurance contract before the end of the year. The industry, which has been quite since the first pension funds were created at the beginning of the last decade, expected the government to postpone this deadline since there was still too much work to be done. And the government accepted their arguments.
The new deadline for companies to finalise the externalisation of their pensions reserves was postponed for two further years to November 2002.
Some externalisation processes that were more advanced were finalised during the first quarter of this year, with a significant flow of assets into the still underdeveloped Spanish occupational pension system. But those companies that were still far from reaching an agreement at the end of 2000 stopped negotiations, and have not yet decided how and when they are going to externalise their pension reserves.
So, in general, this year has been a quiet one for the Spanish pension community. “Last year there was a lot of work and quite significant steps were taken,” says Diego Valero, managing director at Madrid-based consultancy firm Novaster. “It is true that some small and medium-size companies didn’t do much. Even some big corporations stopped negotiations once the deadline was postponed, and it seems everything will remain quiet until the new deadline of November 2002 gets closer.”
Everyone hopes that this deadline will be the final one and that employers and unions do everything they can to reach agreements successfully: “November 2002 will be the fourth deadline that we have had in the past few years and we do hope it’ll be the last one,” says Ángel Martínez-Aldama, director of research at Inverco, the Spanish association for pension and investment funds, in Madrid. “But there were good reasons behind the government’s decision to give companies two extra years.”
And, indeed, to understand why externalisation is taking so long, it is first necessary to understand the way employer-employee relationships work in Spain. The key to this issue is the collective agreements between employers and unions that establish the basis for labour conditions within Spanish corporations. These agreements include salary ranges, working hours and other topics and are in general biannual. Because many collective agreements expire at the end of this year, many companies and unions wanted to wait for the new negotiations to take place to discuss the externalisation of pension reserves under the same framework.
However, and even though we will see more externalisations during the months to come, it seems that in terms of figures and new assets under management, most of the work has been done. Most financial institutions have already externalised their reserves, despite the fact that the law establishes that it is not compulsory for them to do so, and most large companies, such as those in the electricity and telecommunications sectors, have done the same. According to data from Inverco, at June 2001 the occupational system in Spain had assets of e16.8bn, 31.8% more than 12 months earlier, covering just over half a million people.
“The important externalisations, those coming from the largest companies, have already been done,” says Martínez-Aldama. “In terms of new assets coming into the occupational systems this will be small. There are some large corporations still waiting to externalise but not many, and most of those corporations that haven’t externalised their reserves for passive workers will do it through an insurance vehicle.”
So if externalisation of companies’ reserves is not the solution to increasing the volume of assets in the occupational pension industry, what will be the key for the real development of this market in Spain? It seems that, whatever the answer, fiscal incentives for both employers and employees are the only way to promote the creation of new pension plans.
At this point it is important to highlight another key factor of the Spanish reality: the PYMES. These are the small and medium enterprises that represent a huge percentage of the country’s economy, where the future development of funded pension provision should be based. In the past few weeks the government has announced new measures to promote the creation of pension plans among this sector including a 10% tax deduction in contributions to pension plans that hopefully will be translated into more assets in complementary pensions.
“This is something that we proposed more than a year ago and we are glad it has come through,” says Martínez-Aldama. “This is a small business country and this measure is very important, because it is very difficult for employers to even consider establishing a pension fund when on the other hand the contributions to the social security are still very high.” He adds: “We will have to wait and see what happens during the first couple of months of 2002, but we hope this measure will help increase the amount of assets in the market.”
In terms of investment and asset management, the market continues to be a very concentrated one. Making inroads is difficult not only for foreign managers but also for domestic. The large Spanish pension gestoras, which – apart from Fonditel – are subsidiaries of the large financial institutions, control the majority of the assets (see page 30). Significant changes in market share are not expected in the future.
The fact that the big banks are shareholders of the major companies, offer them all types of financial services and, on top of that, manage their pension assets through their gestoras, might sound strange to most outsiders. But it is the general rule in Spain and investors seem to have accepted the system.
The Spanish pension gestoras not only manage pension fund assets but also are the representatives of the pension plans dealing with administrative tasks and helping in plan design. During the past decade the professionalisation of the gestoras has increased enormously and the big names have all the resources needed to provide the best asset management for the clients.
“Some of the gestoras operating in the market have the best human and technical resources to provide an excellent level of asset management,” says Jacint Tió, responsible for investment consulting at William M Mercer in Spain. “During the last few years the number of experts on equity analysis and management that the gestoras have recruited has been quite extraordinary.” He adds: “It is true that it is a very concentrated market because although there are around 70 gestoras operating in the market, the market share is controlled by the large ones, but they are good professionals.”
Inés Serrano, director of investment at Santander Central Hispano Gestión de Activos – part of the BSCH group – in Madrid, comments: “The market is concentrated but the Spanish gestoras are working very well. We have a very well-defined approach to investment and we can provide all the products our clients need, not only on the investment side but also on administration. It’s good for the industry to be diversified, with a whole range of different players, but for the time being the number of assets are too small and large players like ourselves dominate.”
The question now is if such concentration and domination of the Spanish financial giants is putting too much risk on investors’ shoulders.
“Unfortunately, the domination of the big financial institutions is a fact,” says Juan Marín, executive director at Invesco in Madrid. “The only way to solve this problem is not just by the externalisation of pension reserves but by the externalisation of risks. There should be some kind of legal requirement by which the asset manager for your pension fund could not be the same institution that is providing you with banking services and on top it also owns part of your company, but this is not the case.”
However, the legal structure allows gestoras to outsource the investment of 20% of their assets, thus giving a chance for small domestic and large international players to enter the market. But this is only in theory. In practice it does not happen very often.
“I am not sure about the reasons behind this, but they have to be related to the fact that the market is still very small and the gestoras do not feel the need to give mandates away,” Marín says.
David Burns, managing director at Schroders in Madrid, comments: “Some foreign houses see Spain and the Spanish asset managers as being not very sophisticated, and this is not the case. The large Spanish gestoras have very good investment products, not only for investing in the domestic market but also abroad.”
Burns adds: “But as the market develops there will be more opportunities for foreign managers like ourselves.” Schroders, which entered the market a few years ago by the retail route, has seen how the number of foreign asset managers coming into Spain has significantly increased in the past year or so.
He says: “For us, the future will be about collaborating with the Spanish gestoras by offering the products they might need. They are very demanding and they know what they want, and we believe we have a lot to offer.”
Some Spanish investors joined the equity culture at the worst time possible, when the markets started behaving badly and are still coming to terms with how portfolios with for instance only 20% in equities are bringing negative returns. “We are telling our clients not to look only at performance figures and but to focus on the long-term horizon,” says Novaster’s Valero. “People jump into equities without taking into account some factors and invested a lot in the IBEX without much diversification in foreign investment. During the last couple of years the Euro-zone became the domestic market and a huge proportion of the exposure to Spanish equity went into Europe, which was a logical move but made at the time when markets started dropping.”
He adds: “So investors in general are uncertain about all these issues and I think they haven’t had enough training to understand what pension investment means.”
At BBVA Consultores de Pensiones in Madrid, senior consultant Luis Buey comments: “The bad performance of the market is stopping more equity-oriented strategies, but this is happening everywhere and not only in Spain. However mentalities are slowly changing and although investors are concerned about returns they understand more the way financial markets work. It is a question of time. ”
Thinking about the months to come the new fiscal and structural measures affecting pension funds taken by the government (see box), will mark the path along which the industry is going to go. The secret for success will definitely be to promote the creation of more funds from scratch to develop both the occupational and individual system.
“When we think that only 6% of the Spanish population is covered under an occupational pension system, we realise that this sector is still extremely small,” says Manuel Álvarez, director of pension funds at Madrid-based gestora Caser. “There is a need for more measures to promote the sector.”
One of those measures could be the development of sector pension funds, which still do not exist in Spain. Recently the government announced the decision to create a pension plan for civil servants. According to people in the industry this could be a major step forward.
From next year, civil servants, will receive a pay rise of 2% plus an additional 1% that would be split into 0.5% in contributions to a pension fund, and 0.5% in variable contributions related to achieving set targets. The unions have rejected this decision, considering it “ridiculous, and not enough”, and said they will lobby the government to improve the salary and contributions details.
Whatever happens, this is without doubt a significant move, and the new fund will be an interesting case to follow during next year, and could be seen as incentive for the development of industry-wide pension funds, needed to overcome the difficulties of small or medium-sized companies wishing to offer pension plans to their reduced numbers of employees.
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