A Spanish twist

Peter Davy explains why the Spanish pensions landscape is a story of two halves

When it comes to pensions, Spain is full of contradictions. On the one hand, it is better placed to provide for its population in retirement: the lower birth rate during the Civil War and high immigration over the last decade mean that the impact of an ageing population will hit it later than the rest of Europe. However, when it does strike, the impact will be greater.

The baby boomers, along with those immigrants, will start retiring from 2015, and Spain, which has a life-expectancy on a par with France, Italy and Sweden, will face what the OECD describes as “a larger, albeit later, demographic shock”. By 2050, it says, this could push up public pensions costs by seven per cent of GDP.

Similarly, when you look at it in nominal terms, the state pension that accounts for most Spanish people, retirement income is not all that lavish. But compared against incomes and the country’s GDP per capita it’s among the
most generous on the continent, providing an average over 80 per cent of the pensioner’s final salary
in their last 15 years of work.

And, most crucially, while the pensions system has faced almost continual reform since the transition to democracy in the late 1970s, in truth the Spanish are little closer to addressing these problems.

However, as Mercer consultant Xavier Bellavista explains, it’s not that there is much disagreement
as to where the solution lies; “The unions, the market and government all seem to think that the occupational market needs to be developed,” he says. The problem is that there’s no real agreement – and perhaps not much thought – as to how that should be achieved.

There has been real progress in building up almost €50bn in its reserve fund, though, and you can compare that to the €33bn fund in France, an economy at least one and half times the size. This will certainly help smooth the transition to a more sustainable system. However, there’s little clue still as to what that system might look like.

Of course, when it comes to private sector pensions, the market is relatively young. It was founded by legislation that only dates to 1987, points out Bellavista, so it has only been going 20-odd years.

However, even with this in mind, it is under-developed. In fact, private pensions assets amount to just 22 per cent of GDP, according to Towers Perrin in Spain. The comparative figures for the Netherlands, UK and France are 140 per cent, 116 per cent and 60 per cent, respectively. And it is smaller still if you are only talking about occupational schemes, which are not just tiny when set aside the public provision, but also lag investment in individual private pensions, which make up the third pillar.

“Even now it is mainly the multi-nationals that provide occupa-tional pensions over and above state benefits,” says Eladio Bellas, international benefits consultant in the Madrid office of Watson Wyatt. “For the vast majority of companies in Spain it’s still not the norm.”

The more things change…
Of course, the government has hardly ignored occupational pen-sions. Significant reform in 2002 saw the market shift from book reserve financing to external funding, and there have been a flurry of changes more recently. Legislation in December, for instance, increased the flexibility when it comes to investment decisions – allowing greater use of alternatives and permitting different strategies for different scheme members (previously, funds had
to employ a single investment strategy for the entire fund). This shouldn’t be overstated; Spanish funds are still a long way from being able to do anything so radical as adopting lifestyle investing, and members still have no investment choice. However, as Hewitt’s head of retirement in Spain, Angeles Almena, says, “It’s a first step”.

The country has also developed a new pension plan structure – Plan de Previsión Social Empresarial – that offers employers effective tax treatment with a lower administrative burden. This could in time provide a good opportunity for new plans. Yet how much impact these changes will have is questionable. Bellas, for one, doesn’t think much will change: “I don’t really expect any immediate reaction to what we’ve seen,” he says.

Almena agrees: “We won’t see much in the short term.”

And on the central question of how to boost savings in the occupa-tional pensions market, there seems little hope of anything radical from the government.

“There’s no real sign that this is on the agenda, so it’s not clear what’s going to happen in the next four years,” says Ángel Martínez-Aldama, director general of the Spanish Investment and Pension Funds Association, Inverco. It’s notable, for instance, that during the campaigns for the election in March, the parties were only concerned with out-doing each other in their promises for big boosts to a minimum public-sector pension that has already increased more than 20 per cent over the previous three years.

In fact, perhaps the most significant change to private sector pension provision has, if anything, worked to discourage saving: Prior to 2007, individuals could put up to €8,000 tax-free into an employers scheme and another €8,000 into a personal scheme. Since last year, the limit has been reduced to €10,000 between both pillars.
“It’s not exactly encouraging,” says Bellas.

Still waiting for an answer
So what is needed? One common suggestion for the first pillar is to start by extending the period for calculating the benefits from the final 15 years to the whole work life, which would also allow companies to lower their contributions (currently 23.6 per cent of earnings). Add to this, says Bellavista, a strategy from both the unions and companies to promote occupational schemes right across the workforce, not just in a few select industries as at present.
Fundamentally, though, what’s lacking is the public will. As Gregorio Gil de Rozas, a senior consultant for Towers Perrin in Spain, notes, employees aren’t making it a priority. “Collective bargaining is focussed on short term increases
in salaries instead of deferred compensation,” he says, adding that the Spanish “mentality, culture and lifestyle aren’t orientated towards saving for retirement”.

The reason for this is relatively simple: for the majority, the problems just don’t seem that pressing. After all, as Bellas points out, many employees can still, after 35 years contributing to the social security system, retire on 90 per cent of their previous income. “There are few countries in Europe that provide that sort of level,” he remarks
As Bellavista puts it: “The newspapers are all saying that the public system isn’t sustainable and won’t be solvent by 2050, but the people on the street don’t feel it.”

In fact, the likelihood is that, until things look a lot more stretched and the reforms to the state pension actually start, there will be little chance of big growth in occupational funds. And that, perhaps, is the final contradiction when it comes to the Spanish pensions market: If the problems were just a little more immediate, the solutions would probably be that much closer.

Written by Peter Davy, a freelance journalist