The Spanish government has introduced legislation that would spur development of private defined contribution plans and individual retirement savings.
In addition to encouraging creation of qualified retirement plans, the legislation would force employers to switch from book-reserve plans to separately managed private funds within 10 years. Book-reserve plans now hold 1.5 trillion pesetas ($11.3 billion) in assets.
While Spain has had legislation permitting creation of private plans since 1987, few employers have taken advantage of it, given the high level of social security taxes. There are 600 billion pesetas ($4.55 billion) now in qualified employer-sponsored retirement plans.
Some experts believe the bill will be enacted by the Parliament by summer. But with the ruling Socialist Workers Party facing severe corruption problems, a change in political control could alter the course of the bill.
"If there are early general elections, and the Partido Popular wins them, everything may change," said Pablo Plaza, director and senior consultant with William M. Mercer Ltd., Madrid.
While unions did cooperate on the bill with the Socialist Workers Party, it's not clear what will happen if the more conservative Partido Popular is voted into power, he explained.
Government officials in Prime Minister Felipe Gonz lez's government had sounded the alarm that the high cost of the state pension was unsustainable at its current level. This year, state pension payments will rise to 6.3 trillion pesetas.
A previous bill to reform insurance rules and encourage private plans proposed in October 1992 was put off because elections were called in June 1993.
Besides easing the burden on the state, Minister of Labor and Social Security Jose Antonio Grinan argued a complementary system would help finance the country's budget deficit.
Currently, only 1.42 million Spaniards - or 10% of all workers - participate in private retirement plans, according to the Association of Collective Investment Institutions (Inverco), a trade group representing Spanish pension funds.
Of that figure, 1.21 million are covered by individual plans and the rest are within employer-sponsored plans.
Existing legislation clearly pushes employers toward defined contribution plans. The law limits total tax-deductible contributions to both employer-sponsored and individual plans to 750,000 pesetas ($5,685) a year per employee.
Those contributions must be allocated to individual employees, making the pooled-benefit structure of defined benefit plans cumbersome.
The low contribution ceiling limits the effectiveness of both kinds of plans, Mr. Plaza said.
Inverco officials believe the cap should be raised to 1 million pesetas and be adjusted automatically for inflation.
Another strike against defined benefit plans is existing law that gives a supervisory role to a committee. Participants and beneficiaries must make up a majority of the committee, whose powers include the right to set asset mixes and select money managers.
The proposal legislation would permit use of a supermajority vote on certain issues, such as money manager hirings. That would enable employer representatives to block objectionable changes, but the system still would favor defined contribution plans.
Still, the legislation would cause a shift of assets from book-reserve plans into externally managed qualified plans. Companies would have three years to convert their plans, but 10 years to transfer assets to outside funds.
The main beneficiaries probably would be Spanish banks and life insurance companies. But foreign-based managers could get a crack at assets, as long as they maintained an office in Spain.
At least 90% of assets must be invested in publicly traded securities, bank deposits, mortgages and real estate.
In addition, investments in bank deposits can't top 15% of plan assets, and no more than 5% of assets can be invested in the employer's own capital. At least 1% must be kept in cash.
Currently, funded Spanish pension funds maintain a very conservative investment policy, with 95% of assets invested in government debt, which helps finance Spain's yawning budget deficit. Only 4% is invested in stocks.
Still, employers are unlikely to start private plans unless their social security taxes are eased, noted Daniel Fern ndez, commercial director of Intercaser, a Madrid-based insurance and reinsurance society that manages approximately 100 million pesetas in pension assets.
"Businesses will not resort to private mechanisms to cover their employees' pensions until the current social security assessments, which are 30%, are reduced, since it is too expensive to pay the state and provide for pensions," he explained.
The government also wants to encourage use of qualified individual retirement plans, which already are experiencing recent growth. Assets under management in those types of funds is now 700 billion pesetas, but projections indicate the figure could grow to 2 trillion pesetas in the next five years.
The government proposes creating a new type of tax-favored individual savings plan that would last for five years. At the end of that time, individuals could withdraw their assets in cash and pay taxes or roll them over tax-free into a qualified retirement plan. While those plans originally were supposed to start last month, implementation probably will be delayed until next year.
But Mariano Rabad n, Inverco's chairman, said the measure doesn't go far enough. He said participants should be able to withdraw assets tax-free in hardship situations, such as job loss or exhausting unemployment compensation.
Pension experts see the legislation as a first step toward developing private pension funds, but don't see the possibility of implementing a private pension fund system to replace the public one.
"It is necessary to support a complementary system, but we can't talk about the bankruptcy of the state system. We can't leave it for dead," said Mercer's Mr. Plaza.