MADRID - Spanish employers must abandon their existing book-reserve retirement plans and create externally managed plans, under a new law passed by the Spanish legislature last month.
In a curious exception, Spanish banks and insurance companies will be permitted to retain them their book-reserve plans.
Spanish money managers expect the change to improve liquidity on the domestic equity market, where there are few liquid stocks.
In addition, the legal change may cause a boon for domestic banks, the likely recipients of most Spanish pension assets. However, foreign-based managers will be able to compete for business if they register with Spanish regulators. Foreign-based managers such as Barclays de Zoete Wedd, Societe Generale, Citibank and Deutsche Bank already have local banking operations and offer retirement savings vehicles.
The law, which passed the Spanish Congress Oct. 5, has not yet been published, so details were scarce.
Still, based on earlier drafts, the new law represents a major shift away from book-reserving - where assets essentially are invested in the employer - toward funded plans that are managed by independent financial institutions.
The law gives employers either 3 or 31/2 years - depending on experts' interpretation of the law - to switch from book-reserving to a funded plan. They will have the choice of creating a qualified pension plan or purchasing pension insurance, explained Henry Karsten, a director at William M. Mercer Ltd., Madrid.
But the biggest shortcoming in the new law is that it fails to increase the tax-deductibility of contributions. While the law increases the maximum annual allowable contribution to 1 million pesetas ($8,163) per person from 750,000 pesetas ($6,122), objections from the Treasury Department prevented an increase in the tax-deductible ceiling of 750,000 pesetas. Government officials are trying to cut Spain's bloated budget deficit, and opposed increasing the tax-deductible contribution limit.
In addition, pension industry officials are upset that the final bill did not create a special class of tax-favored, five-year savings accounts, and that the law did not ease restrictions on hardship withdrawals.
Mariano Rabadan, head of Inverco, a trade group representing Spanish pension funds, said the new law will provide important new regulation of plans. Still, he cited some missed opportunities. He said his group will push for improved tax deductibility of pension contributions.
Mr. Rabadan said the size of Spanish pension assets may grow by 2 trillion pesetas within three years. At present, there are 1.6 trillion pesetas in individual retirement savings.
According to information from InterSec Research Corp., London, there were 615 billion pesetas of corporate pension assets at the end of 1993, the latest data available. David Booher, director, said growth of pension assets will come slowly since employers will have over three years to convert their plans and even longer to fund past-service liabilities.
Under a 1990 accounting rule, employers are required to fully fund retirees' benefits by 1997 and employees' benefits by 2005.
Multinational companies and utility companies - which tend to have book-reserve plans - will be affected by the switch.
The law also allows for defined benefit, defined contribution or hybrid plans, he said. For qualified plans, employers will have 10 to 15 years to fund their past-service liabilities, Mercer's Mr. Karsten said.
Defined benefit plan growth could by stymied, however. A 1987 pension-law reform requires that employees have a majority of seats on panels overseeing hiring and firing of managers and custodians and selection of the actuary, which may discourage growth of defined benefits plans, where the employer bears the investment risk. Employers seeking to avoid the committee structure probably will turn to insured plans, according to a Mercer bulletin.
However, insured plans receive worse tax treatment than qualified plans, said Alicia Sanmartin, executive vice president, Watson Wyatt Worldwide, Madrid.
Investment restrictions were not included in the law but new regulations will be drafted later.
Until then, plans will follow current rules requiring funds to be at least 90% invested in publicly traded securities, bank deposits, mortgages and real estate.
In practice, funded Spanish plans are conservative, investing about 95% of assets in government debt.
But it is not known to what extent employers will take advantage of the new law. State pension benefits still are extremely generous, offering 100% of final average pay over the last eight years of employment to workers with 35 years of service.
Meanwhile, the employer contributes 23.6% of pay and the employee 4.7%, making it difficult for many companies to afford private pensions on top.