Pension Funds in Portugal

1
Pension Funds in Portugal
José Pavão Nunes World Forum OECD June 2007
2
Summary

• Introduction
• The importance of the Portuguese pension funds
  market
• Legal framework
• Pension funds market
• The structure of Portuguese pension funds market

3
Summary

• Features of the Portuguese pension funds market
• Pension Plans
• Membership
• Pensions
• Financing level
• Investments

4
Introduction

• Pension funds and their growth is intimately
  linked to the level of Social Security payments
• High degree of interdependence between state
  welfare, corporate and personal provision as they
  are clearly complementary
• Population is ageing throughout the world but
  particularly in the more developed nations
• Drop in birthrates
• Increased life expectancy

5
Introduction

• Resident Population Projection by age groups
• Portugal 2005 2050 (thousands)

6
Introduction

• Resident Population Projection
• Portugal 2005 2050 (thousands)

7
Introduction

• Young and Aged Dependence Indices Projections
  Portugal 2005 2050

8
Introduction

• Ordinary state pensions are financed through a
  redistribution system (pay-as-you-go)
• ?
• System breakdown
• ?
• Social Security System Reform
• Pension Funds Development

9
Introduction

• Pension funds (Portugal)
• Supplementary to Social Security System (SSS)
• Way of financing occupational pension plans (2nd
  pillar) and personal pension plans (3rd pillar)
• in some cases finances schemes that replace SSS
  (Banking sector)

10
Introduction

• Pension Funds (EU)
• The Directive on the activities and
  supervision of institutions for occupational
  retirement provision (IORP) represent both a
  challenge and an opportunity for the Portuguese
  pension funds market, namely
• The EU pensions passport and supervision based on
  the home country control principle
• The possibility of companies of any Member State
  being allowed to manage pension funds of
  institutions located in a different Member State

11
Introduction

• The setting up of both freedom to provide
  services without barriers and freedom to invest
  subject only to coordinated prudential
  requirements
• The high level of protection and information for
  members and beneficiaries

12
The importance of the Portuguese pension funds
market
13
Legal Framework

• Law no. 2/71 of 12th April 1971
• companies whose aim is the management of funds
  intended for group insurance relating to
  retirement, widows, disability or other pensions
  shall be governed by the provisions, suitably
  adjusted, applying to insurance companies
• Law no. 28/84 of 14th August 1984
• Framework for supplementary payment schemes

14
Legal Framework

• Decree-Law no. 325/85 of 6th August 1985
• First piece of legislation concerning pension
  funds (no pension fund was set up under it).
• Decree-Law no. 396/86 of 25th November 1986
• Allowed for the management of pension funds to be
  conducted by management companies set up for that
  purpose, as well as by life insurance companies.
• Decree-Law no. 205/89 of 27th June 1989
• Retirement Saving Plans (RSP)

15
Legal Framework

• Decree-Law no. 415/91 of 25th October 1991
• Allowed for the financing by pension funds of
  small and medium-sized companies supplementary
  pension schemes
• Less bureaucracy in the setting up of pension
  funds
• Participation of more than one manager in a
  pension fund
• Fund managers to take out insurance to guarantee
  payment relating to death or disability
• Distinction made between closed pension funds and
  open pension funds

16
Legal Framework

• Decree-Law no. 204/95 of 5th August 1995
• Equity Savings Plans (ESP) (to strengthen the
  stock market )
• Decree-Law no. 12/2006 of 20th January 2006
• Transposed EU Directive no. 2003/41/EC of 3rd June

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Pension funds market

• Pension funds growth 2001-2005

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Pension funds market

• Ratio of pension funds assets and insurance
  assets to the GDP

19
Pension funds market

• The importance of pension funds in OECD 2005
• In per cent of GDP

(1) Data for 2004 and 2005 include the statutory
pension funds. (2) Source Irish Association of
Pension Funds. (3) Data do not include Mutual
Aid Trusts 2004 and 2005 data are estimates.
(4) 2004 pension assets data is 2003. (5) Data
for 2004 and 2005 include Mutual Funds. (6)
Includes assets from the premium pension system
for 2004 and 2005. 2005 data are estimates. (7)
2005 pension assets data is staff estimates 2002
pension assets data is 2001.
Provisional data
20
The structure of pension funds market

• Growth in Pension Funds

Provisional data
21
The structure of pension funds market

• Closed / Opened pension funds

Provisional data
22
The structure of pension funds market

• Closed Pension Funds and Collective Membership by
  economic sector (as of total)

Provisional data
23
Features of the Portuguese pension funds market
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Pension Plans

• Closed Pension Funds and Collective Membership by
  pension schemes (million of euros)

Provisional data
25
Membership

• Number of members and beneficiaries by type of
  pension fund

Provisional data
26
Membership

• Members and beneficiaries by economic sector
• 2005

Provisional data
27
Pensions

• Pension versus Pension funds total amount
• (million of euros)

Provisional data
28
Pensions

• Pensions and contributions versus pension funds
  total amount

Provisional data
29
Pensions

• Number of beneficiaries and paid benefits by type
  of fund and type of benefit - 2005

Provisional data
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Pensions

• of beneficiaries and paid benefits per type of
  benefit - 2005

Provisional data
31
Pensions

• of paid benefits (closed pension funds) per
  type of benefit and economic sector 2005

Provisional data
32
Financing level

• Closed pension funds by economic sectors - 2005

Provisional data
33
Investments

• Investments breakdown by type of pension funds
  2005 (million of euros)

Provisional data
34
Investments

• Geographical breakdown of the pension funds
  assets 2005

Provisional data
35
Investments

• Geographical breakdown of the pension funds
  assets, by type of investment product- 2005

Provisional data
36
Conclusion

• The maturity of Portuguese pension funds has been
  proved by its substantial contribution towards
• Increasing the Portuguese social protection
• Developing the financial markets in Portugal
• Improving the savings rate.

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Conclusion

• The main conditions that might invert the current
  stagnation of the market and generate a new
  pension funds cycle are
• The Social Security reform
• The changes related to the 3rd pillar (personal
  pension plans), which might also involve tax
  reforms
• The reinforcement of the funding basis
• The creation of a real and complete European
  internal market and the provisions established in
  the Directive on the activities and supervision
  of institutions for occupational retirement
  provision.