josé pavão nunes world forum oecd june 2007 pension funds in portugal

José Pavão Nunes

World Forum OECD

June 2007

Pension Funds in Portugal

Summary• Introduction

• The importance of the Portuguese pension funds market

– Legal framework

– Pension funds market

– The structure of Portuguese pension

funds market

Summary• Features of the Portuguese pension

funds market

– Pension Plans

– Membership

– Pensions

– Financing level

– Investments

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

Introduction

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

0%

20%

40%

60%

80%

100%

2005 2010 2020 2030 2040 2050

Population < 15 Population 15-64 Population 65 +

Introduction

Resident Population ProjectionPortugal 2005 – 2050 (thousands)

10 000

10 200

10 400

10 600

10 800

11 000

2005 2010 2020 2030 2040 2050

Total Population

Introduction

Young and Aged Dependence Indices Projections Portugal 2005 – 2050

0%

10%

20%

30%

40%

50%

60%

70%

2005 2010 2020 2030 2040 2050

Young Dependence I ndex Aged Dependence I ndex

Introduction

Ordinary state pensions are financed through a redistribution system (pay-as-

you-go)

System breakdown

Social Security System Reform

+Pension Funds Development

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)

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

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

The importance of the Portuguese pension funds

market

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, widow’s, 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

Legal FrameworkDecree-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)

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

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

Pension funds marketPension funds growth: 2001-2005

11,0

12,5

14,0

15,5

17,0

18,5

20,0

2001 2002 2003 2004 2005

Pens

ion

Fun

ds

Mar

ket

(mill

ions

of

eur

os)

-10%

-5%

0%

5%

10%

15%

20%

25%

Rea

l gro

wth

of

pens

ion

fund

s m

arke

t ab

ove

the

rea

l gro

wth

of

the

GD

P

Pension Funds Market (millions of euros)Real growth of pension funds market above the real growth of the GDP

Pension funds marketRatio of pension funds assets and insurance

assets to the GDP

0%

10%

20%

30%

40%

50%

60%

70%

80%

2002 2003 2004 2005 2006

PFA

/ G

DP

and

IA

/ G

DP0

0%

10%

20%

30%

40%

50%

60%

70%

80%

PFA

/ I

A

PFA / GDP I A / GDP

(PFA + I A) / GDP PFA / I A

0.0

124.9

0.30.40.61.92.83.94.14.24.75.86,87.28.58.79.1

11.312.914.5

18.832.9

50.452.8

58.066.166.2

98.9117.4

123.2

0% 20% 40% 60% 80% 100% 120% 140%

NetherlandsI celand

SwitzerlandUnited States

United Kingdom (7)Finland (1)Australia

I reland (2)Canada

DenmarkJ apan (3)

Sweden (6)Portugal

New ZealandSpain (5)

PolandHungaryMexicoNorwayFranceAustriaBelgium

Czech RepublicGermany

I talyKorea

Slovak Republic (4)Luxembourg

TurkeyGreece

Pension funds marketThe 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.

The structure of pension funds market

Growth in Pension Funds 2001 2002 2003 2004 2005 2006*

Number of managing entities 30 28 28 27 26 27

Number of Pension Funds 236 231 229 221 223 232

Retirement Savings Plans (RSP) 17 20 21 22 20 20

Equity Savings Plans (ESP) 5 5 5 5 4 4

Other opened funds 19 19 20 21 28 33

Closed funds 195 187 183 173 171 175

Total Assets (millions of Euros) 14,808 15,879 16,283 15,185 18,982 21,171




Closed funds 14,177 15,225 15,563 14,387 18,011 20,001

Total Contributions (millions of Euros) 2,170 2,646 1,402 1,705 3,912 1,650




Closed funds 2,058 2,533 1,303 1,583 3,714 1,441


Closed / Opened pension funds

Closed RSP ESP Other open

94.5%

2.3%

0.1%

3.1%

5.5%


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

2004 2005

Banking 68.5% 71.1%

Communications and Transports 14.3% 12.8%

Production and distribution of electricity gas and water 6.5% 6.5%

I ndustry 6.0% 5.1%

I nsurance 1.8% 1.9%

Other fi nancial activit ies 1.0% 0.9%

Trade 1.2% 1.0%

Other 0.8% 0.6%

Features of the Portuguese pension funds

market

Pension Plans Closed Pension Funds and Collective Membership

by pension schemes (million of euros)2005

Closed pension funds 18,011

Defi ned Benefi t 17,717

Defi ned Contribution 30

Hybrid 264

Opened pension funds 971

RSP (Defi ned Contribution) 446

ESP (Defi ned Contribution) 17

Other 508

I ndividual membership (Defi ned Contribution) 129

Collective membership 379

Defi ned Benefi t 332

Defi ned Contribution 45

Hybrid 2

Membership Number of members and beneficiaries by type of

pension fund

2001 2002 2003 2004 2005 2005/2004

(a) Members 283,244 282,026 269,557 265,006 262,271 -1.0%

Closed funds 178,940 174,355 161,430 154,570 148,266 -4.1%

Retirement Savings Plans (RSP)61,565 64,593 65,579 65,279 63,230 -3.1%

Equity Savings Plans (ESP)3,436 3,443 3,274 2,861 2,429 -15.1%

Other opened funds39,303 39,635 39,274 42,296 48,346 14.3%

(b) Beneficiaries (1) 112,813 118,581 110,166 109,740 115,629 5.4%

(a) + (b) 396,057 400,607 379,723 374,746 377,900 0.8%

(b) / (a) 39.8% 42.0% 40.9% 41.4% 44.1%

Membership Members and beneficiaries by economic sector

2005

41%

15%

11%

18%

5%

10%

49%

13%

12%

13%

3%

10%

Members Benefi ciaries

Banking Communications and Transports

Production and distribution of electricity gas and water I ndustry

I nsurance Other

PensionsPension versus Pension funds total amount

(million of euros)

2001 2002 2003 2004 2005

(a) Pensions 891 927 931 950 953

(b) Pension funds total amount 14,808 15,880 16,283 15,186 18,982

(a)/(b) 6.0% 5.8% 5.7% 6.3% 5.0%

PensionsPensions and contributions versus pension funds

total amount

0%

10%

20%

30%

40%

50%

60%

70%

2001 2002 2003 2004 2005

Ben

efici

arie

s /

Mem

ber

s an

d

Pens

ions

/ C

ontr

ibui

tion

s

0%

5%

10%

15%

20%

25%

30%

35%

Pens

ions

/ A

mou

nt o

f pf

and

Con

trib

utio

ns /

Am

ount

of

pf

Number of Benefi ciaries / Number of members

Pension / Contributions

Pension / Amount of pension f unds

Contributions / Amount of pension f unds

PensionsNumber of beneficiaries and paid benefits by

type of fund and type of benefit - 2005

NumberThousand of

eurosNumber

Thousand of euros

NumberThousand of

eurosNumber

Thousand of euros

NumberThousand of

euros

Retirement 48,096 351,471 3,387 25,608 - - 1,892 7,576 53,375 384,655

Disability 31,090 381,360 65 321 - - 2,152 9,868 33,307 391,549

Early retirement / Pre-

retirement7,465 108,054 347 1,030 8 19 287 810 8,107 109,913

Survival 20,007 61,115 275 2,514 5 24 195 446 20,482 64,099

Long duration

unemployment / 5 34 318 1,878 - - 35 79 358 1,991

106,663 902,034 4,392 31,351 13 43 4,561 18,779 115,629 952,207

92.2% 94.7% 3.8% 3.3% 0.0% 0.0% 3.9% 2.0%

Closed funds RSPOther opened

fundsTotalESP

Pensions% of beneficiaries and paid benefits per type of

benefit - 2005

0%

10%

20%

30%

40%

50%

Retirement Disability Early

retirement /

Pre-retirement

Survival Long duration

unemployment /

serious illness

Benefi ciaries Paid benefi ts

Pensions% of paid benefits (closed pension funds) per

type of benefit and economic sector – 2005

Retirement DisabilityEarly retirement

/ Pre-retirementSurvival Total

Banking 14.0% 38,2% 7.7% 3.7% 63.6%

Communications and Transports 14.3% 2.0% 0.1% 0.2% 16.6%

Production and distribution of

electricity gas and water4.2% 0.6% 0.3% 1.5% 6.6%

I ndustry 3.3% 0.9% 1.4% 0.8% 6.5%

I nsurance 0.9% 0.4% 2.2% 0.0% 3.5%

Other 2.2% 0.0% 0.3% 0.5% 3.0%

39.0% 42.2% 12.0% 6.7% 100.0%

Financing level Closed pension funds by economic sectors -

2005

Financing

level

Minimum

financing level

Banking 98% 115%

Communications and Transports 76% 93%

Production and distribution of electricity gas and water 94% 188%

I ndustry 96% 112%

I nsurance 107% 128%

Other fi nancial activit ies 93% 144%

Trade 104% 118%

Other 57% 72%

94% 117%

Investments Investments breakdown by type of pension funds

2005 (million of euros)

Bill and bonds issued

by the public

administration

4,526 25.1% 189 42.3% 0 0.0% 79 15.6% 4,794 25.3%

Bonds issued by the

private sector2,635 14.6% 123 27.5% 0 0.0% 148 29.1% 2,906 15.3%

Shares 3,991 22.2% 19 4.3% 16 94.1% 21 4.1% 4,047 21.3%

Mutual funds 3,838 21.3% 95 21.3% 0 0.0% 190 37.4% 4,123 21.7%

Lands and buildings 1,532 8.5% 8 1.8% 0 0.0% 7 1.4% 1,547 8.1%

Cash and deposits 1,181 10.1% 16 3.6% 1 5.9% 66 13.0% 1,901 10.0%

Other -329 -1.8% -3 -0.7% 0 0.0% -3 -0.6% -335 -1.8%

18,011 100.0% 447 100.0% 17 100.0% 508 100.0% 18,983 100.0%

TotalClosed funds RSP ESPOther opened

funds

Investments Geographical breakdown of the pension funds

assets 2005

5%

2%

17%

6%

26%

14%

9%

20%

2%

70%

Bill and bonds issued by thepublic administrationBonds issued by the privatesectorShares

Mutual f unds

Bill and bonds issued by thepublic administrationBonds issued by the privatesectorShares

Mutual f unds

Other

Portugal30%

Other Countries

70%

Port

ugal

0O

ther

Cou

ntri

eso

Investments Geographical breakdown of the pension funds

assets, by type of investment product- 2005

0%

20%

40%

60%

80%

100%

Bill and bonds

issued by the

public

administration

Bonds issued by

the private sector

Shares Mutual f unds

EU 25*

Portugal

Other

South America

North America

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.

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.

josé pavão nunes world forum oecd june 2007 pension funds in portugal

Documents

importance of pension

management of pension

pension funds total

pension funds of institutions

opened pension funds

pension funds of small

pension funds participation

statutory pension funds