Spanish Association of Collective Investment Schemes and Pension Funds

Sofia, 18 September 2009Ángel Martínez-Aldama

Managing Director

MULTIFUNDS AND THE MULTIFUNDS AND THE IMPORTANCE OF BALANCED IMPORTANCE OF BALANCED DEVELOPMENT OF A MULTI-DEVELOPMENT OF A MULTI-

PILLAR PENSION SYSTEMPILLAR PENSION SYSTEM

2/12

1. Pension Fund asset allocation 2008.

2. Factors affecting Pension Fund asset allocation between DB and DC Funds.

3. Multifunds.

4. Importance of 2nd Pillar contributions.

5. Forthcoming research on DC Schemes.

3/12

1.1. Pension Fund asset allocation 2008 (I).Pension Fund asset allocation 2008 (I).(Source:OECD)(Source:OECD)

0% 20% 40% 60% 80% 100%

AustraliaIrelandFinland

United Kingdom United States

NetherlandsSwedenIceland

BelgiumSwitzerland

NorwayCanada

LuxembourgAustriaPoland

PortugalHungary

DenmarkSpain

MexicoItaly

TurkeyGreece

GermanySlovak RepublicCzech Republic

Korea

Equities Bills and bonds Cash and deposits Other assets

4/12

1.1. Pension Fund asset allocation 2008 (II).Pension Fund asset allocation 2008 (II).

CONCLUSIONS:

Between 2007 and 2008, on average, investment in equities in OECD area decreased by 8.8 percentage points (pp), falling from 49.9% in 2007 to 41.1% in 2008.

In most OECD countries, bonds and equities remain the two most important asset classes, accounting for over 70% of total portfolio in 2008.

Within the “bonds” category, public sector bonds, comprise a significant share of the combined bond holdings in many countries.

5/12

2.2. Factors affecting Pension Fund asset allocation Factors affecting Pension Fund asset allocation between DB and DC Funds. between DB and DC Funds.

OECD states that:

DB and DC funds tend to allocate assets differently, and the factors behind these differences also vary across countries.

For example, in countries where DB plans are very mature there are more investment in bonds, while DC funds catering mainly for younger workers are likely to lean towards more risky assets (such as equity).

However, the transfer of risk from plan sponsors to employees that results from DB-DC shift may also lead to widespread aversion to higher-risk portfolios on the part of individuals, thus lowering the aggregate share of assets allocated to equity.

6/12

3.3. Multifunds (I). Multifunds (I).

Abovementioned affirmations show MULTIFUNDS’ importance.

MULTIFUNDS takes into account

ASSET ALLOCATION

PARTICIPANT’S AGE

7/12

3.3. Multifunds (II). Multifunds (II). Experiences in mandatory schemesExperiences in mandatory schemes

Experiences on MULTIFUNDS

Chile Mexico Peru

Introduction 2002 2005 2005

Types of Funds Five Five1 Three

Portfolios of

Funds

The different portfolios vary according to their percentage investment

in variable income. The most conservative funds do not invest (or

invest very low percentages), in variable income, whereas the more

aggressive funds invest considerable amounts in variable income.

Fund Selection

Possible choices:

Men <55 & Women <50: the 5

types of funds available.

Men >55 & Women >50: the 4

funds of relatively minor risk.

Pensioners: the 3 funds of lesser

relative risk.

System

Members can

choose the 5

types of funds

available1.

System

members can

choose the 3

types of funds

available.

Default Fund

assignment

rules

These rules take into account the ages of the respective members in

case they do not choose a fund.

Source: FIAP 1 Mexican regulation considers changes introduced in March 2008

8/12

3.3. Multifunds (III). Multifunds (III). Experiences in mandatory schemesExperiences in mandatory schemes

Chile Mexico Peru

Transfers of

members’

balances

between the

same manager’s

Funds

Maximum of 2 commission-

free transfers per year.

For a greater number of

transfers, an exit commission

is charged for each

transaction2.

Not commission

Separation of

balances

The balances from mandatory

contributions can be

distributed in different funds

The balances from mandatory

contributions can only be allocated

to one fund.

Profitability Minimum profitability, which

varies according to the type of

fund, is required.

Minimum

profitability is

not required

Profitability

reference or

“benchmark”

indicators

Transfer of

instruments

between Funds

Only when they correspond to

member transfers between

funds of the same fund

manager

Not allowed

between

funds of the

same fund

manager.

Only when they

correspond to

member transfers

between funds of

the same fund

manager.

2 The AFPs are entitled to charge commissions for more than two transfers, but in practice none of them do so.

 

9/12

3.3. Multifunds (IV).Multifunds (IV).Experience in SpainExperience in Spain

Spanish Pension Funds System

Pension Plans, that establish defined contribution for retirement contingency and belong to Employment System’s Pension Plans, can have two sub-Plans

according to participants age.

Plans

Type Promoter Participants Type of Fund

Employment

system’s Pension

Plans

Entity, Society or Firm Promoter’s

employees

Employment Pension

Funds

Associate system’s

Pension Plans

Association,

Syndicate or Labour

Union

Promoter’s

associates or

members

Individual system’s

Pension Plans

One or several

financial Entities Natural people

Personal Pension

Funds

10/12

4.4. Importance of 2nd Pillar contributions (I). Importance of 2nd Pillar contributions (I).

EFRP (European Federation for Retirement provision) considers that:

Contribution cut to the second pillar risks provokes a breach of confidence in the pension reform that is so desperately needed throughout Europe.

Independent academic research indicates that small differences in contributions make a huge difference to the accumulated pension capital at the pay-out date. A 1 % additional contribution during 40-years of pension savings leads to a 30 % higher pension.

Providers have hugely invested in the necessary infrastructure and expertise to run the 2nd pillar pension system. Deviating from this model could undermine their commitment to that providers.

Some European Countries are under discussions about reduction of 2nd pillar contributions

11/12

4.4. Importance of 2nd Pillar contributions (II). Importance of 2nd Pillar contributions (II).

These conclusions show 2nd Pillar contributions’ importance.

BALANCED DEVELOPMENT OF A MULTI-PILLAR PENSION SYSTEM

A prerequisite to deliver adequate retirement income to the population at large

12/12

5.5. Forthcoming research on DC Schemes. Forthcoming research on DC Schemes.

DC pension provision has grown at a rapid pace in the past decade.

This paper will be focused on DC plans provided through the workplace and mandatory DC pillar.

EFRP is preparing a policy paper, which aims to provide an overview of the size and design of DC schemes throughout

Europe.