A bill is currently being processed as part of Spain’s programme to reduce public expenditure that will bring major reforms to the Spanish social security system. The bill is expected to be passed before the summer and will result in substantial changes in coverages offered by the public system, with an estimated average reduction in benefits of around 15%.

Reform of public pensions
The pension reforms will come into force in 2013. However, it they are designed in such a way that the changes will only be fully implemented in 2027. The main changes involved in the reform are as follows:
- Legal age of retirement: The legal age of retirement will be deferred from 65 years to 67. In addition, for a full pension, contributions must be made for at least 37 years, as against the 35 years needed up to now.
- Long employment careers: Workers who have made contributions for 38 years and six months will be able to retire at 65 years of age.
- Early retirement: Under the reform it will be possible to retire at age 63, provided there have been a minimum of 33 years of contributions. A reduction of 7.5% will be applied per year taken.
- Incentives to extend the working career: People who continue working in spite of being eligible to retire with a full pension will receive an extra benefit of between 2% and 4%, depending on the length of their contribution career.
- Computation period: This is extended from the last 15 years of contributions to the last 25.
- Beneficiaries and parents: Beneficiaries who also receive income (e.g. from work) will contribute to social security in future. At the same time, fathers or mothers with children who have had to stop work in order to care for them will count as having contributed for up to two years.

Reductions in benefits
According to a recent report by the OECD, one of the effects of the pension reform will be a drop of nearly eight percent in the benefits received. It is estimated that a worker with a full career who started contributing in 2008 would collect a benefit equivalent to 81.20% of his or her final salary under the old system. With the changes introduced under the reforms, this will fall to 73.9%.

Savings on GDP
The same OECD study estimated the savings provided by the reform at 3.5% of GDP in 2050.

Private pension reform
The public pension reforms open up new opportunities for private pension plans, not least because the reforms will necessitate adjustments to currently existing commitments, mainly regarding defined benefits, in order to adapt them to the new retirement rules.

Although the reforms will have a long transition period, so that their effects will soften with time, they will promote new developments in supplementary coverages. Since the last major reform of company pensions in 2002, there have been no thorough-going changes that would allow supplementary plans to come of age.

Less than 10% of Spain’s working population is covered by a group insurance policy or employment pension plan. Spain is thus very different from other countries in Europe. However, with the speed of change to the retirement age now set to be among the fastest in the world, there is a new opportunity for gaps to be covered by supplementary pension plans.

It is essential for the second pillar to be developed using in-depth analysis of the full variety of solutions available, such as industry-sector plans or schemes specifically for small and medium enterprises.

This reform of supplementary plans needs to be tackled autonomously, and not tied to the reform of the public pension system. Business organisations, trade unions, the insurance and pension fund industry, as well as the authorities, need to work together to find a way forward. Tax incentives will be important, but cannot develop the second pillar alone. Both trade unions and businesses will need to take a longer-term view if we are to see immediate salary remuneration giving way to deferred remuneration systems.

The future should bring further improvements in service and transparency by insurance companies and pension fund managers. We need to see more specific rather than general solutions, and the development of flexible remuneration systems, with a range of tax optimization options.

For more information please contact Ms. Ana Delgado, Desarrollo de Negocio | VidaCaixa Previsión Social ,VidaCaixa
E-mail: adelgado@vidacaixa.com
Phone: +93 227 89 57