Pension Funds in Portugal

Transcription

1 Pension Funds in Portugal Introduction José Pavão Nunes Head of Statistics and Information Control Department, Portuguese Insurance and Pension Funds Supervisory Authority (ISP) The importance of pension funds and their growth is intimately linked to the level of Social Security payments. As well known, there is a high degree of interdependence between state welfare, corporate and personal provision as they are clearly complementary. The fact that the population is ageing throughout the world, but particularly in the more developed nations, due to both the drop in birthrates and increased life expectancy, raises serious problems in terms of financing the Social Security System, especially in regard to retirement pensions. The following Figures, using data from the latest official report on the sustainability of the Portuguese Social Security System, show the projections of resident population and the young and aged dependence indices. Figure 1. Resident Population Projection, by age groups Portugal (thousands) 100% 80% 60% 40% 0% Population < 15 Population Population 65 + Source: Social Security (2006), Technical Report on the Sustainability of the Social Security System 1

2 Figure 2. Resident Population Projections Portugal (thousands) Total Population Source: Social Security (2006), Technical Report on the Sustainability of the Social Security System Figure 3. Young and Aged Dependence Indices Projections Portugal % 60% 50% 40% 30% 10% 0% Young Dependence Index Aged Dependence Index Source: Social Security (2006), Technical Report on the Sustainability of the Social Security System The dependence indices in Figure 3, show the young dependence index 1 slightly decreasing due to fertility issues and the aged dependence index 2 increasing considerably due to the fast ageing of the Portuguese population. Given that in Portugal, ordinary state 1 The Young Dependence Index is defined as the ratio Population < 15 / Population The Aged Dependence Index is defined as the ratio Population 65 + / Population

3 pensions are financed through a redistribution system (pay-as-you-go), the problem is expected to grow worse in the near future and the system may break down if its structure and method of financing are left unchanged. Social Security System reform is underway in Portugal in an attempt to find solutions to its financing problem. There is a move towards creating a system that is not based solely on the principle that the present working population pays for the pensions of today s retired people (a redistribution scheme). Instead, the new system gives greater importance to the principle that every working person should also contribute to the financing of their own pension by creating financial reserves that are capitalized (a capitalization scheme). The existing know-how of both pension funds management and life insurance companies is an important advantage that has been taken into account when choosing the governing options for the reform of the public pension schemes. The new system also stands on three pillars where occupational pension plans (the 2nd pillar) and personal pension plans (the 3rd pillar) take on an even greater importance as supplementing the ordinary state pensions (the 1st pillar). This represents a challenge for the Portuguese pension funds market and will generate a new pension funds cycle in Portugal. The development of capitalization schemes and supplementary plans in the form of occupational and personal pension plans is therefore one of the factors that will ensure that the current levels of pension income will be maintained. At the same time, it makes an invaluable contribution to the development of the Portuguese capital market as a result of the extra investments that will be made into funds that, once capitalized, will finance their commitments with regard to pensions. In Portugal, pension funds already finance supplementary schemes and are thus a privileged way of financing occupational pension plans and, to a lesser extent, personal pension plans. In some cases they also finance schemes that replace Social Security, as for example in the Banking sector. The settlement 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 (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 The setting up of both freedom to provide services without barriers (cross-border in terms of managers, asset allocation and custodians) and freedom to invest, subject only to coordinated prudential requirements (similar to the one existing in Portugal, subject to the prudent person plus principle in terms of investment policy) The high level of protection and information for members and beneficiaries 3

4 The importance of the Portuguese pension funds market Legal framework The first legal reference to pension funds in Portugal appeared in Law no. 2/71 of 12th April Basis VI of that Act stated that 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 same provisions, suitably adjusted, applying to insurance companies. Given the high level of inflation at the time and the calculation method used for state pensions (based on average earnings over the best five of the last ten years), the sums paid to pensioners differed considerably from their salaries at the time of their retirement. It was therefore natural that companies should develop supplementary pension plans and that the legislature should feel the need to take into account the problem of their financing. In fact, companies incurred considerable expense with the payment of supplementary retirement benefits, which were sometimes quite generous, without actually quantifying the cost involved. Almost all pensions were paid by the pay-as-you-go system, in other words, without any prior financing. However, the 1971 Act was never regulated and therefore never had any practical effect. Later, in 1984, the Social Security Act (Law no. 28/84 of 14th August) laid down the framework for supplementary schemes, in the section on Private Initiatives. The management of supplementary schemes was entrusted to mutual associations, insurance companies and other collective bodies set up for that purpose. A condition of such schemes was that they had to include contributions from those participating in the fund as a source of its financing. As for pension funds, the first piece of legislation was passed in 1985 (Decree-Law no. 325/85 of 6th August). It was only in force for a short period of time and no pension fund was set up under it. The lack of tax incentives was certainly one of the main reasons why it did not achieved its aims. All changed in 1986 with new legislation (Decree-Law no. 396/86 of 25th November) that 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. This change was enhanced by alterations made to tax incentives in One of the fundamental factors in the development of pension funds was the tax incentives framework relating to the contributions made by companies and/or fund members, the income from investing the fund s assets and their guaranteed benefits. In 1989, the scope of pension funds was extended to personal savings with the implementation of legislation dealing with Retirement Saving Plans (RSP), derived from Decree-Law no. 205/89 of 27th June. Such pension funds enjoyed particularly favorable tax incentives. Decree-Law no. 415/91 of 25th October 1991 used previous experience to amend major shortcomings found in the implementation of the earlier legal framework. Thus, it allowed for the financing by pension funds of small and medium-sized companies supplementary pension schemes, for less bureaucracy in the setting up of pension funds, for greater flexibility in the receipt of payments, for the participation of more than one manager in a pension fund, as well as for fund managers to take out insurance to guarantee payments relating to death or disability. In this way, a distinction was made between closed pension 4

5 funds 3, in which there must be a link between those taking part, usually companies, and open pension funds 4 to which any individual (personal participation) or company (corporate participation) can subscribe. In 1995, Equity Savings Plans (ESP) 5 were created, under Decree-Law no. 204/95 of 5th August, in an effort to strengthen the stock market. Under Portuguese law, pension funds are autonomous portfolios with no legal personal identity and are only liable to the beneficiaries in regard to the fulfillment of pension plans. They operate on a capitalization basis and must have sufficient assets to meet the minimum amounts set by the current regulations, calculated on the basis of the liabilities incurred (solvency minimum). Pension fund investments must comply with the rules covering their make-up and these include rules about spreading and matching. The recent Decree-Law no. 12/2006 of 20th January 2006, which transposed EU Directive no. 2003/41/EC of 3rd June into Portuguese law, is now being regulated. Pension funds market ISP calculations given in Figure 4 below show that in 2005 the pension funds growth rate was around 22.4%, reversing the trend of the recent years. The real growth of the pension funds market was 21.8% above real GDP growth. Two main reasons can explain this fact: good performance of the pension funds assets in that period and extra contributions made in order to match pension funds liabilities, which were increased by the new calculation method introduced in compliance with the international accounting standards (IAS) 6. Figure 5 shows that the weight of pension funds assets (PFA) in GDP rose from 10.6% (in 2004) to 12.9% (in 2005). On the other hand, the same ratio including only assets covering technical provisions in the insurance market (IA) rose from 20.6% to 24.7% over the same period. The increase in both indicators shows that the weight of pension funds in the insurance market remained unchanged (52.3%) reversing the recent trend, and the combination of both markets represented around 38% of GDP by the end of A pension fund is defined as a closed fund when it relates to only one sponsor or, when there are a number of sponsors, there must be a business, associative, professional or social connection between the sponsors and approval is needed for new sponsors to join in. Closed pension funds may be set up by a company, groups of companies, groups of social or professional associations, or by agreement between employers' associations and trade unions. 4 A pension fund is defined as an open fund when no link between those joining the fund is necessary and membership of the fund is solely dependent on acceptance by the pension fund manager. Open pension funds may be set up by any institution entitled to manage pension funds. The total net value of an open fund is divided into units, that may be represented by certificates. 5 ESP pension funds, and RSP pension funds, are defined as open pension funds to which only individual membership is permitted. 6 This revision occurred to pension funds whose sponsors are listed on a stock exchange (mainly Banking sector). 5

6 Figure 4. Pension funds growth: Pension Funds Market (millions of euros) Pension Funds Market (millions of euros) 25% 15% 10% 5% 0% -5% -10% Real growth of pension funds market above the real growth of the GDP Real growth of pension funds market above the real growth of the GDP Figure 5. Ratio of pension funds assets and insurance assets to the GDP 80% 80% 70% 70% PFA / GDP and IA / GDP0 60% 50% 40% 30% 10% 60% 50% 40% 30% 10% PFA / IA 0% % PFA / GDP (PFA + IA) / GDP IA / GDP PFA / IA 6

7 In 2005, the position of Portuguese pension funds within the OECD countries can be observed in the Figure 6 below. Figure 6. The importance of pension funds in OECD 2005 In per cent of GDP Greece Turkey Luxembourg Slovak Republic (4) Korea Italy Germany Czech Republic Belgium Austria France Norway M exico Hungary Poland Spain (5) New Zealand Portugal Sweden (6) Japan (3) Denmark Canada Ireland (2) Australia Finland (1) United Kingdom (7) United States Switzerland Iceland Netherlands , % 40% 60% 80% 100% 1 140% 98.9 (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 (5) Data for 2004 and 2005 include Mutual Funds. (6) Includes assets from the premium pension system for 2004 and data are estimates. (7) 2005 pension assets data is staff estimates; 2002 pension assets data is Source : OECD, Global Pension Statistics Figure 6 shows not only the importance of pension funds in the OECD countries but also reflects the differences in the design and maturity of pension systems. In some countries (such as Portugal) pension schemes are based in Bismarkian and beveredgian models (redistribution system) while in other ones (such as Netherlands) pension schemes are based in multipillar pension models (1st pillar beveredgian systems complemented by capitalisation schemes). Presently it is possible to have the knowledge of several trends among pension funds across the OECD countries due to a statistical project initiated in 2002: The OECD Task Force on Pension Statistics (TFPS). The huge diversity in terms of pension funds nature among the OECD countries, namely: historical traditions, level of substitution income in respect of the public 1st pillar and social protections models, has created a significant need for development of comprehensive and comparable pension statistics in order not only to fill this statistical gap but also to assist governments in assessing their programmes and reforms. The TFPS project aims to set up an analytical database of global pension statistics and indicators. It started with the development of a taxonomy structured around two key terms, 7

8 pension plans and pension funds, and two approaches, functional and institutional. Since then the TFPS have been collecting data permitting inter-country comparisons with current statistics and indicators across OECD countries. The structure of the Portuguese pension funds market Pension funds have become increasingly important and this has been reflected in an increase in the volume of assets under management, as detailed in Table 1 below. At the end of 2006 there were 27 pension funds managers 7 in Portugal (14 life insurance companies and 13 pension fund management companies), managing 232 pension funds with total assets of 21,171 million euros. Of the 232 pension funds, 175 were closed and 57 open pension funds, of which 20 were Retirement Savings Plans (RSP), and 4 were Equity Savings Plans (ESP). Table 1. Growth in Pension Funds * Number of managing institutions Number of Pension Funds Retirement Savings Plans (RSP) Equity Savings Plans (ESP) Other open funds Closed funds Total Assets (millions of Euros) 14,808 15,879 16, ,185 18,982 21,171 Retirement Savings Plans (RSP) Equity Savings Plans (ESP) Other open funds 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 Retirement Savings Plans (RSP) Equity Savings Plans (ESP) Other open funds Closed funds 2,058 2,533 1,303 1,583 3,714 1,441 * Provisional data Regarding the structure of total assets held by type of pension fund, closed pension funds have been representing around 95% of the total. This very high percentage can be 7 Pension funds may be managed by companies created solely for that purpose, referred to herein as management companies, or by insurance undertakings which pursue legally the business of life insurance in Portugal. The pension fund manager shall perform all its acts in the name of and on behalf of the sponsors, members, contributors and beneficiaries. As the fund's administrator and legal representative, the pension fund manager may deal in assets and real estate, make bank deposits in the fund's name and exercise all rights or perform all acts directly or indirectly related to the fund's assets. 8

9 explained by the existence of pension schemes 8 that replace Social Security, as for example in the Banking and Communication sectors (see Figure 7 below). Note that the steep decline in total assets held by in 2004 is explained by the partial transfer (about 1 billion of euros) of funds from one Banking sector closed fund to Social Security. Amongst open pension funds, while RSP and ESP have been showing smooth growth, other open pension funds have shown a high increase in the last two years due to increases in collective membership 9, some of them transferred from closed funds. Total contributions grew substantially in 2005 (mainly to closed and other open funds ) particularly due to the already mentioned change in pension funds liabilities calculations. Figure 7. Structure of the pension funds market 2.3% 94.5% 5.5% 0.1% 3.1% Closed RSP ESP Other open Concerning the social and economic role of pension funds in Portugal as a vehicle of financing pension schemes, according to the OECD taxonomy, the weight of personal pension plans was around 3% of the total while occupational pension plans represented about 97%. Alternatively, using the pillars definition and taking into account that pension funds are replacing Social Security, the weight of the 3 rd pillar (personal pension plans) remains the same, while occupational pension plans are subdivided into the 1 st and 2 nd pillars representing about 56% and 41% respectively. According to the different sectors in the economy in 2005, Banking, Communication and Transport sectors represented about 84% of the members of closed pension funds and collective membership of other open pension funds as shown in Table 2 below. 8 Pension schemes are plans that define in their own terms the conditions under which the person has the right to receive a pension in the cases of pre-retirement, early retirement, retirement, disability or on survival. 9 Collective membership of an open pension fund arises when sponsors wishing to join the fund acquire units. A number of sponsors may belong to a single collective membership provided there is a business; associative, professional or social connection between them and their approval is needed for new sponsors to join the collective membership. Pension schemes funded through collective membership of an open pension fund may be of different types: defined contribution, defined benefit or hybrid schemes, and they may also be contributory. 9

10 Table 2. Closed Pension Funds and Collective Membership by economic sector (as % of total) Banking 68.5% 71.1% Communications and Transports 14.3% 12.8% Production and distribution of electricity gas and water 6.5% 6.5% Industry 6.0% 5.1% Insurance 1.8% 1.9% Other financial activities 1.0% 0.9% Trade 1.2% 1.0% Other 0.8% 0.6% Features of the Portuguese pension funds market Pension Plans Pension schemes can be subdivided into three types: Defined Benefit (DB) 10, Defined Contribution (DC) 11 and Hybrid (H) 12. In Portugal, occupational plans are mainly of the DB type. In 2005, DB plans related to closed pension funds represented around 98% of its total while those related to collective membership of open pension funds were about 88% of its total (see Table 3 below). Personal plans are exclusively DC plans. They include individual membership of open pension funds and the totality of RSP and ESP pension funds (3 rd pillar). Table 3. Closed Pension Funds and Collective Membership by pension schemes (in million of euros) 2005 Closed pension funds 18,011 Defined Benefit 17,717 Defined Contribution 30 Hybrid 264 Open pension funds 971 RSP (Defined Contribution) 446 ESP (Defined Contribution) 17 Other 508 Individual membership (Defined Contribution) 129 Collective membership 379 Defined Benefit 332 Defined Contribution 45 Hybrid 2 10 In Defined Benefit plans, benefits are pre-determined and the contributions are calculated to ensure payment of those benefits. 11 In Defined Contribution plans, contributions are pre-defined and the benefits are determined according to the contributions paid in and the corresponding accumulated earnings. 12 Hybrid plans combine the features of both types defined benefit and defined contribution plans. 10

11 Membership In 2005 the number of individuals that were members or beneficiaries of pension funds increased slightly (0.8%). The number of members decreased 1% while the number of beneficiaries increased 5.4%, as shown in Table 4 below. Membership of other open funds rose by 14.3% while that of ESP 13 declined by 15.1%. The reduction in the number of members can be explained by reorganizations measures in the staff held by the sponsor companies across the different economic sector, as well as the change in status of members into beneficiaries. Table 4. Number of member and beneficiaries by type of pension fund /2004 (a) Members 283, , , , , % Closed funds 178, , , , , % Retirement Savings Plans (RSP) 61,565 64,593 65,579 65,279 63, % Equity Savings Plans (ESP) 3,436 3,443 3,274 2,861 2, % Other open funds 39,303 39,635 39,274 42,296 48, % (b) Beneficiaries (*) 112, , , , , % (a) + (b) 396, , , , , % (b) / (a) 39.8% 42.0% 40.9% 41.4% 44.1% * Beneficiaries of all types of pension funds The weight of members in the total of the working population remains at the same level of the previous years, around 5% 14. According to the Portuguese National Statistics Institute (INE), in 2005 the working population was around 5 million people. The distribution of members and beneficiaries by economic sector (see Figure 8 below) shows that Banking, the biggest sector, represented 41.3% of the total (from 39.5% in 2004) and 49.2% of the beneficiaries (from 42.4% in 2004). 13 The weight of ESP pension funds is irrelevant, and therefore this decline had no impact on the global results. 14 Double counting must be taken into account, as some of the members of RSP and ESP are also members of other pension funds. 11

12 Figure 8. Members and beneficiaries by economic sector % 5% 18% 11% 15% 10% 3% 13% 12% 13% 41% 49% Mem bers Beneficiaries Banking Production and distribution of electricity gas and w ater Insurance Communications and Transports Industry Other Pensions Table 5 shows the amount of benefits paid 15 since 2001 as well its weight in the total amount held by pension funds. In 2005, the amount of benefits paid (953 millions of euros) remained at the same level as the previous year (950 millions of euros), but considering the highest growth of the contributions in that period 16, the pension / contributions ratio dropped to 24.4% (almost half of the percentage in 2004). Table 5. Pension versus Pension funds total amount (millions of euros) (a) Pensions (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% 15 Includes pension and lump sums paid to fund beneficiaries and/or single annuity premiums paid to insurance companies. 16 See page 5. 12

13 Figure 9 shows the maturity of the Portuguese pension funds market. The continued absence of structural changes regarding pension funds has allowed the pension market to get into a stationary phase, as shown by the evolution of the beneficiaries / members ratio. Figure 9. Pensions and contributions versus pension funds total amount 70% 35% Beneficiaries / Members and Pensions / Contribuitions 60% 50% 40% 30% 10% 30% 25% 15% 10% 5% Pensions / Amount of pf and Contributions / Amount of pf 0% % Number of Beneficiaries / Number of members Pension / Contributions Pension / Amount of pension funds Contributions / Amount of pension funds Table 6 details the number of beneficiaries and amount of paid benefits, by type of pension fund and type of benefits, and shows the existence of a narrow relation between the weight of the number of beneficiaries and their paid benefits by type of pension fund. Table 6. Number of beneficiaries and paid benefits by type of fund and type of benefit Closed funds Number Thousand of euros Retirement Savings Plans (RSP) Number Thousand of euros Equity Savings Plans (ESP) Number Thousand of euros Other open funds Number Thousand of euros Number Total Thousand of euros Retirement 48, ,471 3,387 25, ,892 7,576 53, ,655 Disability 31, , ,152 9,868 33, ,549 Early retirement / Preretirement 7, , , , ,913 Survival 20,007 61, , ,482 64,099 Long duration unemployment / serious illness , , , ,034 4,392 31, ,561 18, , , % 94.7% 3.8% 3.3% 0.0% 0.0% 3.9% 2.0% 13

14 In 2005, 92.2% of beneficiaries and 94.7% of paid benefits belong to closed pension funds. Figure 10 shows that concerning the different types of benefits, retirement and survival benefits have a higher percentage of the total per number of beneficiaries than per paid benefits (retirement: 46.2% versus 41.4%; survival: 18% versus 7%), while disability and early retirement benefits show the inverse relationship. This can be explained by relative nature of these benefits. Figure 10. % of beneficiaries and paid benefits by type of benefit % 40% 30% 10% 0% Retirement Disability Early retirement / Pre-retirement Survival Long duration unemployment / serious illness Beneficiaries Paid benefits Table 7 shows for closed funds the weight of paid benefits per type across economic sector. Notice that 38.2% of the total paid benefits in 2005 refers to disability in the Banking sector 17. Table 7. % of paid benefits (closed pension funds) per type of benefit and economic sector 2005 Retirement Disability Early retirement / Pre-retirement Survival Banking 14.0% 38.2% 7.7% 3.7% 63.6% Communications and Transports Production and distribution of electricity gas and water Total 14.3% 2.0% 0.1% 0.2% 16.6% 4.2% 0.6% 0.3% 1.5% 6.6% Industry 3.3% 0.9% 1.4% 0.8% 6.5% Insurance 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% 17 Which corresponds to about 60% of the total of paid benefits in this sector. 14

15 The Insurance sector is the only one where there is a higher percentage of paid benefits concerning early retirement than retirement. This can be explained by the reorganizations of staff that have taken place in this sector. Financing level Closed pension funds 18 financing level is calculated according to the ratio between the pension funds total assets and the total of the present value of the pensions in payment (of beneficiaries 19 ) plus the present value of past services liabilities (of members 20 ). In general, both present values are computed using different methods and/or assumptions, depending on type of schemes. Table 8 shows the financing ratio calculated using two different scenarios for In the first scenario the financing level is computed using methods and assumptions considered by the sponsor and the managing institution as the more suitable for financing the pension scheme liabilities. The second scenario it is computed using the minimum financing level according to methods and assumptions imposed by the current legislation 21. In terms of the aggregated total, the minimum financing level for 2005 was 117% (versus 106% in 2004). However, in the same period, the financing level, which is calculated with more prudent assumptions than the minimum, was 94% (versus 92% in 2004). Only Communication and transport and Other sectors showed a minimum financial level below 100%. Table 8. Financing level Closed pension funds by economic sector Financing level Minimum financing level Banking 98% 115% Communications and Transports 76% 93% Production and distribution of electricity gas and water 94% 188% Industry 96% 112% Insurance 107% 128% Other financial activities 93% 144% Trade 104% 118% Other 57% 72% 94% 117% 18 Defined benefits and hybrid schemes type only. 19 Individuals entitled to the benefits set out in the pension scheme, whether they were members or not. 20 Individuals whose personal and professional circumstances determine their entitlement to the pension scheme, regardless of whether they contribute or not to its funding. 21 It is important to mention that not all relevant parameters are defined in the current legislation. 15

16 Investments In the last few years pension funds have assumed an important role in the growth of the Portuguese stock market. In 2005 pension funds assets portfolios showed a high dispersion amongst the different investment classes. In almost all classes they represented more than 10% of the total investment, as is shown in Table 9 below. Notice that this structure remained practically unchanged from The classes of investment that have shown higher variation are Bills and Bonds (dropped 3 points), Land and Buildings (dropped 3 points) and Deposits (rose 2 points). Table 9 also details the breakdown of assets per classes and type of pension fund. The breakdown of closed pension funds investments is very similar to the total. The investment product with higher weight is Bills and bonds issued by the public administration representing more than one quarter of the total assets invested (slightly higher than the previous year). Cash and deposits represented 10% of the total due to the rise in the contributions verified at the end of 2005 that were not invested at that time. The breakdown of other open funds differs from the breakdown of the closed funds. Here, Mutual funds represented 37.4% of the total invested 22. Bills and bonds issued by the public and private sector represented 45% of the total and if added to the weight of the Mutual funds (not invested in shares) this percentage represented almost 60%. Table 9. Investments Breakdown by type of pension funds Bill and bonds issued by the public administration Bonds issued by the private sector Closed funds RSP ESP Million of euros % Million of euros % Million of euros % Other open funds Million of euros % Million of euros Total 4, % % 0 0.0% % 4, % 2, % % 0 0.0% % 2, % % Shares 3, % % % % 4, % Mutual funds 3, % % 0 0.0% % 4, % Lands and buildings 1, % 8 1.8% 0 0.0% 7 1.4% 1, % Cash and deposits 1, % % 1 5.9% % 1, % Other* % % 0 0.0% % % 18, % % % % 18, % * The negative weight of this class is justified by the use of derivatives 22 In particular, 16.6% refers to funds that invest in shares. 16

17 Figure 11 shows the geographical breakdown of the pension funds assets: around 70% of the investments were made abroad, mainly in EU 25. Figure 11. Geographical breakdown of the pension funds assets Portugal 30% 6% Other Countries 70% Portugal Bill and bonds issued by the public administration Bonds issued by the private sector Shares 26% Mutual funds 17% 2% 5% 70% 14% 9% 2% Other Countries Bill and bonds issued by the public administration Bonds issued by the private sector Shares Mutual funds Other Regarding public debt, the investments made in the EU 25 (not including Portugal) represented around 76% of the total (Germany: 28%, France: 14.4% and Spain: 10%). The investment in countries outside EU (4.9%) showed a high increase, around 3.3 points, explained by investments in Brazilian debt. The investment in public debt is, in its majority, listed in the stock exchange (97%) and about 58% concerns assets with an AAA rating 23. Figure 12. Geographical breakdown of the pension funds assets, by type of investment product % 80% 60% 40% EU 25* Portugal Other South America North America 0% Bill and bonds issued by the public administration Bonds issued by the private sector Shares M utual funds * Portugal not included 23 The weight of the assets with a rating superior to A is around 91%. 17

18 Conclusion References: Concerning bonds, Portugal 24 is still the first choice of pension funds managers (22% of the total), followed by France, Nederland, Ireland, United Kingdom and Germany with percentage varying between 5.4% and 9.1%. The investments in Portuguese companies shares continue to have a strong weight (71%). The remaining share investments in the EU 25 () refers mainly to Spain (7%), United Kingdom and Italy (both with a 3.6%). Finally, the other 9% are invested in the countries outside the EU, such as USA (4.5%) and Brazil (3.8%). For mutual funds, the year 2005 showed a slow down in the investment in national funds (from 40.2% in 2004 to 30.5%), followed by an equivalent increase in the investment in funds from the Luxembourg (from 31% in 2004 to 39.5%). 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. 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 3 rd 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. INE, (2005), Estatísticas da População (Statistics of the Population). ISP, (2005), Os Fundos de Pensões, Relatório do Sector Segurador e Fundos de Pensões (Pension Funds Report on the Insurance Sector and Pension Funds). ISP, (2005), Estatísticas de Fundos de Pensões (Pension Funds Statistics). OECD, (2004), Global Pension Statistics Project: Measuring the size of Private Pensions with an International Perspective. OECD, (2006), Pension Markets in Focus (October 2006, Issue 3). Segurança Social (Social Security), (2006), Relatório Técnico sobre a Sustentabilidade da Segurança Social (Technical Report on the Sustainability of the Social Security System). 24 Considering individual countries. 18