Portugal has a relatively generous first pillar public pension, but as in many countries it is beginning to feel the strain of an ageing population. Accordingly. a gradual reform of the system is under way to reduce the level of the first pillar via an increase in the period used for calculations and the introduction of a ceiling for contributions. Meanwhile the private pension sector is showing signs of steady growth, especially in certain sectors not covered by the state system.
The general contributory scheme covers all workers, with a few exceptions, mainly in the public sector and banking. The compulsory scheme must also be joined by the self-employed. The benefits are comprehensive, and are supported by a voluntary insurance scheme, providing protection to persons not covered by the compulsory scheme. Here benefits include old age, survivors and invalidity pensions, death grants and other welfare payments. Finally there is a non-contributory means tested-scheme for people not covered by the first two schemes.
There are also special schemes for individuals in certain professions and benefits for young people and the disabled.
The PAYG social security pension is a defined benefit scheme, with a monthly accrual rate of 2% of indexed earnings in the best 10 years within the last 15 years before retirement for each year of contribution. The maximum benefit is 80% of final average earnings and the minimum 30%. In 1999 this minimum was equivalent to 53% of the national minimum wage. The government is keen to extend the period used for calculation to 25 years.
Contributions are the main source of finance for this system, but it remains some way from being a funded scheme. The total contribution rate is 34.75% of the gross wage, of which 23.75% is paid by the employer and 11% by the employee. This global rate covers contributions for pensions, work-related benefits and welfare payments, with no differentiation being made for different insurance categories. Contributions for the self-employed are lower and special categories of dependent labour also make lower contributions. Again the government is looking to adjust the contribution ceiling to ease pressure on benefit payments.
Since the beginning of last year the universal retirement age has been made more flexible. After 30 years of membership of the system individuals may retire at 55 subject to a 4.5% annual penalty, or retirement may be deferred until 70, in which case subject to 40 years of membership a 10% bonus is payable. No formal indexation system is in operation, and pension levels are decided by the government on an ad hoc basis.
Employer and employee contributions are tax deductible, but pensions have been subject to taxation since 1989. They benefit, however from beneficial tax rates , the average rate being 7% lower than that on earned income, and the progressivity curve shallower.
The non-contributory pension covers those whose income is 30% or less of the national minimum wage, or 50% if married. Currently this pension amounts to 38% of the minimum wage and is only payable from the age of 65.
The system for the public sector provides higher benefits for employees, although contributions are similar to those in the general system, the government funding the gap in benefits and contributions. For employees hired prior to 1993 the reference income is the last month of service; those hired since that date, however, are subject to the much longer period used in the private sector. Unfortunately for the government 98% of the workers in the sector were hired before the cut-off date, and pension payments are set to rise towards GDP levels in the medium term, with the benefits from harmonisation not expected to kick in for around 40 years. Contributions in this sector amount to 10% with an additional 1% of gross salary paid for medical cover.
Private supplementary pensions were introduced in 1987 and are particularly popular in the banking sector, which is not covered by the general scheme. In most companies these non-contributory schemes are the result of collective bargaining, and remain the realm of large state or recently privatised corporations and multinationals. There has been no real push to expand this area, but the government’s reforms in the social security system will result in it being less generous, and mean that some encouragement will have to be given to expand occupational pensions through fiscal reform.
Although such plans used to be integrated with the social security system, this is no longer the case, and plans may be either defined benefit or defined contribution, with most opting for the latter. Defined benefit schemes aim to provide between 80% and 100% of final pay, including state benefit.The disengagement from the state system means that although 65 is the standard retirement age, private funds can now offer early retirement.
These funds can be financed through book reserves, insurance arrangements or company pension funds. The 1987 reforms have made pension funds the most popular vehicles due to tax benefits. Significantly employer allocations to book reserve are not tax-deductible, however employer contributions to pension funds and insurance contracts covering retirement benefits are generally tax-deductible up to 15% of total wages. Under current regulations these schemes are managed, on a segregated basis, by life insurance companies and pension fund management companies.
With institutional investment geared more to equities and foreign assets than in other parts of southern Europe there is also a tendency to outsource management. Although asset managers must be registered in Portugal, foreign companies are gaining market share.
Despite this, most asset allocation is rather conservative although this is likely to change as regulations allow 50% exposure to equities. The current figure of 28% is expected to increase as more expertise arrives in the market. The euro impact has also been slow to have an its effect in Portugal, with less exposure to foreign assets than anticipated, although this too is set to change.