IPE speaks with Ángel Martínez-Aldama, director of the Spanish investment and pension fund association Inverco, regarding the recent market slump and the losses made by local pension funds since January.

IPE: "Spanish pension funds' return on investment has shrunk by 1.74% between January and September this year. How do you explain these losses?"

AMA: "The losses are mainly due to the equity market fall experienced this summer, but not only. Traditionally, pension funds' exposure to equities has been relatively low. Even though the overall asset allocation to this asset class stood at 30-35% three years ago, now this exposure has been lowered to around 20%. I would attribute most of the losses made by pension schemes to fixed income products and more especially to government bonds, as the asset class has taken a serious hit since 2009 due to the sovereign debt crisis in Europe.

"But even though the losses are significant, we need to bear in mind that, due to their long-term liabilities, pension funds should look at medium and long-term returns on investment rather than focusing on the short term. Therefore, looking at the next 20 years, we expect pension funds in the country to reach an average return on investment of 5% per annum."

IPE: "What is pension funds' priority at the moment? Are they adopting the same strategy as some of their European counterparts, which consists of diversifying more by increasing their allocation to emerging market instruments and alternative assets? Or are they going 'back to basics'?"

AMA: "After four years spent in the midst of this financial crisis, most pension funds in the country have already switched their investment strategy. They are now seeking to adopt a more conservative approach and shorten the length of their investments, as well as reduce their exposure to certain markets.

"However, a distinction arises between occupational and individual pension plans. In the first type of funds, the policy is put in place by the company itself and employee representatives. In principal, they can be convinced that a long-term approach should be maintained.

"For individual plans, employees can switch from one pension fund to another without paying extra taxes. Therefore, these pension schemes are under pressure to maintain their return on investment and focus more on the short term. Clearly, the recent financial turbulence and the losses this summer have made them shiver.

"Considering the fact alternative assets have not provided high returns since last year, individual pension plans are now considering sticking to the fundamentals. Most of them will stick to their allocation to government bonds and equities over the coming months."

IPE: "On a political level, do you think some actions from the Spanish government or the European Commission could help the market to restore confidence?"

AMA: "A European summit will be held on 23 October. The main issue should be to recapitalise European banks. The most outstanding example at the moment is obviously Dexia. The real issue comes from the fact that, if such banks are not recapitalised, the impact on the real economy will be huge. This issue should be clarified in one sense or another, and as soon as possible. Otherwise, the market will not be able to start its recovery."

IPE: "What does the future hold for Spanish pension funds? Are you expecting any further losses stemming from the current dip in financial markets?"

AMA: "Within the last 10 days, the bond and stock markets have been performing relatively well. In terms of Spanish debt, the spread over German bonds has decreased to nearly 80-90 basis points. Clearly, this has affected pension funds' asset holding positively.

"However, you never know what could arise before year-end. We have been in a crisis for four years now, and quite frankly, it would be naïve to believe the economy would recover any time soon."

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