The Spanish asset management industry is not a pensions management industry, according to Santiago Fernández Valbuena, chief executive officer of Fonditel, which manages the assets of Spain’s largest pension fund for the Telefonica workers. “Spain is dominated by unit trusts and not by pension funds.”
Occupational plans account for 40% of the pensions assets in Spain, the rest are mainly in individual plans. The vast majority of pensions assets are in defined contribution (DC) plans.
Employers wanting to set up pension arrangements in Spain need a pension plan, a pension fund and pension plan manager, he says, describing the plan itself as just the contract or agreement. “This is hosted in a pension fund, which acts as an investment portfolio. This money has to be managed and the accounts administered by a pension fund management company.” Fonditel as a pension fund manager runs the assets of the Telefonica group’s different plans as well as managing the participants’ accounts. It also runs individual plans, open to the public.
There are requirements that must be met in order to set up a pension fund management company, he explains. “There are specific restrictions designed by the legislator, back in1987, to provide a threshold to prevent entrants at too low a capital level, or of dubious respectability entering the business. So Spanish pension fund management companies, such as Fonditel, must put up 1% roughly of the total value of the assets managed as capital. So if you are running E1bn, you have to put up E10m of capital.”
This restriction imposes a heavy burden when managing DC plans, where no explicit guarantees are provided to members. “This is our situation at Fonditel, we manage E4bn of assets and we need E40m in capital. But we need this capital for nothing – our fixed assets are less than E2m. We outsource many activities and we give no guarantees whatever. So we are not responsible for any investment returns in the insurance sense.”
He considers that the evolution of Spanish legislation has been very slow but it has tried to break down some of the doors that were previously closed. These doors were erected by those committed to the pay-as-you-go system who regarded pensions solely as the business of the government. This attitude is behind much of the pensions thinking in Spain. In addition, pension funds have to have a custodian, which ensures that the managers never touch the money.
Every manager is responsible to the comisión de control, equivalent to a board of trustees, which is the overall governing body of the fund, is responsible for running the whole plan. “This can vary in size from just three members in a small scheme to the very big, as in Fonditel, where it is 17 people strong,” he says. He points out that a major feature is that the membership must have overall control, with the consequence that it is the participants’ money that is represented. So the sponsor gets the minority share, even in a defined benefit plan. This issue, he says, has been very hotly debated in Spain, as some employers are not interested in setting up new plans if they are in the minority, saying: “We are not sure this is a fair deal looking at it from the business standpoint.”
The board selects the manager and custodian,who has to be separate from the asset manager.
For historical reasons, the Telefonica Employees Plan, which has around 62,000 active members, is hosted within the Antaris 2 pension fund, for which Fonditel is the manager. The asset mix is currently 35% equities and 65% bonds having moved in the four years from 3% equities and 97% bonds. This was not as bad as it sounds, he says. “Investors had been getting 7% pa in real rates of returns for the past 10 years, so it was the smart thing to do. But that party is over. The equity culture is where investors are heading.”
Fonditel was set up according to the 1987 law. It has a small team of 29 people with E4.2bn managed in DC money, 98% of which is Telefonica employees pension fund. “We manage 10 other plans, and run 74,000 accounts for the main plan and 7,000 other accounts. So we are responsible for about 30% of the total of pension fund assets in Spain, but only 11% of the overall pensions market.” he points out. “This is not an indicator of how big Fonditel is but of how undeveloped the occupational system is here.”
This is based on a talk to the European Institutional Asset Management Conference in Madrid earlier this year