Spanish employees within defined benefit (DB) insurance company pension plans will lose around a quarter of the returns normally guaranteed on their contributions following a ruling by the government that insurers can no longer offer annually adjusted 'single premium' contracts.
The contracts, offered yearly on the basis of short term Spanish government bond rates which have in recent years returned around 4.3%, will be abolished by the year end with insurers only able then to guarantee 3.2% for DB plans, the normal rate for 30 year government bonds and 'regular' DB insurance schemes.
And the move is set to push employees in Spain towards defined contribution plans (DC), including thousands of older workers and retirees who had been dependent on the fiscal benefits of the insurance schemes.
Ian Hinton, consultant at Aserplan, part of the international Woodrow Milliman network, explains: The issue for the government is the lowering of interest rates in line with the rest of the eurozone - so they are seeking to level out the insurance system before interest rates drop and any risk is left with employees and pensioners.
"One of the outcomes will almost certainly be a shift in Spain to DC plans, because pensioners are going to start receiving less money than they are used to." Angel Munoz, financial director at Madrid-based Dutch insurer Nation-ale Nederlanden, comments: "Older people in Spain have been traditionally attracted to these products be-cause of the fiscal advantages, so this government ruling could hit them hard and many I'm sure will be strongly considering looking at DC pension plans now. This could also greatly impact on Spain's insurance business - but at the same time the logic behind such change fits into the falling interest rate environment of Spain within euroland, so it is difficult to see any other solution."
Almudena Hernández, senior consultant at Madrid-based Buck Consultants, adds: "Most companies in Spain are currently redesigning their pension plans in a DC mould because of tax advantages, and in anticipation of government legislation on pension funds to appear in the first quarter of this year. So I think this announcement will push further this trend as a result of employee demand. However, I think those workers truly desiring a DB scheme will stay, because even at the new flat rate - regular high returns will mean lower premiums later in life, so there is sufficient compensation there. " Hugh Wheelan"

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