José Pavão Nunes World Forum OECD June 2007 Pension Funds in Portugal

Summary Introduction The importance of the Portuguese pension funds market –Legal framework –Pension funds market –The structure of Portuguese pension funds market

Summary Features of the Portuguese pension funds market –Pension Plans –Membership –Pensions –Financing level –Investments

Introduction Pension funds and their growth is intimately linked to the level of Social Security payments High degree of interdependence between state welfare, corporate and personal provision as they are clearly complementary Population is ageing throughout the world but particularly in the more developed nations –Drop in birthrates –Increased life expectancy

Introduction Resident Population Projection by age groups Portugal 2005 – 2050 (thousands)

Introduction Resident Population Projection Portugal 2005 – 2050 (thousands)

Introduction Young and Aged Dependence Indices Projections Portugal 2005 – 2050

Introduction Ordinary state pensions are financed through a redistribution system (pay-as-you-go) System breakdown Social Security System Reform + Pension Funds Development

Introduction Pension funds (Portugal): –Supplementary to Social Security System (SSS) –Way of financing occupational pension plans (2nd pillar) and personal pension plans (3rd pillar) –in some cases finances schemes that replace SSS (Banking sector)

Introduction Pension Funds (EU) 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

Introduction –The setting up of both freedom to provide services without barriers and freedom to invest subject only to coordinated prudential requirements –The high level of protection and information for members and beneficiaries

The importance of the Portuguese pension funds market

Legal Framework Law no. 2/71 of 12th April 1971 companies whose aim is the management of funds intended for group insurance relating to retirement, widows, disability or other pensions shall be governed by the provisions, suitably adjusted, applying to insurance companies Law no. 28/84 of 14th August 1984 Framework for supplementary payment schemes

Legal Framework Decree-Law no. 325/85 of 6th August 1985 First piece of legislation concerning pension funds (no pension fund was set up under it). Decree-Law no. 396/86 of 25th November 1986 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. Decree-Law no. 205/89 of 27th June 1989 Retirement Saving Plans (RSP)

Legal Framework Decree-Law no. 415/91 of 25th October 1991 Allowed for the financing by pension funds of small and medium-sized companies supplementary pension schemes Less bureaucracy in the setting up of pension funds Participation of more than one manager in a pension fund Fund managers to take out insurance to guarantee payment relating to death or disability Distinction made between closed pension funds and open pension funds

Legal Framework Decree-Law no. 204/95 of 5th August 1995 Equity Savings Plans (ESP) (to strengthen the stock market ) Decree-Law no. 12/2006 of 20th January 2006 Transposed EU Directive no. 2003/41/EC of 3rd June

Pension funds market Pension funds growth:

Pension funds market Ratio of pension funds assets and insurance assets to the GDP

Pension funds market The importance of pension funds in OECD – 2005 In per cent of GDP * Provisional data (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 2001.

The structure of pension funds market Growth in Pension Funds * Provisional data

The structure of pension funds market Closed / Opened pension funds * Provisional data

The structure of pension funds market Closed Pension Funds and Collective Membership by economic sector (as % of total) * Provisional data

Features of the Portuguese pension funds market

Pension Plans Closed Pension Funds and Collective Membership by pension schemes (million of euros) * Provisional data

Membership Number of members and beneficiaries by type of pension fund * Provisional data

Membership Members and beneficiaries by economic sector 2005 * Provisional data

Pensions Pension versus Pension funds total amount (million of euros) * Provisional data

Pensions Pensions and contributions versus pension funds total amount * Provisional data

Pensions Number of beneficiaries and paid benefits by type of fund and type of benefit * Provisional data

Pensions % of beneficiaries and paid benefits per type of benefit * Provisional data

Pensions % of paid benefits (closed pension funds) per type of benefit and economic sector – 2005 * Provisional data

Financing level Closed pension funds by economic sectors * Provisional data

Investments Investments breakdown by type of pension funds 2005 (million of euros) * Provisional data

Investments Geographical breakdown of the pension funds assets 2005 * Provisional data

Investments Geographical breakdown of the pension funds assets, by type of investment product * Provisional data

Conclusion 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.

Conclusion 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 3rd 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.