the lack of incentives and the situation sink these savings funds
The pension plans, a financial instrument designed so that workers with savings capacity can have an economic cushion for retirement, are experiencing their worst moment. The drastic cut in tax incentives for individual plans, which has involved the transfer of participants, has not involved a mobilization of money towards employment plans as the Government of Pedro Sánchez intended. The (very) negative effect on profitability of interest rate hikes and the significant fall in stock markets in recent months due to the ukrainian invasionto Russia have given the finishing touch, with a drop in the number of investors, a decline in the assets of these products and a negative return, very similar to that recorded in 2008.
In the previous crisis, the profitability of the plans was negative for seven quarters -from March 2008 to September 2009- and now significant setbacks have been observed in the last two quarters, of 8.4% in the accumulated figure for the current year. Meanwhile, the drastic drop in contributions to individual funds -of 17%- has not translated into a transfer to the employment system. The withdrawal of tax incentives reduces these contributions by 2,571 million euros from January 2021 to September 2022.
What incentives do pension plans have?
The change of taxation, reducing the incentivized contribution limit to 1,500 euros has led to a decrease in gross contributions. For many, this decision, argued that individual benefits only benefit citizens with high incomes, does not apply to employment. These lose up to one hundred million in contributions between January and September 2022, according to the latest statistics from the Association of Collective Investment Institutions and Pension Funds (Inverco).
The significant drop in profitability affects almost all savings formulas, especially guaranteed ones, long-term fixed income and variable income
The significant drop in profitability affects almost all savings formulas, especially guaranteed ones, long-term fixed income and variable income. The most conservative individuals –in fixed and guaranteed income– They are designed for people close to retirement who theoretically do not put their savings at risk, but who are now the most affected by the new economic and financial context, with a bond market pressured by high inflation. These products have lost much of their attractiveness to investors.
But neither have equity plans been spared from these drops in profitability, designed for risky investors, mostly young, who take on significant risks in search of greater long-term profitability; neither the associated plans nor the employment plans, for which the Government has decidedly opted to ‘save’ the pensions of the ‘baby boom’ generation, the most numerous, and has focused tax incentives on them, a decision that has not had the desired effect.
Everything influences this situation. The high volatility that exists in the financial markets due to geopolitical and inflationary tensions – fundamentally generated by the energy crisis– and the increasingly well-founded fears of a recession in the short term have caused corrections in the stock and bond markets. In the third quarter, according to the Inverco analysis, the exposure of foreign portfolio assets increased again compared to previous quarters and stood above the end of 2021, standing at 38.5%, thanks to the increase in the exposure to fixed income, which reaches 12.2%.
Where is the money from pension plans invested?
“Meanwhile, the exposure in the domestic portfolio decreased slightly compared to the previous quarter but remained at the levels observed at the beginning of the year, standing at 44.3%, as a result of a lower exposure in public fixed income (13.1% With this, the weighting of the exposure to equities in the portfolio of the Pension fundsboth directly and indirectly through IICs, continues at an all-time high, representing almost 41% of the total”.
In parallel, the Institute of Economic Studies (IEE) has demanded an improvement in the fiscal incentives of these savings instruments after verifying “deficiencies” in the current tax framework. In a report presented a few days ago, it analyzes the tax treatment for private pension plans in Spain compared to the rest of the countries of the European Union and denounces that individual private pension plans have worsened “significantly” in recent years after of several reforms that have cut the contribution limit from 10,000 euros per year in force in 2014, to 1,500 euros per year today. “This would have meant a progressive drop in the total annual volume of contributions from 6,200 million euros in 2006 to 2,594 million in 2021, which represents a decline, in relative terms, of more than 58%”.
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