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INVESTMENT & PENSIONS EUROPE
OCTOBER 2005

PENSIONS AND POLITICS: PORTUGAL
Trying to get some space

Reforming a pensions system is difficult when politicians are too timid to admit to problems and the population expects to state to provide, George Coats finds

During the campaign for February’s general election the then opposition Socialist Party (PS) promised to cut taxes, raise public sector wages and increase pensions. The governing right-of-centre Social Democrat Party (PSD) was offering fiscal stringency. For a majority of the electorate the choice seemed obvious, and PS leader José Sócrates emerged as prime minister. But in light of expectations of a 2005 budget deficit of 6.3% of GDP, since coming into office the government has increased VAT, reduced the rightto early retirement and modified the very favourable civil service pension plan to bring it into line with the rest of the state pension system.
The government says the failure to deliver on its pre-election pledges is due to the previous administration’s opaqueness on the extent of the country’s fiscal crisis. For the PSD it is a cynical U-turn on populist and opportunistic promises.
But while the Socialists’ programme was blatantly populist – and with Portugal having been subjected to a barrage of very public EU criticism for breaching ceilings for its budget deficit-to-GDP ratio the party would have had to have been suffering from a severe attention deficit not to realise the country’s dire fiscal situation – on pensions it just might have a point.
The PSD government had undertaken pension reforms. In 2002 it shifted the basis of calculation for state pensions for people who retire after 2017 to a full career-average income
realigned for inflation from the average of the 10 best years over an employee’s last 15 years indexed to inflation. And in 2003 it introduced tax incentives for those investing in third-pillar savings products.
But it did not portray the changes as part of a strategy to fend off a looming crisis; rather they were presented as a solution. The result is that the Portuguese public is largely unaware of the pension problem, has not realised the implications of the PSD alterations and continues to complacently expect the state to provide a retirement income that is the equivalent of 80% of a salary.
And the impact of the changes will be dramatic. The 80% figure will hold, being based on 2% of a salary over 40 years of service, but the base figure will be substantially lower. “We estimate
that the new law will pay around 60% of a last salary, so people will receive less,” says Maria Isabel Semião, director at BPI Pensões, the pension fund manager of the BPI banking group.
Nevertheless, the changes will not be enough. The Portuguese economy has undergone dramatic transformations over the past 70 years, moving in the mid-1970s from a corporatist fascist model under a fascistic Salazar dictatorship, through a period of widespread nationalisations by farleft military-backed governments to the current mixed economy presided over by alternating centre-left and centre-right administrations. But the pension system and public perceptions have not kept pace.
“People have a paternalistic relationship with the state,” says Leonardo Mathias, director general at Schroders in Lisbon. “One can argue that this was due to 50 years of a very strong state under Salazar and afterwards with the revolution.”
Francisco van Zeller, president of the Confederation of Portuguese Industry (CIP), agrees. “When socialism took over after the fall of the dictatorship they thought that the state should provide everything – pensions, jobs, all type of security and healthcare,” he says.
“The average person who does not read the economic press will probably be unaware that there is a pensions crisis,” says Luis Veloso, director of Energias de Portugal (EDP) pension fund. “There is very little coverage of the issue on the TV, although there is an increasing debate on the state of the economy, pointing out that we are in a difficult situation and there is a lack of discipline in the public accounts.”
“Not a single minister has come out and said that this is a problem,” says Leonardo Mathias. “And it’s not something remote, on current trends a generation issue will become evident sometime between 2015 and 2017. But with high deficits, infrastructural requirements, no growth in exports, investments and services, and a dependency on domestic consumption there is really no room to spend money on pensions. Consequently, unless we change the whole system the alternatives are raising the age of retirement or opening the doors to immigration.”
However, there are no indications that the political will exists to change the whole system. “The Socialist Party mentality is to keep the state as the main provider,” notes one observer. “And they don’t create space for a supplementary system.”
“Our main goal was to pursue the World Bank recommendations and establish a multi-pillar system in Portugal,” says Miguel Frasquilho, a PSD parliamentarian and a former secretary of state for treasury and finance. “We passed the laws but unfortunately we didn’t apply the measures. Maybe we lacked the courage.”
Frasquilho served in the government of former PSD premier and current European Commission president José Manuel Durao Barroso. “I think that part of the problem was that we opened up too many fronts, trying to reduce the budget deficit, introduce a justice bill, reform the residential rental market and the labour market as well as reform social security,” Frasquilho says. “The ideas were good but the results were poor, and we did not manage to implement
them.”
The legislation introducing a career-average calculation also created the possibility for those whose income exceeded a pre-determined multiple of the minimum wage of opting out of the PAYG allocation and putting the money into thirdpillar schemes. “At the time there was a discussion of supplementary provision and whether second pillar contributions should be within the public or private sector, recalls Paula Bernardo of the UGT trade union confederation. “So the law also included the possibility for people to put a part of their public contributions into a complementary system.
However, the enabling regulations were not put into effect” before the government fell. But before it fell the PSD withdrew the third-pillar tax incentives in response to fiscal pressure. And experience shows that tax incentives work in Portugal. “Most company plans came into existence in the late 1980s because between 1985 and 1991 they drew huge fiscal benefits,” says Mathias. “But when the fiscal benefits stabilised they fell away.”
Only 1,000-2,000 of the 200,000 companies in Portugal offer secondpillar pensions to their employees, according to Watson Wyatt in Lisbon.
Second-pillar schemes have assets in the region of €15-16bn, or 10-12% of GDP. “Of this, 50-60% belongs to banks’ pension funds which since the fall of the dictatorship in the mid-1970s have had their own pensions structure,” says Bernie Thomas of Watsons. “Bank employees do not belong to the social security system and so their pension provision in effect provides a combined first and second pillar provision. So true second-pillar pension plans that act as top ups to the state pension have assets that amount to about €5bn.”
And there is no movement to increase the number of plans, says Van Zeller. “You don’t hear about such schemes,” he says. “If you look at social responsibility, which is a fashionable thing to do now, you find mention of charities, the environment, health protection at work and
various other matters, but you see nothing about pensions.”
He highlights another problem, Portugal’s recent tradition of revolving-door governments. “We have changed welfare minister four times in the last three years,” Van Zeller says.
“I spoke with the first three, but when the fourth came in I decided to wait to see whether he lasts more than six months before making another initiative because I’m tired of raising the problem again and again and each time I go there it’s always new. There appeared to be no institutional memory or continuity.”
And then there is the electoral calendar, with Portugal holding regional elections later this
month and a presidential election in January, both of which are seen as referendums on the government’s performance. “Electoral cycles are very short,” Van Zeller notes.
“Governments don’t have time to make even medium-term policies, let alone to think long term. They want to do things that will show visible results in two years and we know what they have to do on pensions will not have short-term visible results. Something has to be done but they are so afraid of telling the truth.”
However, Van Zeller is a member of a tripartite forum, the social economic council (CES), that brings together four employer groups, two trade union confederations, and the ministers
of finance, economy and labour, where issues can be hammered out behind closed doors. “The pensions issue is one for the CES, not for parliament,” says Van Zeller. “That’s where we say how things really are, we tell the truth and we bring our souls to the table.”
The trade unions also have proposals. “We want to explore the introduction of pension funds through collective bargaining as we see in the majority of other European countries,” says Bernardo. “We have already told the government that it would be in the national interest to
implement fiscal incentives for pension funds created through collective bargaining. In our economy most enterprises are too small to have a pension fund, but we could at a sectoral level. And in 2003 we designed a model contract that could be used by all collective bargaining negotiators.”
But collective bargaining negotiations could be improved. “We are having difficulties negotiating with the employers’ groups on these pension funds,” Bernardo adds.
“I have not detected the same level of preoccupation with private sector pensions that we have in the unions because they have always seen it as the state’s responsibility,” says Van Zeller. “But I suppose we could find arrangements for complementary plans with one of the two major union confederations. But to do this we need the support of the tax authorities.” Clearly, it’s time to bring more souls to the table.

In "INVESTMENT & PENSIONS EUROPE"/OCTOBER 2005