Spanish Association of Collective Investment Schemes and Pension Funds Sofia, 18 September 2009 Ángel Martínez-Aldama Managing Director MULTIFUNDS AND THE IMPORTANCE OF BALANCED DEVELOPMENT OF A MULTI-PILLAR PENSION SYSTEM

2/12 1.Pension Fund asset allocation Factors affecting Pension Fund asset allocation between DB and DC Funds. 3.Multifunds. 4.Importance of 2nd Pillar contributions. 5.Forthcoming research on DC Schemes.

3/12 1. Pension Fund asset allocation 2008 (I). (Source:OECD)

4/12 1. Pension Fund asset allocation 2008 (II). CONCLUSIONS: Between 2007 and 2008, on average, investment in equities in OECD area decreased by 8.8 percentage points (pp), falling from 49.9% in 2007 to 41.1% in In most OECD countries, bonds and equities remain the two most important asset classes, accounting for over 70% of total portfolio in Within the “bonds” category, public sector bonds, comprise a significant share of the combined bond holdings in many countries.

5/12 2. Factors affecting Pension Fund asset allocation between DB and DC Funds. between DB and DC Funds. OECD states that:  DB and DC funds tend to allocate assets differently, and the factors behind these differences also vary across countries. For example, in countries where DB plans are very mature there are more investment in bonds, while DC funds catering mainly for younger workers are likely to lean towards more risky assets (such as equity).  However, the transfer of risk from plan sponsors to employees that results from DB-DC shift may also lead to widespread aversion to higher- risk portfolios on the part of individuals, thus lowering the aggregate share of assets allocated to equity.

6/12 3. Multifunds (I). Abovementioned affirmations show MULTIFUNDS’ importance. MULTIFUNDStakes into account ASSET ALLOCATION PARTICIPANT’S AGE

7/12 3. Multifunds (II). Experiences in mandatory schemes Experiences on MULTIFUNDS 1 Mexican regulation considers changes introduced in March 2008

8/12 3. Multifunds (III). Experiences in mandatory schemes 2 The AFPs are entitled to charge commissions for more than two transfers, but in practice none of them do so.

9/12 3. Multifunds (IV). Experience in Spain Spanish Pension Funds System Pension Plans, that establish defined contribution for retirement contingency and belong to Employment System’s Pension Plans, can have two sub-Plans according to participants age.

10/12 4. Importance of 2nd Pillar contributions (I). EFRP (European Federation for Retirement provision) considers that:  Contribution cut to the second pillar risks provokes a breach of confidence in the pension reform that is so desperately needed throughout Europe.  Independent academic research indicates that small differences in contributions make a huge difference to the accumulated pension capital at the pay-out date. A 1 % additional contribution during 40-years of pension savings leads to a 30 % higher pension.  Providers have hugely invested in the necessary infrastructure and expertise to run the 2nd pillar pension system. Deviating from this model could undermine their commitment to that providers. Some European Countries are under discussions about reduction of 2nd pillar contributions

11/12 4. Importance of 2nd Pillar contributions (II). These conclusions show 2nd Pillar contributions’ importance. BALANCED DEVELOPMENT OF A MULTI-PILLAR PENSION SYSTEM A prerequisite to deliver adequate retirement income to the population at large

12/12 5. Forthcoming research on DC Schemes. DC pension provision has grown at a rapid pace in the past decade. This paper will be focused on DC plans provided through the workplace and mandatory DC pillar. EFRP is preparing a policy paper, which aims to provide an overview of the size and design of DC schemes throughout Europe.