The new pension insurance law allows payments of over 1,500 euros from 2022. This is intended to support savers, since the contributions to individual old-age provision are tax-limited. The law is still being drafted in the House of Representatives, but several groups support the government’s proposal to include a clause that would allow the new contribution ceilings to be retroactive.
The key figure in the new regulation is the Public Employment Promotion Pension Fund (FPEPP). It is a collective pension plan (provided by companies or public administrations for the benefit of their employees), but over which the Department of Social Security has some supervisory powers.
These newly created vehicles are meant to be the spearhead to try to generalize retirement provision in the context of the workplace. The executive wants companies and employees to agree, as is happening in other countries around us, that part of the remuneration goes to long-term savings instruments that allow for the supplementation of old-age pensions.
The government has favored the number of collective plans over individual ones because they have lower commissions and the latter have been abused by high earners to reduce their tax burden.
It must be remembered that contributions to pension plans are deductible from the income tax base. In return, the worker must pay tax as earned income on the money he draws from his retirement plan when he retires. It is a tax deferral.
Until a few years ago, the general addition/deduction limit was 10,000 euros per year. In 2020 it fell to EUR 8,000, last year the Board of Management drastically reduced it to EUR 2,000 in individual plans, and to up to EUR 1,500 for the current financial year.
The new figure of supplementary social security
- financial support. Despite the misleading name, the new publicly funded employment pension funds (FPEPP) are not state funded. It is the pension administrators and the social security mutuals that will set up these funds. They have to be approved by a funding committee with officials from the Department of Social Security. Each manager will only have two or three plans.
- Simplified Plans. Once CaixaBank, Ibercaja or Mapfre have created their FPEPPs, different groups can create simplified plans that invest their money in the above FPEPPs. It is the sectoral agreements (company and union agreements), the professional bodies or self-employment organizations that draw up these plans and decide in which FPEPP to invest.
- Self-employed and SMEs. With the creation of these two figures, the FPEPP and the simplified plans, the government intends to generalize saving to supplement old-age pensions in the workplace. Something that until now has been very limited to large companies and multinationals and some public administrations (which have not contributed for years). The processing of this new projected savings product also coincides with the open negotiation between the self-employment associations and the social security to seek a new contribution for this group of workers.
While the limit remains at 8,500 euros for collective pensions, the truth is that many groups do not have access to these vehicles, which depend on the agreement between the company and the union representation.
A particularly affected group are the self-employed, who have seen their most important old-age provision instrument, individual old-age provision, restricted for the past two years.
To compensate for these two years of severe savings restrictions through pension provision, the new regulations appear to allow the self-employed to exceed the €1,500 limit this year and make contributions of up to €4,750.
The current deduction cap is set out in the General Budget Law, but a specific clause in the new Pension Plan Law could allow the new FPEPP caps to come into effect for the current financial year.
The final formula is yet to be determined, but self-employed organizations are putting great pressure on lawmakers to find a formula that will allow them to regain the savings time lost this year and last.
The big problem is that even if the regulations are passed before June 30th, as the government has promised in Brussels, it will be almost impossible to create new investment vehicles and get individuals to invest in them before the end of the year.
One of the formulas under consideration is to temporarily exceed the contribution limit of 1,500 euros in individual pension plans, with the promise that this additional money will eventually be allocated to an FPEPP if these have already been created.
It would be a temporary measure that would only be applied during the first years of the new FPEPP’s validity and would allow for a significant inflow of funds to be generated when this number starts.