Spain: Proposed amendments to Spain's state pension system

On 7 June 2013, a committee of experts appointed by the Spanish government was asked to prepare a report on the “sustainability factor” of the social security system. The report was commissioned pursuant to Act 27/2011 regarding the modernisation and adequacy of the social security system and was put before Spanish Congress on 18 and 19 June 2013. Following consultation with businesses and trade unions, which is due to start this September, the report’s findings could be implemented by law.

The report establishes a dual formula, aiming to secure the future of the state pension system. This formula is based on the “inter-generational equity factor” (FEI) and the “annual revaluation factor” (FRA).

The FEI factor introduces a mechanism for adjusting the initial value of the state pension in line with increased life expectancy. The FRA factor is calculated using the ratio of retirees to active employees (i.e. expenses to income) and replaces the current revaluation mechanism (which is linked to the Spanish Consumer Price Index).

Experts recommend implementing this formula as soon as possible rather than waiting until 2027 (which is the date envisaged by the Act). They also recommend granting access to higher pensions to those able to contribute for longer.

Action for employers

The proposed revisions could impact employees in both the public and private sector. Employers should be prepared for employees (i) to request to work for longer; and/or (ii) to exert pressure (through collective bargaining) to obtain supplementary private pension schemes at the employer’s expense.

Article written by Carmen Martinez, Senior Associate