The trompe l’oeil of pension plans

When you think about your retirement, several thoughts come to mind. First, that after a lifetime of working it is important to ensure a good economic situation when the time comes, to be able to live relaxed and enjoy the well-deserved rest. The second, that with the current pension system it will be difficult to achieve that economic well-being if we do not seriously intend to “make a piggy bank” for a few previous years, because our generation will not have a pension equivalent to that of previous generations.

Even among the “previously retired”, who more and who least looked for a savings strategy to prepare a complementary mattress. Those were times when having money in the bank account earned more than it does now (now, directly, it doesn’t earn), so between that and the traditional pension plans, most saw their savings needs resolved. But things have changed. Now having the money sitting in the account is a huge loss of opportunity, and pension plans are not the financial product with which we can obtain the best profitability.

However, still to this day they continue to be the investment vehicle most contracted by Spanish families: According to data from Inverco, 40% of them are participants in a pension plan. Currently, we are in the process of legislative change to regulate them, and we already know that from now on, one of their attractions, which was to be able to deduct a contribution of up to 8,000 euros per year in the Income Tax return, will be reduced to 1,500 euros.

Will this make us Spaniards look for other saving alternatives? It can certainly be a stimulus, but it should not be the only one. First, because the first motivation of any investment strategy, above taxation, must be profitability. And if we talk about profitability, it is important that we look in more detail at the products that we contract, the commissions that we pay for them and the historical returns that they accumulate, to know if it is really what suits us best or is what suits us best. Our bank.

At Micapital we have analyzed the behavior of the five Spanish pension plans that accumulate the largest number of participants -which correspond to the three large Spanish banking groups, CaixaBank, Santander and BBVA- during the last five years (2016-2020). And we have found a not very pleasant surprise: in none of them profitability equals inflation, and in all of them the banks have earned more with their commissions than the participants.

A bargain for them, of course. That is why they dedicate important commercial campaigns to attract customers. The effort they dedicate to these commercial tasks is much greater than to offering quality management of these products. Customers, loyal for years, religiously contribute their money without asking too much in return, without liquidity involved and with high commissions. What more can they ask for?

But customers should demand more from them; without a doubt, fewer commissions and that they worry about properly managing their savings so that they can bring them greater profitability. And an advisory service that really looks out for your interests.

For example, one of the mistakes made by investors in pension plans, promoted by the aforementioned commercial campaigns, is to invest in them in December or at the end of the year. In this way, the money has been standing still for the rest of the year in the bank account, waiting for the moment to be invested and paying an opportunity cost for it, while not getting anything in return when it could have been generating profits. Therefore, it would be advisable to make regular contributions each month to a portfolio of pension plans tailored to each person..

Another aspect to improve in these products is that many of them maintain a very traditional profile and a very low level of risk, while, except in cases in which the investor is already very close to retirement age, when linked to a very long-term investment strategy, this circumstance should be taken advantage of more and a high risk should be assumed in order to achieve better profitability.

On the other hand, before jumping headfirst into a pension plan It would also be interesting to evaluate other alternatives. For example, investment funds, which can also be considered with a strategy focused on retirement. Its main advantages are liquidity -in the event of unforeseen events, the money can be recovered immediately-, the variety of products to choose from -not only from the Spanish market, but also internationally- and the quality of management behind these funds. In addition, with regard to commissions, they are also usually lower than those of pension plans.

The retirement it is a very specific investment objective linked to a long-term target date, which gives us a significant margin to build a tailored plan. It is advisable to combine these contributions with others in the medium term destined for other savings objectives, such as the purchase of a home or a vehicle, the education of the children and, simply, to have a security cushion.

At a time when we are going through a complicated socioeconomic situation, inflation has taken off and we have a serious problem with pensions, it is essential to encourage investment, make us aware of the importance of saving every month and to put it to work, at least to match inflation and not lose purchasing power.