Company Pension Plans (PPE) implementation in SMEs

We are currently in a moment in which decisions will have to be made in the short-medium term if we want to maintain the sustainability of the public pension system. A "melon” that sooner or later we will have to open up and find a solution: Austrian backpack, raise taxes, increase the birth rate, continue extending the retirement age... 

Of course, it will not be easy, and without a doubt, the participation and consensus of all social and political agents will be necessary to avoid causing legislative changes depending on the governing party, as it will be an issue that will affect the coming years.

In this panorama, we find an alternative: the so-called “Employment Pension Plans (EPP))”. These plans are promoted by companies and institutions for their staff with the purpose of complementing the public pension they receive from Social Security upon retirement.

The reality is that these plans are not rooted in the business fabric, specifically in SMEs. However, it is a proposal that should be offered as a Social Benefit or included in the company's Flexible Remuneration Plan to promote its implementation, helping employees ensure a better standard of living after retirement.

The employment pension plans have been reinforced in the 2022 General Budgets. The Government has increased the maximum annual limit that can be contributed to these group plans to 8,500 euros. This incentive for employment plans contrasts with the reduction of the maximum contribution to individual pension plans: the maximum capital that the taxpayer can deduct in the Income Tax return drops from 2,000 to 1,500 euros.

Who makes contributions to a pension plan?

In an Employment Pension Plan, the company is the promoter and the worker is the participant. These present the option of joining their staff and they voluntarily decide to participate.

Generally, contributions are made by the promoter on behalf of his staff, as part of their remuneration. There is also the possibility for workers to make contributions on their own.

What happens when the worker leaves the company before retirement?

When a worker stops working for the company that promotes the pension plan, the specifications of the plan must be consulted to see how to proceed.

We may encounter the following scenarios:

• That the worker abandons the plan having to transfer his consolidated rights (i) to the employment pension plan of his new company, if it has one, (ii) to an individual pension plan or (iii) to a pension plan corporate social.
• Although the worker is no longer in the company, he or she can choose to leave his or her rights consolidated in the plan and become a suspended participant, which entails the same rights as the plan participant except for contributions, which the promoter stops making in your name. At the time of retirement (or the rest of the contingencies that allow collection), you will become a beneficiary, being able to redeem your consolidated rights.

What are the principles of PPE?

The worker must have 2 years of seniority, or whatever the initial negotiation indicates.

The amount of the contributions may be different, if agreed.

Contributions are irrevocable. Once contributed, they become part of the rights of the beneficiaries.

Can there only be one promoter in a PPE?

No. The PPE can have one promoter (the company or institution) or several, which can be several companies, as well as unions, their federations and confederations, and business associations, legitimized for collective bargaining.

What are Employment Pension Plans like in other countries?

Although we are behind in terms of pension models, in other countries, to prevent the system from collapsing due to the increase in average lifespan and the decrease in birth rates, they have been developing systems that encourage employment pension plans for years. Its objective is that the private part can provide coverage to citizens after their retirement. For example:

UNITED KINGDOM

It is undoubtedly one of the most advanced pension system models. They have the so-called “automatic enrollment”, in which the company is obliged to automatically enroll its staff in some type of savings or pension plan. It includes any employee over the age of 22 and the mandatory contribution is 5% of salary.

HOLLAND

A system of mandatory collective company plans is added to the public pension. Through negotiation, the parties decide what amount to contribute. The success of these employment plans is so great that they surpass private savings plans.

SWISS

The mixed model consisting of public and private pensions works, the part added through mandatory employment pension plans is equivalent to 7 % of the salary.

AUSTRALIA

Formally known as Superannuation, Australia's mandatory contribution system obliges companies to have savings systems for workers' retirement. The mandatory amount is 9.5% of workers' salaries, with plans to be 12% in 2025.