Social Security Fund should buy less national public debt

Nthe report “Reform Pensions in Portugal – For a Sustainable, Adequate and Fair System – a Contract between Generations”, presented on Tuesday by the working group created by the Government and to which Lusa had access, a diversification of the FEFSS portfolio is recommended, namely by “reducing the concentration in national public debt, in the name of fiduciary duty, risk diversification and good international practice”.

For experts, the concentration of more than half of the Portuguese public debt portfolio raises three problems, starting with the “excessive exposure to a single sovereign issuer”, which “against good diversification practices and exposes the fund to the risk of concentration and non-compliance of the State itself, precisely in the scenario where the fund would most be needed”.

There is also a problem of fiduciary duty, and “when investment policy is subordinated to public debt management objectives — the fund is in fact a major state creditor, and the acquisition of national debt partially cancels debt in consolidated accounts — the interest of pensioners is no longer the dominant criterion, bringing FEFSS closer to an instrument of financial repression”.

Thirdly, experts identify a problem of financial performance, as “fund growth has mainly been based on the absorption of balances and taxes, and not on a systematic real return on congener reserve funds”.

In this regard, the working party points out that FEFSS “has grown less by the profitability of its assets than by the absorption of the balances of the Previdential System and the tax charged, and that its majority application in Portuguese public debt produces a consolidation effect that reduces the ratio of public debt”.

According to the report, FEFSS has, since its inception, presented a nominal return rate on annualised transfers of around 3,93%, which corresponds, deflating by the consumer price index, a real annual return of approximately 1,64%, a figure below that recorded by congener reserve funds.

Over time, changes to the portfolio composition were determined, but currently, it has to have a minimum of 50% in securities representing Portuguese public debt or others guaranteed by the Portuguese State.

The experts also recommend, as far as FEFFS is concerned, segregating the management of political power by applying an “autonomous professional management model, with a governing body subject to ‘fit and property’ requirements, selected by transparent process and evaluated against measurable targets, shielding investment policy against discretionary interference”.

They also advocate the need to strengthen transparency and supervision, in particular by imposing public disclosure of the annual report with audited statements, investment policy and the code of conduct, and by considering the subjection of the fund to the appropriate sectoral supervision of the ASF (national pension fund authority).

Another suggestion of the working group is to clarify the mandate and rename the fund, i.e. to enshrine the determining reason for the use and exclusive allocation of the fund to the payment of pensions, as well as to change the name to “Public Pension Systems Reserve Fund”.

According to the Ministry of Labour, at the end of last year, “the FEFSS portfolio was worth EUR 42 billion (13.9% of GDP), which corresponds to the amount of around 24.8 months of pensions (more than 2 years)”.

This portfolio “has grown by EUR 6 billion by 2025, with the contribution of appropriations worth EUR 4.5 billion, and profitability of EUR 1.5 billion (+3.92% profitability)”, adds the same note.

FEFSS was established in 1989 and was only used once in 1993 in the form of a fully amortised loan in the following financial year.