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Spain: Changes in pension environment, actual and proposed

Retirement|Total Rewards|Health and Benefits

By Pilar Garcia-Aguilera | February 24, 2021

Spain increases cap on supplementary tax-favored pension contributions while considering social security pension reforms.

Employer Action Code: Act

The 2021 State Budget included a number of changes to the personal income tax regime, including an increase in the top tax rate from 45% to 49% on gross income of 300,000 euros or more and an increase in the cap on tax-favored contributions to approved pension plans, such as PPE plans (Planes de Pensiones de Empleo). At the same time, parliament approved potential social security pension reforms (based on 21 general recommendations in the so-called Toledo Pact for Pension Reforms) to address the system’s financing and sustainability, among other things. The social security pension reform package is being submitted to the European Commission in Brussels for review as part of a series of reform commitments linked to European Union (EU) financial aid and is intended to form the basis of negotiations with employers and labor unions.

Key details

  • The cap on tax-deductible annual contributions to qualified private pension plans — PPEs, PPAs (Planes de Previsión Asegurados) and PPSEs (Planes de Previsión Social Empresarial) — from employers and employees in total increased from €8,000 to €10,000 (subject to a maximum of 30% of gross income), effective January 1, 2021. However, whereas previously there were no separate caps for employee and employer contributions, the reforms cap employee tax-deductible annual contributions at €2,000 and employer contrubitons at €8,000.

Notable issues identified for potential social security pension reforms include:

  • Developing measures to discourage early retirement (methods for which are still to be determined)
  • Basing pensionable earnings on the best 35 years of covered pay (currently 25 years)
  • Reexamining the pension sustainability factor (linking retirement age to changes in life expectancy), which is due to take effect no later than January 1, 2023, while ensuring that pensions do not lose purchasing power
  • Moving some of the funding liabilities to the general budget, increasing financing by changing the calculation of contributions for the self-employed, and substantially increasing (or abolishing) the monthly cap on covered pay for contributions and benefits

Employer implications

Employers should review their supplemental pension plans in light of the tax changes. As most plans are defined contribution (DC) arrangements, typically jointly funded by employer and employee contributions, the cap on tax-effective employee contributions limits the ability of higher-paid employees to contribute. Employees who want to contribute higher amounts than permitted by the new tax provisions may want to take advantage of salary sacrifice (retribución flexible) provisions that allow employees to exchange up to 30% of their pre-tax salary for non-cash benefits, including additional employer pension contributions.

The social security pension reforms will take some time to develop, pending review by the European Commission and negotiations with the social partners (employers and union leaders) but the linkage with the EU financial aid package would appear to be a significant inducement for reforms. The government has floated a number of ideas related to the reforms, including creating a government run “superfund” to compete with private pension providers. Employers should monitor the development of the reform package. The elimination or substantial increase in the covered pay ceiling for social security (€4,070 per month in 2021) would significantly affect the cost of employment for employees earning above the ceiling but presumably would make the pension benefits from social security more generous.


Pilar Garcia-Aguilera

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