Guide - The Employment Pension Plan

Complete guide to the Employment Pension Plan: what it is, tax advantages for company and employee, how to implement it step by step, and why it is transforming compensation in Spain.

1. What Is a Pension Plan?

Pension plans are savings products that guarantee the right of the persons, in whose favor they are established, to receive economic benefits in the future. There are three types of plans:

Pension plans are integrated within a pension fund, which are assets created to guarantee the rights of plan participants through their proper management, custody, and control.

Pension fund management entities are organizations whose purpose is the administration of pension funds. These can be corporations exclusively dedicated to this purpose, insurance entities authorized to operate in Spain in the direct life insurance branch, and also mutual benefit societies.

The custody and deposit of securities and other financial assets integrated in the pension funds corresponds to a custodian entity established in Spain. The management and custodian entities are responsible for all damages caused by the breach of their obligations.

2. How Does the Employment Pension Plan Work?

Three figures are involved in the operation of the Employment Pension Plan:

The conditions a company must meet are defined by the policy that the Plan has in the regulations that set the minimums that said plan must guarantee.

To ensure the proper fulfillment of obligations of both the mentioned parties and the Management Entity, there is the Control Committee. In Employment Pension Plans, it is made up of representatives of the promoter or promoters (if there are several companies), and representatives of participants and beneficiaries.

The collective agreement is the legal agreement that can oblige a company to offer the Employment Pension Plan to its workers. This can occur with company collective agreements (specific to a single company) or with sectoral collective agreements (governing labor relations in a specific sector). In the latter case, pension commitments with workers have materialized through the Simplified Sectoral Employment Pension Plan, an instrument introduced in 2022 to accelerate mass adoption, as has occurred in the construction sector.

The sectoral collective agreement may allow companies in the sector not to join the simplified sectoral plan if they agree on their own employment pension plan that cannot have inferior conditions to the sectoral plan.

However, Simplified Employment Pension Plans need not be sectoral. They are a way to streamline what was previously attempted with Joint Promotion Pension Plans. These Plans seek to facilitate companies of various kinds reaching an agreement to create and join the same plan.

At Arca, we allow the conditions offered by the company to be set in the company's adhesion document to the Plan and to be easily decided by each company, since we have conceptualized the regulations governing the Employment Pension Plan to give companies that want to join the greatest possible maneuverability allowed by law.

3. What Economic Advantages Does the Employment Pension Plan Have?

For the Employee

The compensation received through the Employment Pension Plan is not subject to income tax (IRPF). This prevents that portion of salary from being reduced by taxes, so the worker receives more money. Moreover, all the capital contributed by the company (and the employee if the Plan so establishes) is directly invested, generating returns that are in turn reinvested, providing even greater benefits thanks to the cumulative effect of compound interest over the long term.

For the Company

It is the most efficient way to compensate workers, since compared to other channels such as flexible compensation or salary itself, the employment pension plan ensures that the employee receives more money while also reducing part of the cost for the employer. In other words, with the same cost for the company, the employee receives more compensation in their paycheck at the end of each month.

This is thanks to the reduction of Social Security common contingencies that the company pays monthly. This reduction is 100% for the increase in the contribution resulting from the employer's contribution to the pension plan.

It applies only to the common contingencies portion, that is, applying the general rate of 23.6% on the extra contribution base, which will be the company's contribution to the pension plan:

Contribution to reduce = Contribution × 23.6/100

DISCOVER: There is a maximum deductible contribution amount determined by multiplying by 13 the contribution resulting from applying the minimum daily contribution base of Group 8 of the General Social Security Regime for common contingencies by the general employer contribution rate for coverage of said contingencies: (€38.89 × 13) × 23.6% = €119.31. The maximum deductible contribution is €119.31, so the maximum contribution to reduce will be €28.16.

It also has a direct tax return thanks to Corporate Tax deductions. First, the company must declare the annual contributions to the plan through Form 345 (and not Form 190). The deduction for the company, which is greater for workers with lower salaries, is up to 10% of what was contributed.

For gross salaries equal to or less than €27,000:

Corporate Tax Deduction = Annual contribution × 10%

For higher salaries:

Corporate Tax Deduction = (27,000 / Gross Salary) × Annual contribution × 10%

For example, for contributions of €250 per month (€3,000 per year), if the employee receives €27,000 or less, the deductible amount would be €300. With that contribution but a salary of €30,000 or €60,000, it would be €270 or €135 respectively.

4. What Are the Maximum Limits of the Employment Pension Plan?

Employment Pension Plans only allow a maximum contribution of €8,500 per year, combining company and employee contributions. Additionally, the employee can have an Individual Pension Plan where they can contribute up to €1,500 annually.

How much the worker can contribute is always determined by the annual amount assumed by the company, so that:

GOOD TO KNOW: Management entities are obligated not to accept contributions above this amount, potentially incurring administrative liability. However, if the participant or the company has contributed above this limit, the management entity is responsible for returning the amounts improperly contributed. Returns are made taking into account consolidated rights, that is, the sums contributed and the returns generated.

If the employee exceeds contribution limits because they have simultaneously made higher contributions to both an individual and/or self-employed pension plan as well as the employment one, the contributions made to the employment plan are returned last.

5. How to Launch an Employment Pension Plan?

Whenever it is not defined by a collective agreement, the company decides on the following criteria, which can always be modified later:

In the Pension Plan, the joint will of worker and company prevails, provided that any guarantees established by law (or agreement) are at minimum respected. In this way, both the initial conditions when joining a pension plan and any subsequent modifications must be signed by both the company representative (for example, the Director or CEO) and the workers' representative (for example, the HR Director).

GOOD TO KNOW: It is mandatory to offer the employment pension plan to all company employees who have their tax residence in Spain.

DISCOVER: To guarantee the company's financial well-being, the company has the option to condition its contribution to the achievement of certain organizational milestones or objectives: profit, EBITDA, etc.

6. Taxation

Like any other compensation, contributions made to the pension plan are also a deductible expense for the company in Corporate Tax.

If the company respects the established contribution limits, it will not have to pay any income tax withholding on behalf of the workers.

Pension plan contributions are subject to Social Security contributions (unless the worker to whom they are attributed is already contributing at the maximum base).

In general terms, when part or all of the plan capital is received, it must be added to the employment income for that year to calculate the corresponding tax percentage, as it is taxed as employment income under income tax.

Current income tax brackets:

7. Fees

The fees charged by management entities have been regulated by law to prevent bad practices that go against the cumulative growth of savings. Hence, limits have been imposed on accrued fees calculated on the saver's consolidated rights: 0.85% annual in fixed income funds, 1.3% annual in mixed fixed income funds, and 1.5% for the rest.

It is worth considering the possibility that the pension fund manager may apply a fee in case of early withdrawal before retirement.

At Arca, we are committed to transparency, which is why we seek the highest savings returns while charging the minimum in management fees. We progressively reduce fees based on volume. Our current fee is 0.556% on accumulated savings. It is the result of adding:

8. How to Transfer an Employment Pension Plan?

When we talk about a worker who leaves the company where they were a participant in the pension plan, neither company nor employee can make contributions to that same plan. The employee becomes a suspended participant. The money remains personally theirs and continues to be invested with the same policy as the employment pension plan.

To allow the employee to transfer the rights they have in their employment pension plan to a new provider, one should consult the plan regulations. As a general rule, whether destined for an individual pension plan or a new employment one, the relationship with the former company must have ended in order to transfer it. Therefore, if the employee is on a leave of absence, the management entity may not allow them to move their savings.