Returns on pension plans: what should it be

A pension plan must provide savings for your future as well as a return on your investment

A pension plan should offer return, as well as help you save for the future, through investment. In other words, the money contributed by the customer over the years does not remain sedentary, but is invested in order to obtain returns. This investment is based upon certain risk and return criteria, which are established in advance in a document approved by the Regulator and agreed to by the account holder. This way, when you redeem your pension plan, the stakeholder can not only expect the money accumulated from contributions, but also the returns on the pension plans, which will depend on the factors below.

A pension plan grows by means of periodic contributions made by the plan holder. these can be made on a regular basis (monthly, quarterly, etc.), or sporadically (one-off contributions with no set frequency), and in no case can they exceed the maximum limit established by law, which is €8,000.

As money accumulates in the plan, the plan's managers will be investing in various types of financial assets, in accordance with the investment profile assigned to the plan. There are three frequently applied investment profiles, which are based on the level of risk to be assumed in order to achieve the level of returns desired. The profiles on which the returns on the pension plans will depend are: conservative, moderate or decided.

This is how we reach one of the key elements of returns on pension plans: The higher the investment risk, the higher the potential returns, but also the greater the potential losses that the plan holder may assume. On the other hand, as the amount of risk assumed decreases so do the potential returns, although the possibility for investment losses goes down as well.

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What does a pension plan invest in to increase returns

Pension plans primarily invest in financial products described as either fixed income or equities. Another way to increase returns on pension plans is by investing in derivative instruments or assets from the money market. This means that pension plans can be classified by the type of investments they make:

  • Short-term and long-term fixed-income plans: these plans invest their capital primarily in fixed-income securities with varying maturities, issued by both public entities and private corporations. Because of the characteristics of this type of investment, fixed-income plans have a lower theoretical risk, but lower estimated returns as well.
  • Equities plans: these plans invest in corporate stocks traded on a Stock Exchange. These assets are subject to more volatility and they therefore have a higher level of risk, although they can offer potential returns significantly greater than those offered by no-risk or low-risk assets.
  • Mixed-income plans: Mixed-income pension plans combine investment in fixed income and equities. The proportions invested in these types of assets will depend upon the investor profile for the plan itself, which means that the more resolute the investor, the more capital invested in equities, and the more conservative, the more invested in fixed income.
  • Guaranteed plans: these may invest in either equities or fixed income, and they guarantee return of 100% of the capital and/or a minimum revaluation, as long as the money remains in the plan until the agreed-upon maturity date.

With all this information, it is important to emphasize that none of these types of pension plans are better or worse than the others; some plans are just better adapted to a particular customer's investment goals and profile.

For example, younger savers who still have 20 or 30 years ahead of them before they retire are advised to adopt a resolute investor profile and rely more on equities. The reason for this is that the potential earnings are higher and, if losses do occur for the investments, the customer still has plenty of time ahead to recover.

The opposite case is seen with investors whose retirement date is approaching and who have just a few years left to make contributions to their plan before they redeem it. For these savers, it is advisable to adopt a conservative investor profile by investing in fixed income, with lower returns but also with low risk. Their priority at that point in time is to consolidate their capital and avoid exposing the savings they have accumulated over many years to unnecessary risks.

The importance of making contributions on a regular basis

The returns offered by a pension plan are very important in terms of allowing the customer's savings to grow. However, this is not the only factor to consider when estimating the savings objective to be achieved using a pension plan. In fact, it is essential for the customer to establish a saving philosophy where contributions are made regularly.

Saving €100 per month with a return of 3% is more beneficial than saving €50 per month with a return of 6%, as you can see in the following example:

Plan A Plan B
Plan A
Nominal interest rate of 3%
Plan B
Nominal interest rate of 6%
Plan A
Annual equivalent rate (12m) 0.25%
Plan B
Annual equivalent rate (12m) 0.49%
Plan A
Age (30 years)
Plan B
Age (30 years)
Plan A
Retirement (65 years)
Plan B
Retirement (65 years)
Plan A
Time period (35 years)
Plan B
Time period (35 years)
Plan A
Time period (420 months)
Plan B
Time period (420 months)
Plan A
Monthly amount: €100 
Plan B
Monthly amount: €50 
Plan A
Total saved: €73,547
Plan B
Total saved: €68,680

Example taken from the BBVA Pensions Institute

As you can see, saving a larger amount in a pension plan with lower returns provides more profits than saving less in a pension plan with higher returns.

The regularity of the contributions made is equally important, and is something that produces especially positive effects over the long term. It is better to make smaller contributions consistently over time than to contribute higher amounts in an irregular manner.

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Pension plan fees

Finally, in order to calculate the returns that a pension plan can offer, the fees associated with it must also be considered. There are two types of fees: management and depository. Any bank and any pension plan will have some different percentages associated for charging fees, and it is important to be aware of these in order to understand the costs they represent for the customer.  However, in all cases there are some maximum fees established by law, which cannot be exceeded.
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