Types of pension plans

Find out about the different types of pension plans and discover which one best suits you

Pension plans are pension savings instruments that work on the basis of the capital contributions made by their sponsors and/or holders; these contributions are invested in different financial assets, the composition of which will depend on the type of plan, in order to maximize the return subject to the criteria set out in the plan's investment policy.

Pension plans can be classified according to three criteria:

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Pension plans according to sponsor

There are three types of pension plans according to who sponsors the plan. The sponsor can be any company, business, corporation, trade union or association. That is, the sponsor is the body that sets up the plan and, therefore, it should not be confused with the plan's holders or participants, who are the customers that contract the plan.

  • Individual retirement plans: they are sponsored by financial institutions and their plan holders are individuals. These plans are contracted in a personal capacity by customers that want to save and invest for their future. This type of pension plan includes, for example, those offered by banks and other financial institutions.
  • Employer pension plans: they are sponsored by companies or corporations and the plan holders are their own employees. Contributions to the plan are made by the sponsor company itself or by the employee in a personal capacity.
  • Associate pension plans: these are sponsored by trade unions, associations or guilds and their plan holders are their members. Only the plan holders can make contributions to the pension plan.

Pension plans according to the contributions and benefits

A pension plan is funded by the contributions made by its holders or sponsors. On the basis of these contributions, the plan holder can expect future benefits. Therefore, depending on the type of contributions made and the benefits received for them, we can find three types of pension plans:

  • Defined contribution plans: in these pension plans, a contribution that the plan holder or the sponsor of the plan will make periodically is established. In this type of pension plan, future benefits are not stipulated. That is, upon withdrawing from the plan, the plan holder can expect to recover their invested capital as well as a return - positive or negative - that will vary depending on the investments the plan has made. These pension plans are available for all three types of sponsor: individual, employee and associated.
  • Defined benefit plan: in these pension plans, it is guaranteed that upon redeeming the plan, the holder will receive the capital they contributed as well as a pre-defined benefit or return. These pension plans are only available in the employee and associated formats.
  • Mixed plans: these pension plans combine characteristics of these two types. Firstly, a periodic contribution that the plan holder or sponsor must pay is established; secondly, a minimum return or benefit that the plan holder will have access to upon redeeming it is established. These pension plans are only available in the employee and associated formats.
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Pension plans according to their investment policy

Depending on the types of assets in which the plan invests, or on the composition between different types of assets, we can find the following classification:

  • Short and long-term fixed-income: these pension plans invest the capital in both public (Governments) and private (companies) fixed-income financial assets. Fixed-income securities have a lower theoretical risk than other financial products but, at the same time, also a lower expected return. The average duration of the short-term fixed-income portfolio cannot exceed two years. (shorter duration means lower risk) and it will be more than two years in the case of the long-term fixed-income category.
  • Balanced fixed-income: these plans invest both in fixed-income securities and in equities, although a capital limit that they can allocate to the latter is stipulated: 30% of the plan total.
  • Variable income: these pension plans invest in equity assets, such as listed stocks. These pension plans offer a higher expected return than fixed-income plans, but they are also exposed to a higher risk of losses.
  • Balanced equity: these plans combine investment of the capital in equities, to which they allocate between 30% and 75% of the pension plan's capital, and fixed-income assets.
  • Guaranteed: in guaranteed pension plans, it is guaranteed that the plan holder will recover at maturity all the invested capital, provided that they keep their money in the plan until its maturity. These pension plans carry a very low risk, although their returns are also lower than those of other similar savings products. 

You are advised to take out one type of pension plan or another according to the investor profile you wish to adopt, which will depend, among others factors, on the time remaining until retirement. In your BBVA branch they will explain to you the different options you have for saving for your retirement.

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