The pension system in Spain, as we know it, is at risk. In Spain the first pillar of social welfare, i.e. the state-run public pension system, is based on a “distributive” system. This principle is also known as “intergenerational solidarity”, since the contributing generation finances the pension of the retired generation, and the first generation will in turn be financed by the next generation.  

Therefore, the contributions collected from active workers don’t accumulate in a private fund to collect future payments for said workers, but instead are used to finance current pensions. However, they do generate future rights for contributing workers, in the form of contributions that will give access to a future pension that will be financed by the then active workers.  

It’s therefore clear that the future base of workers must be large enough for their contributions to be able to sustain the benefits of the system’s beneficiaries.  

This is where we find the first problem in Spain, the population pyramid. According to OECD data, Spain competes with Switzerland for second place globally among the countries with the longest life expectancy. This fact is very good news for Spanish society. Nevertheless, it’s a threat to this distributive system since, at the same time, Spain is one of the countries in the developed world with the lowest fertility rate (1.2 children per woman of childbearing age). According to the INE and Eurostat, the Spanish population aged over 60 will increase from 30% of the working age population in 2019 to almost 60% in 2049.  

To this first population problem, we have to add that the Spanish social welfare system is one of the most generous among the OECD countries, given that the replacement ratio, i.e, the percentage of income in retirement in relation to previous income as an active worker, is one of the highest. It reaches around 70% of the last contributed salary, according to the OECD in its report “Pensions at a Glance 2019”. 

Therefore, we’re faced with a very supportive system that needs to be supplied by an abundant amount of resources and yet is supported by an increasingly weak pillar, which makes us believe that its sustainability is questionable.  

What can we do as individuals to compensate for this weakness in our country’s public welfare system and therefore try to ensure a decent pension in the future?  

This weakness in the social welfare system forces us to make an extra individual effort based on saving. Up to now, and according to a report by the consulting firm McKinsey, this hasn’t been the case, since 3 out of 4 Spaniards claim that they don’t save anything for retirement, leaving their future in the hands of a system with questionable sustainability. 

“And if I save, as this article tells me to do, to compensate for the uncertain sustainability of public pensions, what can I do with that money?” 

In Spain, we can invest in private pension systems, through the well-known pension plans. The purpose of this article isn’t to explain their features, so we’ll only comment on them briefly. Individual Pension Plans (IPPs) are based, unlike the public social welfare system, on a Capitalisation System, in which each individual contributes for themselves. Therefore, the benefits are directly related to the contributions that have been made, as well as to financial and time-related developments (how and when they have been invested).  

In this case, the component of intergenerational solidarity that we saw with the distributive system doesn’t appear, so there’s a piggy bank in which the contributions of each individual contributor are saved to generate future income. It’s a question of giving up consumption in the present in favour of consumption in the future. 

At this point, we come to another of the problems citizens will face in planning their retirement: the concentrated supply and type of product that IPP providers in Spain make available to savers. The bias of these products towards fixed income is very clear, and only about 17% of IPPs are 100% equities, according to data published by Inverco. 

At Cobas, we believe that this is a problem, as it has been well proven throughout history that, in the long term, the best asset and the one that has offered the best returns has been equities. The basic premise of a pension plan is to generate wealth, or at least to protect our purchasing power in retirement and, in the long term, the chances of a group of companies destroying wealth are zero or almost zero, as shown by the fact that no market index has ever lost all its value. 

Focusing on the subject at hand, within equities there is an investment philosophy where the main catalyst fits perfectly with the idea of retirement planning, which is Value Investing, and that catalyst is none other than time. 

Time, combined with a continuous investment, allows us to participate efficiently and constantly in economic growth. For proper retirement planning, ideally capital must be permanent. 

Time also allows us to benefit from compound interest and its ripple effect on investments.  


The sooner we start investing, the greater the benefit we’ll get from compound interest. However, time, besides offering us positive things, requires us to behave in a certain way and understand certain concepts.  

Time, related to a continuous investment, requires us to understand that the concept of volatility isn’t equal to that of risk, but rather to that of opportunity. And this is necessary because, in the market, share prices fluctuate much more than the real value of the companies, allowing us to take advantage of the inefficiencies generated by this fact, offering us the possibility to buy cash flows for less than their true value. 

Moreover, time, once again combined with this concept of a continuous investment, will require us to control our emotions so that we don’t get carried away by our own biases. The main enemy of the long-term investor is the investor themselves. 


To sum up, Spanish citizens are faced with a public social welfare system with very questionable sustainability levels. Furthermore, once we decide to save and put our savings to work in order to compensate for the pension we’ll receive from the public distributive system, we find ourselves faced with a supply of products very biased towards an asset with questionable long-term profitability levels. This is none other than fixed income, which, in many cases nowadays, and due to the ultra-expansive monetary policies of the main central banks, offers negative real returns. 

However, fortunately in Spain we have the possibility of putting our savings to work through independent managers, with a clear philosophy of Investment in Value, which, in its most basic form, in my opinion, fits like a glove with this retirement planning concept: long term and the concept of a continuous investment. 

The world, with each day that passes is a better place than the day before, and equities have the ability to capture this constant improvement, as well as giving us the opportunity to monetise it. The sooner we start, the calmer we’ll retire. 

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