Measures for financial and social sustainability of public pensions system approved

Following the signing between government, employee, and employer representatives of an agreement on pension reform, the Official State Gazette published Law 21/2021, of December 28, 2021, to guarantee the purchasing power of pensions and other measures to strengthen the financial and social sustainability of the public pensions system which contains important and significant new social security legislation (“Law 21/2021”). It came into force on January 1, 2022.

The measures listed below are its most notable:

1. New revaluation mechanism to retain pensions’ purchasing power

A new revaluation mechanism is determined to review and retain pensions’ purchasing power. It specifically states that pensions will retain their purchasing power. So contributory pensions will now be revalued at the start of every year by a percentage equal to the average value of interannual variation rates expressed as a percentage of the Spanish Consumer Price Index for the twelve months running up to December of the previous year.

Every five years, the government and employee and employer representatives will carry out a periodic evaluation of the effects of the pension revaluation for the purpose of drawing up a proposed review if considered necessary, to retain pensions’ purchasing power.

2. Measures to encourage a voluntary narrowing of the gap between effective and normal retirement age

Law 21/2021 contains measures designed to narrow the gap between effective and normal retirement ages.

a. Voluntary early retirement

It contains a review of the reduction multipliers to be used on the resulting pension amount in the case of voluntary early retirement to encourage a longer working life. These multipliers will be used for each month or fraction of a month that remains, on the occurrence of the trigger event, before the worker reaches the normal retirement age by reference to the worker’s substantiated contribution period. The reduction multipliers range between 21% –where retirement is brought forward by up to 24 months – and 2.81% –where it is only brought forward by a month–.

Starting on January 1, 2024, if the worker’s resulting pension exceeds the maximum social security pension, when applying the reduction percentages to the pension, the maximum limit provided each year in the General State Budget Law must be observed. A 10-year transition period is defined, running form January 1, 2024 (subject to the fulfillment of certain requirements).

These rules will not be applicable to individuals whose employment contracts were terminated before January 1, 2022 (if they do not later return to any social security regime, for a period longer than 12 months), or in cases where individuals have been affected by a collective layoff procedure or as a result of a collective labor agreement, a company collective agreement or an insolvency proceeding, approved before the new law came into force; namely, before January 1, 2022.

However, for entitlement to a pension to be recognized in these scenarios, the National Social Security Institute will apply the legislation in force on the date the pension trigger event occurs, where it is more favorable to these individuals.

b. Early retirement for reasons not attributable to the worker

It has included as additional grounds for the termination of contracts all the grounds based on objective reasons and voluntary termination by the worker arising from the scenarios set out in cases of geographic mobility, material modification and termination of contract at the worker’s request due to serious breaches as described in article 50 of the Workers’ Statute.

It moreover determines a reduction multiplier to be used on the resulting monthly pension amount  instead of the quarterly amount, in addition to modifying the percentages of those multipliers. There are two variables that will determine the multiplier to be used: (i) every month or fraction of a month that remains, on the occurrence of the trigger event, before the worker reaches the normal retirement age and (ii) the substantiated contribution period. The reduction multipliers will range between 30% – where retirement is brought forward by 48 months – and 0.5% –where the trigger event is brought forward by a month–.

c. Early retirement by reason of activity and disability

Firstly, in relation to retirement by reason of activity the application procedure and process for determining the indicators evidencing qualifying levels of hazard, hardship or toxicity have been changed, something which will be implemented by regulations and will allow the approval of decrees stipulating age reduction multipliers in certain sectors of activity.

The applicable age reduction percentages will be reviewed every 10 years at the most.

These reduction multipliers will not make it possible for interested parties to retire before they are 52, nor will they be taken into account for the purposes of substantiating the age laid down to be eligible for partial retirement, the additional percentages of the computation base under article 210.2 of the Revised General Social Security Law (TRLGSS) and any other early retirement option. These limits will also apply to the age reduction multipliers in cases of retirement due to disability.

d. Delayed retirement

Incentives are provided for prolonging active life beyond the statutory normal retirement age applicable in each case.

• An exemption is allowed from contributions for nonoccupational contingencies – except for temporary incapacity resulting from those contingencies – in relation to employees who have reached a pensionable age. The exemption will also include contributions for unemployment benefit, to the wage guarantee fund and for occupational training. The periods in which this exemption will apply are to be computed as if contributions had been made for the purposes of being eligible for and determining the benefit amounts.
• Moreover, self-employees aged 65 or over will be exempt from social security contributions, with the exception of contributions for temporary incapacity and for occupational contingencies.
• The payment of a financial supplement is stipulated for workers who continue working even if on reaching normal retirement age they fulfill the contribution requirements that would make them eligible for a retirement pension. That supplement will not be compatible with access to active aging options and may be received in whichever of the following ways the interested party chooses:

• An additional 4% for each full year of contributions made between the date on which the worker reached retirement age and the pension trigger event.
• A lump sum for every full year of contributions between the date they reached that age and the age of the pension trigger event using a formula based on the number of contributed years.
• A combination of the preceding two options (to be implemented in the regulations).

e. Active retirement

The main new change is that at least one year must elapse over the normal retirement age. Compatible full or part time work may be carried out for an employer or as a self-employed worker.

It will not be a requirement to be able to elect that option that employers must not have adopted unjustified termination decisions in the six months preceding that compatibility. Nor will it be necessary that, after the start of a compatible working and pension arrangement, the company must retain over the term of the pensioner’s employment contract, the number of jobs existing at the company before it started.

f. Mandatory retirement

Collective labor agreements may only impose mandatory retirement where (i) the worker is aged 68 or over; or (ii) fulfills the requirements to be eligible for a full normal retirement pension; and (ii) the measure is linked to generational transition as a result of at least one new worker being hired under an indefinite full-time contract.

As an exception, this retirement age may be lowered to the normal retirement age where the percentage of women in employment, for any of the economic activities falling within the functional scope of the collective labor agreement, is below 20%, and in these cases a woman must be hired simultaneously under an indefinite full-time contract. In the National Classification of Economic Activities to which the employer concerned belongs the percentage of female employees must be below 20% of the total number of workers on the effective date of the decision to terminate the contract.

Notice of the decision to terminate an employment contract under this option must first be given to the workers’ statutory representatives and to the worker concerned.

In a transition period, any clauses in force which were agreed under collective labor agreements signed before January 1, 2022 will stay valid for up to three years after the end of the initial term agreed in the collective labor agreement concerned. And they will be fully applicable to any collective labor agreements signed on or after that date.

g. Reduction to contributions for workers over 62 on temporary incapacity leave (sick leave)

Employers’ social security contributions for nonoccupational contingencies have been reduced by 75% during periods of temporary incapacity leave (sick leave) for workers over 62.

3. Intergenerational fairness mechanism

In the spirit of strengthening the balance between generations and of shoring up the sustainability of the social security system in the long term, an intergenerational fairness mechanism is put in place.

A first component of this mechanism is that, starting in 2023, contributions will increase by 0.6 percentage points, retaining the structure of the current distribution between employer and worker. This contribution will be retained until 2032.

4. Other measures in Law 21/2021

• The current clause safeguarding the right to keep retirement terms and conditions in place before Law 27/2011 has been maintained. Namely, earlier legislation has been kept in force giving entitlement to a retirement pension for individuals who: (i) terminated their contracts before April 1, 2013; or (ii) had their employment contract suspended or terminated as a result of collective layoffs or collective agreements with any scope due to decisions in insolvency proceedings. In both cases, and from that date, they must not have rejoined the job market.
• A financial supplement is provided for individuals who started receiving a retirement pension before the normal retirement age between January 1, 2002 and December 31, 2021, in certain cases of long contribution periods.