Annual Report 2019
Saving like this, is future 00
Index 01-Directors Report 2019 p. 1 - 4
02-2019 in figures p. 5 - 10
03-New Strategic Plan 2019-2021 p. 11 - 16
04-Our managament p. 17 - 24
05-Commitment to socially responsible investment (SRI) p. 25 - 32 Annexed 06-Market Performance Auditoría p. 33 - 44 DictamenAnnual Accounts actuarial Directors Report 2019 01
Directors’ Report 2019
1 Geroa Pentsioak, Entidad de Previsión Social Voluntaria de Empleo
GEROA PENTSIOAK, EPSV DE EMPLEO, with tax identification number V20548244, commenced its activity in 1996 and is registered on the Basque Country Register of Voluntary Social Welfare Entities under number 178-G.
Its sponsor members are: At 31/12/2019, the governing board comprised the following members: • ADEGI, with registered office at Paseo Mikeletegi 52, 20009 Donostia, Gipuzkoa. • Chair: Joseba Villarreal, representing ELA And the trade unions: • Vice-chair: Nerea Zamacola, • ELA, with registered office at Calle Consulado, representing ADEGI 8; 20011 Donostia, Gipuzkoa. • Treasurer: Francisco Javier Sasigain, • LAB, with registered office at Calle representing ADEGI Pokopandegi, 9; 20018 Donostia, Gipuzkoa. • Secretary: Ángel Ramos, • CC.OO, with registered office at Calle Carlos I, representing UGT 1; 20011 Donostia, Gipuzkoa.
• UGT, with registered office at Calle Catalina de Erauso, 7; 20010 Donostia, Gipuzkoa.
2 Directors Report 2019
GEROA PENTSIOAK is an employment Mission voluntary social welfare entity (EPSV as per its Spanish acronym) created equally between ADEGI and trade unions, with the aim of supplementing the monthly state pension of its member workers. To do so, the equal contributions made over the working life of employees are managed by a technical team, which is responsible for managing them independently, efficiently and on a sustainable, long-term basis, in order to offset the decline in pensioners’ purchasing power.
To be an Entity of which our members Vision feel a part and who value the competitive advantage it offers them, such as being able to maintain their quality of life in retirement, and protecting them in unforeseen circumstances such as disability and death.
3 Geroa Pentsioak, Entidad de Previsión Social Voluntaria de Empleo
Our INDEPENDENCE: We are an Entity that does values not rely on any public body or financial entity.
PARITY: We are an Entity founded on parity: on the one hand, 50% of our governing bodies are represented by ADEGI, and 50% by the ELA, LAB, CC.OO. and UGT, trade unions. On the other, contributions are made equally by workers and companies.
NOT-FOR-PROFIT: The net profits obtained from managing resources are reinvested in members’ assets and used to cover the commitments with members in the form of annuities.
Note that the members of the governing bodies do not receive any remuneration or allowances in their capacity as such, and all emoluments received by Entity personnel for sitting on boards or participating in other types of acts on behalf of GEROA revert back to the EPSV.
SOCIAL RESPONSIBILITY: One of our objectives is to foment the Basque Industrial fabric, mainly through supporting the creation and development of projects in Gipuzkoa.
4 2019 in figures 02
2019 in figures
5 Geroa Pentsioak, Entidad de Previsión Social Voluntaria de Empleo
Contributions
CONTRIBUTIONS 96.74 M€
COMPANIES SECTORS 8,794 20
NEW MEMBER COMPANIES MODIFICATIONS TO % CONTRIBUTIONS · Lansolar Ingenieros · Paper + 0.2% (1.40%) 2 · Adecco Outsourcing · Clece +2% (3%)
INCOMING MOVEMENTS INDIVIDUAL MEMBER COMPANIES* THAT HAVE LEFT
Several calls have also been received from companies showing an interest in · Grupo Herribus joining, although they ultimately 1 1 *Those that lack a Gipuzkoa collective sector agreement did not.
AMOUNT OF INCOMING MOVEMENTS 16,005 €
6 2019 in figures
Benefits
BENEFITS 55.09 M€
AS A LUMPSUM IN ANNUITIES 37.27 M€ 17.81 M€
NUMBER
RETIREMENT SEVERE DISABILITY 2,004 9
TOTAL PERMANENT DEATH DISABILITY 2,753 376 159
ABSOLUTE PERMANENT DISABILITY 205
BENEFITS WITH ADDITIONAL CAPITAL (disability and death of active members) · TOTAL AMOUNT: 13,300,127€ 424 · ADDITIONAL CAPITAL: 4,764,712€
OUTGOING MOVEMENTS AMOUNT OF OUTGOING MINIMUM ANNUITY 2019 AVERAGE RETIREMENT MOVEMENTS ANNUITY 2019 76 538,475€ 175€ 185.60€
7 Geroa Pentsioak, Entidad de Previsión Social Voluntaria de Empleo
Investments
Breakdown Fund 1 Breakdown Fund 2
SHORT TERM FIXED INCOME FIXED INCOME 13.03% 51.94% 97.98%
EQUITIES OTHER SHORT TERM 27.55% 7.48% 2.02%
Assets
FUND 1 ASSETS FUND 2 ASSETS 2,189 M€ 48 M€
SOLVENCY MARGIN NET ASSETS OF THE ENTITY TOTAL ASSETS MANAGED 44% 37 M€ 2,274 M€
8 2019 in figures
Yield Fund 1
Yield 1 year 5 years 20 years Since 1996
GEROA 9.79% 5.01% 5.83% 6.26%
CPI 0.80% 0.94% 2.07% 2.11%
AVERAGE Mixed fixed income (INVERCO data) 5.31% 0.91% 1.70% 3.38%
*This yield does not guarantee or determine future yields
Expected Annuity
381 €/€/month for life*
63% Gains 37% Contributions
Given this data, a 43 year old worker who began contributing in 1996 with the average contribution for the metal sector, and who continues making their contributions today, upon reaching the age of 67, would receive a life annuity of €381*, of which 63% will correspond to gains and a mere 37% to contributions.
*Forecast based on a yield of CPI+2%. Amount corresponding to the present value of money.
Annuity Revaluation
GEROA TEMPORARY ANNUITIES GEROA LIFETIME ANNUITIES CPI STATE PENSION 1.50% 3.52% 0.80% 0.90%
9 Geroa Pentsioak, Entidad de Previsión Social Voluntaria de Empleo
Expenses
ADMINISTRATIVE DEPOSITARY BROKERAGE THIRD PARTY TURNOVER AVERAGE EXPENSES EXPENSES FEES FEES RATIO PAYMENT PERIOD
0.11% 0.03% 0.01% 0.26% 122.92% 1
Collective
MEMBERS WITH CONTRIBUTIONS IN 2019 114,627 +1.22% This represents of total 37% FEMALE MALE workers in the province of Gipuzkoa 34% 66%
AVERAGE AGE MEMBERS WITH NO MEMBERS WHO ARE RECEIVING BENEFICIARIES* WHO ARE CONTRIBUTIONS IN 2019 ANNUITIES RECEIVING ANNUITIES 43 years 162,040 2,531 607
*People receiving annuities as a result of the death of a member.
· Bidasoaldea: 10,137 · Donostialdea: 10,871 · Urola Erdia: 5,871 · Debabarrena: 8,275 · Goierri: 8,584 · Urola Garaia: 4,793 · Debagoiena: 9,217 · Oarsoaldea: 9,832 · Urola Kosta: 6,498 · Donostia: 21,222 · Tolosaldea: 7,542 · Others: 11,785
10 New Strategic Plan 2019-2021 03
New Strategic Plan 2019-2021
11 Geroa Pentsioak, Entidad de Previsión Social Voluntaria de Empleo
In 2019, we presented the 2019-2021 Strategic Plan agreed unanimously by all the organisations, which once again shows their firm commitment to the need to supplement the state pensions of workers in our territory.
For the governing bodies of GEROA, this means being able to pay an annuity of at least the maximum contribution amount of the prior year over a prolonged period, i.e., between at least 20 years and for life.
This Strategic Plan sets out 5 STRATEGIC LINES to be developed through different actions over the next 3 years.
1. Awareness and dissemination plan
This strategic line forms part of the challenge to improve member satisfaction. In order to achieve this, we have switched collaboration agency, and our current ally is the San Sebastian- based company breakingmolds.
The first step was to publish avideo that identifies the spirit of GEROA, which was awarded the Euskalit short film prize. Izaskun Legazkue and Eduardo García, collecting the Euskalit award. Furthermore, the new Welcome Pack has been sent out to the more than 1,300 new members of the Entity.
All of the above is aimed at giving our members a better understanding of what GEROA is, its objective, its values and principal traits.
12 New Strategic Plan 2019-2021
2. Analysis of unemployment benefit
To develop the second line of our strategic plan we hired, the Junior company of the Faculty of Deusto, to conduct a study of the different state social benefits, the results of which will be available in 2020. The incorporation of this contingency into those covered by GEROA is being done in such a way that it does not jeopardise the beneficiaries of said aid. ESME is the Junior Company of the Deusto University.
3. Analyse Geroa´s social responsibility
“GEROA has been taken GEROA is an entity that avails of the financial markets several times as a model in order to achieve its objective of providing monthly supplements to workers’ pensions, an eminently SOCIAL to follow both at the level objective. of the Basque Country Proof of our social responsibility is manifold, such as the and at the state level.” equal and altruistic involvement of social agents in our governing bodies, a largely female workforce, a policy of choosing local suppliers or various lines aimed at promoting local investment. We were also the first employment EPSV to sign up to the Principles for Responsible Investment (PRI) in relation to Socially Responsible Investment (SRI).
As a consequence of all of the above, GEROA has been chosen several times as a shining example both at Basque level, as a reference for the General Deputy of Bizkaia, at state level, through the Toledo Pact, -where Virginia Oregui, a manager of the Entity, intervened in 2018 and for which she was congratulated by parties from across the political spectrum - as well as at European level, where we have received 3 awards from the prestigious IPE magazine.
13 Geroa Pentsioak, Entidad de Previsión Social Voluntaria de Empleo
Social impact 2019
22 Workers 10.10% Investments in the Basque Country
100% Indefinite contract 7.1 millions Local investment 2019
1 Person recruited 195 New jobs in companies owned by Orza or directly 0% Turnover ratio 2 People in the Euskalit evaluation club
73% Women 27% Men on staff 50% Unions and 50% ADEGI at the Governing Board 9% 0-30 years 74% 30-50 Years 17% Over 50 10 Womens and 16 Men on the 1,274 Training hours Governing Board
86% Service in Basque 0€ Board Members remuneration
Geroa has a Remuneration Policy approved by the Governing Board where the absence of Variable Remuneration is established.
Distribution of expenses 2019
Brokerage: Depositary: 10% 17.7% Communications: 5.6%
Stock Market Information: 5.2%
TI: 4.0%
Advice: 3.6%
Others:
Wages and Salaries: 11.4% 42.5%
14 New Strategic Plan 2019-2021
“the strategic plan 4. Permit individual contributions to provides for the cover social security pension shortfalls possibility of making One of our concerns is that workers whose working life is voluntary contributions interrupted or who arrive late to the labour market cannot to GEROA .” reach acceptable levels of coverage when they retire.
In order to address this, at least partially, the strategic plan provides for the possibility of making voluntary contributions to GEROA members who began making contributions after the age of 25, or who have undergone periods during which they made no contributions, in order to make up these social security pension shortfalls.
The technical aspects of this development are being prepared in 2019 and 2020, for roll-out in 2021.
5. Reinforce the governing board´s commitment to benefits in the form of annuities
In the 70’s, the ‘Sidero’ Supplement was created in the form of an annuity for metal sector pensioners who retired on a pension below the minimum wage. In 1996 and using surplus Sidero funds, GEROA came into being thanks to the firm conviction and the breadth of vision of ADEGI and the ELA, LAB, CC.OO. and UGT trade unions to provide general coverage for retirement, disability and death-related situations all the while upholding the philosophy of the Social Security pension supplement.
During GEROA’s formative years, the amounts accumulated by workers were very small and paid out in the form of lumpsum. Since 2001 however, with the introduction of Additional Capital in the cases of disability and death-related situations, the amounts began to grow and a monthly annuity became the method of choice for supplementing the monthly state pension. Exceptionally, when accumulated amounts were insufficient to meet payments over a prolonged period of time, the benefits could be paid out in the form of lumpsum.
15 Geroa Pentsioak, Entidad de Previsión Social Voluntaria de Empleo
Approval of the Strategic Plan in the 2019 General Assembly
During all these years, the minimum amount necessary to receive annuity benefits was revised up until 2012, when an automatic calculation formula was established whereby when the accumulated savings were enough to be able to pay out a monthly annuity equivalent to the maximum contribution for at least 20 years, the benefit was paid out this way.
In this Strategic Plan all the members of the governing board unanimously ratified the commitment to pay out the supplement in the form of annuities, on the understanding that GEROA’s objective is to try and cover the entire life of our pensioners, taking into account that the life expectancy in Gipuzkoa at 65 years of age is 19.3 years for men and 23.6 for women, and following the payment method for these type of systems in the majority of European countries.
LIFETIME ANNUITIES TEMPORARY ANNUITIES
Year 2001 2006 2008 2009 2012 2013 2014 2015 2015 2016 2017 2018 2019 2020
Minimum per month 60.10€ 70€ 80€ 100€ 149€ 151€ 158€ 166€ 166€ 166€ 168€ 173€ 175€ 188€
16 Our managament 04
Our management
17 Geroa Pentsioak, Entidad de Previsión Social Voluntaria de Empleo
In 2019, we remained committed to continual improvement, and GEROA has once again retained the ISO 9001:2015 certification. Furthermore, we continued working on applying the Euskalit Advanced Management Model, in which 2 members of GEROA’s workforce actively formed part of its club of assessors.
18 Our managament
1. Commitment to continual improvement:
In 2019, we remained committed to continual improvement, GEROA has once again retained the ISO and GEROA has once again retained the ISO 9001:2015 9001:2015 certification certification. Furthermore, we continued working on applying the Euskalit Advanced Management Model, in which 2 members of GEROA’s workforce actively formed part of its club of assessors.
Both ISO standards and the legislation governing EPSVs highlight the importance of risk analysis, something which we have always been very conscious of in GEROA, as we work rigorously in our mission to achieve the best pension supplement for our members.
This is why, in light of current interest rates and growing life expectancy, we have modified the Technical Bases for calculating the mathematical provisions corresponding to life annuities.
As a result, the new Technical Bases are as follows:
TECHNICAL INTEREST RATE MORTALITY TABLES 2% PERM-F 2000P
MATHEMATICAL PROVISION SOLVENCY MARGIN 78,218,253.60€ 44%
Furthermore, conscious of the importance of cybersecurity risks, 6 of our team members attended awareness sessions, and next year we will once again conduct a cybersecurity audit.
Also noteworthy is the involvement of our governing board members in management, evidenced by the EPSV Training Course attended by one of the members, who with the corresponding legal accreditation, participated on this course.
19 Geroa Pentsioak, Entidad de Previsión Social Voluntaria de Empleo
1. Commitmennt to continual On a separate note, amendments were made to articles “Many are the voices that 5.6 and 7 of the Regulation of Payments of the GEROA I call for and propose tax improvement: Plan de Previsión de Empleo, to adapt it to new situations and redraft it to give greater legal certainty in relation to changes regarding EPSVs. ” the amount, payment and treatment of benefits with non- member contributions. We also modified the Statement of Investment Principles.
But we must continue to work…
As mentioned, we ended 2019 with modifications to our technical bases, but this has only just begun as new mortality tables have just been published which we will have to gradually adapt to in the coming years.
Many are the voices that call for and propose tax changes regarding EPSVs. However, we are waiting for them to be specified.
Concerning investment-related legislation, our Assembly ratified not to implement the Strategic Life Cycle in our Entity, but other types of changes are expected as the sector is requesting the Basque Government to broaden the range of assets that qualify for investment, as current regulations are becoming obsolete.
2. Communication
As mentioned before, one of the main points of the Strategic Plan is to transmit what we do, how we do it and why we do it, as it is important to remember that GEROA is not a financial instrument, but a pension supplement.
In addition to changes on our website and the publication of a video, 2019 was a year in which we have been working on a communication campaign that will be launched in 2020 and will culminate in 2021, our 25th anniversary.
An explanatory session was also held on the GEROA model in CAF and Virginia Oregui spoke at the Mutualities Workshop held in Madrid. Virginia Oregui, a speaker at the Meeting of Mutualities held in Madrid.
20 Our managament
3. Our team
In 2019 a new member joined our team: Sara Villasante, who, after several years of experience in London and Bilbao, joined our Investments Team, specifically in matters of Direct Investment. On the other hand, one of our reception colleagues left.
A unanimous decision was reached to sign a Company Agreement setting out our working conditions and we adapted to the new clock-in regulations without any major complications. We also have a remuneration policy approved by the governing board.
The GEROA team
People are GEROA’s most important asset, which is why they receive ongoing training, not only at technical level to further their professional development, but also physically and emotionally, because of our conviction of being a healthy organisation.
Furthermore, the entire workforce attended 2 talks on healthy eating and we have a routine of active micro- pauses involving stretching exercises and a special 30-minute session in collaboration with Sasoi.
Two team members also attended a very useful mindfulness course for people working face-to-face with the public.
21 Geroa Pentsioak, Entidad de Previsión Social Voluntaria de Empleo
2019 2018
Workforce 22 22 Male 27% 27% Female 73% 73% Average age 41.54 43.24 % Permanent contracts 100% 100% % With a higher degree 50% 41% % Employees able to speak basque 86% 86% % Participants in training sessions 100% 100% Nº of hours of training 1,274 961 % Workforce on a reduced timetable 36% 41%
4. Innovation
We have broached many aspects of innovation during 2019, the most notable of which were the following:
• The Banners internet campaign, which resulted in numerous members registering in the Private Area.
• The Power Query course in which 10 employees took part allowed the operation of large databases to be Nueva Área Privada de la web, systemised more rapidly and operational risk to be más funcional y amigable mitigated.
• The renewal of the Private Area for both worker members and companies and assessors, thus facilitating the management thereof, giving it a friendlier appearance and allowing simulations to be performed in a very simple manner.
22 Our managament
5. Society
As regards society, we work in 2 areas:
a) Financial education and extension of the social welfare culture.
In this regard, Virginia Oregui collaborated on the book “The risk of Longevity in companies” with the chapter “A success story of developing supplementary social welfare through labour relations: Geroa Pentsioak, trans-sector and territorial collaboration among social agents as a model for success in Spain”. Furthermore, Virginia gave a talk on pensions in Oiartzun in collaboration with Elkarkidetza and Orza.
Another point worth mentioning is that Eduardo García, head of the Entity’s Internal Control, is the representative of the Basque EPSV Federation in the European Association “Pensions Europe”, for which he receives no remuneration.
b) Commitment to local investment: Gipuzkoa and the Basque Country
In 2019, investments were made in two new start-ups and a new micro-loan was granted.
CIN GROUP: Is a group specialised in the implementation of digitalisation solutions through artificial vision and automation to guarantee “ZERO DEFECTS” in products and components throughout the entire transformation chain of materials in highly demanding sectors. Solutions that have a major impact in terms of quality improvement and cost savings for customers.
MODFIE: Modfie is a casting and hiring tool in the area of advertising, extras and the performing arts. All candidates are managed online.
We have also increased our presence in companies in which we were present the prior year.
23 Geroa Pentsioak, Entidad de Previsión Social Voluntaria de Empleo
GEROA has more than Euros 50 million invested in ORZA AIE, a Direct Investment Vehicle owned 50%- 50% by GEROA and Elkarkidetza. Through ORZA AIE, GEROA participates in Basque companies in sectors such as health, aeronautics, machining, safety etc.
In 2019 it invested in four new companies:
DENEB MEDICAL: Deneb Medical, SL, which is developing a surgical robot for the selective cutting of tissue that avoids unintentional damage to critical anatomical structures.
MIKROBIOMIK HEALTHCARE: Mikrobiomik Healthcare Company, SL is dedicated to the research, development and sale of new human microbiome-based medicines.
ALERION TECHNOLOGIES: Alerion Technologies, SL a company that offers solutions for the automated inspection of infrastructures in the renewable energies industry.
AVANTI STRATEGIES: Avanti Strategies, SL which is dedicated to the assembly and hire of scaffolding, forklifts and other auxiliary items for the construction industry.
24 Commitment to socially responsible investment (SRI) 05
Commitment to socially responsible investment (SRI)
25 Geroa Pentsioak, Entidad de Previsión Social Voluntaria de Empleo
During 2019 we have actively managed, incorporating the Environmental, Social and Good Governance (ESG) aspects into our selection of assets, as part of our commitment to companies that show a better risk/return in the medium-to-long term.
26 Commitment to socially responsible investment (SRI)
01 We will incorporate ESG issues into investment analysis and decision- making processes. 02 We will be a active owners and incorporate ESG issues into our During 2019 we have actively managed, incorporating the ownership policies and practices. Environmental, Social and Good Governance (ESG) aspects into our selection of assets, as part of our commitment to companies that show a better risk/return in the medium-to- 03 long term. We will seek appropriate disclosure We use ESG rankings and different indicators and non- on ESG issues by the entities which financial information of the companies, thus enabling us to we invest. monitor them and compare them to our competitors. Our investor portfolio does not include companies with severe controversies1 or which do not comply with the 10 principles 04 of the UN Global Compact. We will promote acceptance and Against a backdrop of a transition towards a low carbon implementation of the principles within the investment industry. emissions economy, our commitment to climate change consists of supporting companies that contribute to sustaining and improving the environment, such as those involved in renewable energies, energy efficiency, water 05 management and the reduction of coal dependency. In this We will work together to enhance regard, our goal is to gradually reduce carbon emissions of our effectiveness in implementing the Principles. the Entity’s securities portfolio by up to 6% by 12/31/2023.
06 1.- Severe controversy: controversies are incidents related to factors which have to do We will each report on our activities with the environment, social responsibility and corporate governance and which affect and progress towards implementing companies. We consider severe controversies to be those with a level 5 rating given by the the Principles. ESG Rating Sustainanalytics agency.
27 Geroa Pentsioak, Entidad de Previsión Social Voluntaria de Empleo
The following companies, among others, contribute positively to the environment:
Listed company
HOLALUZ: A company which supplies 100% renewable energy (solar, hydroelectric, wind, biomass or biogas) and also promotes energy consumption for own use through solar panels.
Start Up
BUNTPLANET: A company in San Sebastian which, through a combination of algorithms and artificial intelligence, offers software solutions to reduce water loss in the drinking water supply.
Through Orza
GESE: Company specialised in energy management. Improves energy efficiency in industrial environments, public services and public administrations and achieves substantial energy savings.
Each year we perform a quarterly control to verify the ESG rating of the portfolio. We also analyse whether any company has been embroiled in a severe controversy involving these aspects, and we back compliance with the 10 Principles of the UN Global Compact. In the event of an incident, the Investments Committee can actively engage in dialogue with the company in order to understand and assess the situation, give it a deadline to resolve the incident or declare it unfit to remain in the portfolio. During 2019, two companies were deemed unfit and their investments removed from the portfolio. There are certain companies which, although not rated as severe controversy, or which do not fail to comply with the Global Compact principles, remain under surveillance.
Lastly, we select management entities that employ best practices in terms of Socially Responsible Investment: those which incorporate ESG criteria in their investments, and favouring those which adhere to the 6 Principles of Responsible Investment (PRI).
28 Commitment to socially responsible investment (SRI)
Main indicators
ASSET TYPE POLICY OBJECTIVE RESULT as of 31/12/2019
Public debt bonds and Countries with a rating of more than 70 in Min 95% 100% government bonds the Bloomberg “ESG Country Risk” ranking
Countries with a rating of more than 70 Min 95% 99.87% in the Bloomberg “ESG Country Risk” ranking”
ASG Sustainalytics or RobecoSAM Min 50% 72.72% ranking: Rating of more than 70 (of those with ranking)
ENVIRONMENTAL Informative 73.22% (Ranking Sustainalytics/RobecoSAM>70) 98.01% (CDP Climate Score = 4)
Corporate fixed income, SOCIAL Informative 72.55% (Ranking Sustainalytics/RobecoSAM>70) equity and covertibles GOVERNANCE Informative 66.97% (Ranking Sustainalytics/RobecoSAM>70) 68.95% (CDP Climate Score = 4)
Excluded due to behaviour: Positions with 0% (unless 2 companies declared companies which fail to comply with any undoing nonsuitable during of the principles of the Global Compact positions is the year and/or those with a level 5 controversy prejudicial for rating the member)
Level 4 controversies or securities 26 Companies under observation under observation -
Green Bonds/Sustainable Bonds - 5 Bonds (10,000,000€) The Management Entities must introduce Funds, ETF and investment Min 75% 97.70% through venture capital ESG criteria companies Management Entltes wich are Min 75% 95.95% signatories of the UNPRI Excluded due to behaviour 0 0 Management Entities affected
Min 75% Deposits, current accounts, ESG qualification from Sustainalytics or 88.09% fixed-term deposits, currency... RobecoSAM * 91.61% have a rating of more than 70
Structured products and ESG qualification from Sustainalytics Min 75% Structured: derivatives or RobecoSAM 0% have a rating of more than 70 Futures and options: 100% *100% have a rating of more than 90
Ranking of Sustainalytics or RobecoSAM. Score from 0 to 100, with 100 being the best score. Measures the positioning of companies in terms of ESG (Environment, social, Good governance) * CDP Climate Score (1-8) with 8 being the best. It measures the company´s level of commitment to climate change mitigation, adaptation and transparency. * ISS QualityScore: (1 to 10) with 1 being the best. It is the general Rating assigned by the Institutional Shareholder Services (ISS) to the governance practices of the company. The percentages shown have been calculated on the companies for which we have data.
We are active shareholders
In 2019, we voted at 19 general shareholder meetings of listed companies. We exercise the right to vote at companies in which we invest (ownership interest greater than 0.05%), representing the interests of our members while seeking the long-term sustainability of the companies and taking into account ESG criteria.
29 Geroa Pentsioak, Entidad de Previsión Social Voluntaria de Empleo
We also sat on the boards of 100% of the start-ups we invested in (10 companies) and voted at the general Global Investors assembly of 9 funds or venture capital firms. Statement to Governments on Climate Change
This statement is signed by 631 investors representing over USD $37 Promotion of SRI trillion in assets.
Geroa’s head of SRI participated in the “Advanced SRI strategies in the management of portfolios” workshop as part of the 2019 SRI week organised by Spainsif at Deusto University. She also wrote an article on SRI for a book that was published to commemorate the 35th anniversary of the Basque Country EPSV Federation.
Initiatives
Through the PRI collaboration platform, we took part in different initiatives with other investors:
“PRI-Ceres coordinated investor statement on deforestation and forest fires in the Amazon.”
• Signatories to the “Investor Statement on Deforestation and Forest Fires in the Amazon”urging companies to redouble their efforts and demonstrate a clear commitment to eliminating deforestation within their operations and supply chains.
• Signatories to the “Global Investor Statement to Governments on Climate Change”.
The statement came about due to investor concerns over the implementation of the Paris Agreement and urges governments to implement the actions necessary to achieve the goals of the Agreement.
• Signatories to the letter written by PRI to the SEC against the restriction of rights of US shareholders.
30 Commitment to socially responsible investment (SRI)
“This is an initiative to “Signatory sign on letter: SEC proposed promote the principles of changes to shareholder proposals and proxy women’s empowerment advisory firms.” and achieve gender equality.” This initiative is in response to the US Securities and Exchange Commission’s (SEC) bid to limit the proposal and voting rights of shareholders at annual general shareholder meetings of investees in the United States, which would have a negative impact on ESG-related issues.
• Signatories to the “Investor Statement to support the UN Women’s Empowerment Principles and achieve Gender Equality”.
“Investor Statement to Support the UN Women Empowerment Principles.”
This is an initiative to promote the principles of women’s empowerment and achieve gender equality. It recognises that empowering women is a major issue both from a social and financial perspective and asks that companies strengthen their commitments and take decisive and concrete actions towards gender equality.
In this regard, as of 2020, we will engage in active dialogue or vote at general shareholder meetings of companies which have no women on their boards so that appropriate measures be taken.
Committed team The investment team undergoes regular training in this subject matter through conferences, seminars, courses, actively updating developments and content that will be incorporated into this process.
Noteworthy is that the head of SRI has obtained ESG analyst certification: “EFFAS Certified ESG Analyst (CESGA)”.
31 Geroa Pentsioak, Entidad de Previsión Social Voluntaria de Empleo
And now what? “We have engaged the services of an ESG During 2019, we have worked to evolve in the field of SRI, testing different tools to enhance the analysis and control of information provider our portfolios. This testing period served to create a more which is developing a comprehensive policy for 2020, in which we undertake to continue evolving. tool that will allow us to strengthen the analysis In this regard, we have engaged the services of an ESG information provider which is developing a tool that and control of different will allow us to strengthen the analysis and control of ESG aspects of our different ESG aspects of our investment portfolio. Future investment portfolio.” improvements include the development of a climate module with which we can monitor portfolio carbon emissions, as well as the climate-related threats and opportunities to which we are exposed. Modules are also being created that will allow us to monitor the impact of our investments in society and the aligning of investments with the UN’s 17 Sustainable Development Goals.
32 Market Performance 06
Market Performance
33 Geroa Pentsioak, Entidad de Previsión Social Voluntaria de Empleo
The performance of the financial markets was quite extraordinary in 2019. The majority of assets, both fixed income and equities, saw double digit returns, quite the opposite of what happened in 2018.
However, the political and economic uncertainties at the end of the year remain, and weak growth as of the third quarter, particularly in Europe, persists, although it appears to have bottomed out.
34 Market Performance
“The US Federal Reserve, The reason for this trend in the financial markets, with no which up to December factors, particularly macroeconomic, to support it, is due clearly to the actions of central banks. In 2019, more than 30 2018 had been raising central banks, representing 75% of the planet’s economy, cut interest rates, slashed interest rates, and those that did not, continued with their them on 3 occasions, quantitative easing (QE) policies. bringing the price of The US Federal Reserve, which up to December 2018 had been raising interest rates, slashed them on 3 occasions, money down to 1.75%.” bringing the price of money down to 1.75%. In Europe, the ECB, which had suspended its QE, reactivated the policy even cutting the benchmark interest rate by 10 basis points to -0.50%.
The monetary authorities are continuing with their extremely lax measures, maintaining very flat curves and offering practically zero return over the different terms. The controversy of whether these negative rates serve a purpose is on the table of many strategies and even of the ECB itself.
The year began as 2018 ended, with significant uncertainty over protectionism and its implications for world trade, as well as Brexit.
As regards protectionism and particularly the trade war between the US and China, things swung from appearing to be going off the rails, with no agreement being reached and prohibitions for Huawei over the use of Android or the 5G networks, to reaching the Phase 1 trade deal in December. The trade war with respect to Europe has not reached the levels of tension that occurred with China, and could mainly affect the automotive industry.
After constant toing and froing, endless debates, a divided population and the resignation of Theresa May as prime minister, elections were held in the UK in December, giving Boris Johnson a substantial majority. This allowed Brexit to be set for 31 January 2020, and the threat of a hard Brexit dissipated.
All of the above meant that the stock market indices of developed countries closed up practically on annual highs, or even all-time highs if we include the US.
35 Geroa Pentsioak, Entidad de Previsión Social Voluntaria de Empleo
Protectionist threats have weakened the manufacturing “Protectionist threats sector, affecting estimated growth rates. The most exposed have weakened the countries, Germany and Japan, have suffered the most. Other developed economies, thanks to the impetus of the manufacturing sector, services sector and domestic consumption, have suffered affecting estimated less as a result. growth rates.” After elections were held in Spain, a minority coalition government emerged, but it will have to negotiate to bring about any meaningful reform, meaning the Spanish stock market has lagged behind other indices. With the collapse of the coalition government in Italy, a new government was formed with a much less belligerent attitude towards Europe.
As actual interest rates are negative, the only interesting alternative to the decline in value of money is the assumption of risk. As for fixed income securities, the assets of emerging countries and high-yield assets are those which have performed best. The risk perceived by the issuer is extremely low, as is the term premium.
Equities on the other hand have played an extraordinary role during the year: this is partly due to the actions of central banks, and partly because companies, particularly American companies, have exceeded all profit expectations, especially technological and growing companies. All this is coupled with the lack of alternative assets, low volatility and the buyback of shares by companies which pushed demand for these assets. At the end of the year, there was a partial rotation of sector securities, with a recovery in those lagging behind, mainly financial and value-added sectors.
Liquid assets, generally linked to infrastructures, real estate and venture capital, have emerged as an alternative to traditional assets, as the illiquidity premium can be an interesting factor when valuing the investment.
36 Market Performance
Performance of indexes
Equities Fixed income
Eurostoxx 24.78% German bond 3.16% Germany 25.22% French bond 5.10% France 26.37% Spanish bond 8.43% Spain 11.82% Italian bond 12.67% Italy 28.23% Portuguese bond 10.63% United Kingdom 12.10% UK bond 4.76% USA 28.88% US bond 8.50% Japan 20.93% Japanese bond 0.16% Emerging Countries 15.42% EU credit 5.98% Global 25.19%
Foreign currencies vs. Euro Commodities US Dollar 1.99% Oil 24.93% Yen 3.00% Gold 15.47% Pound Sterling 6.12% Agriculture 1.72% Metals 6.98%
“At the end of the year, Our Portfolio there was a partial rotation of sector Fund 1 securities, with a recovery in those lagging behind”. Fund 1 contains assets supporting the economic rights of active members (Euros 1,580 million), those of deferred members (Euros 531 million) and the mathematical provisions of members and beneficiaries with actuarial annuities (Euros 78 million). The total value of this fund’s assets at 31 December 2019 amounted to Euros 2,189 million. The yield on this investment portfolio has been a positive 9.79%. The Entity’s compound yield since incorporation is 6.26%, which represents a revaluation of 326% since the beginning.
37 Geroa Pentsioak, Entidad de Previsión Social Voluntaria de Empleo
The main positive return factor was the exposure to equities, with a combined contribution of 5.69%, while fixed income contributed a highly respectable 3.90%. The other portfolio components had a lesser impact, but contributed positively nonetheless during the year.
ASSET CLASS WEIGHT YIELD CONTRIBUTION TO TOTAL
Mark to market F.I. 41.81% 8.54% 3.57%
F.I. AT MATURITY 10.12% 3.24% 0.33%
Short term 13.03% 0.56% 0.07%
Equities 27.55% 19.88% 5.48%
Others 2.53% 4.13% 0.10%
Private Equity 4.96% 8.07% 0.40%
Brokerage Expenses -0.02% Depositary Expenses -0.02% Administration Expenses -0.12% 9.79%
*This yield does not guarantee or determine future yields
If we compare the return with the risk assumed, the indicators are as follows:
GeroaGEROA FUND Fondo 1 1 CarteraCOMPARABLE comparable PORTFOLIO
Yield 9.79% 9.75% Volatility 3.82% 3.45% Sharpe ratio* 2.56% 2.83%
* The Sharpe ratio measures the risk-adjusted return.
38 Market Performance
Return: Geroa vs Benchmark
Return
11.00% 9.79% 9.00% 9.75%
7.00%
5.00%
3.00%
1.00%
-1.00%
-3.00%
-5.00%
12/31/18 12/31/19 01/31/19 02/28/19 03/31/19 04/30/19 05/31/19 06/30/19 07/31/19 08/31/19 09/30/19 10/31/19 11/30/19
Geroa Benchmark
The portfolio has been actively managed, mainly in equities, with a focus on countries, sectors and securities with potential for good revaluation. Hedging has also been employed during the year for European and American equities in order to avoid unwanted losses.
39 Geroa Pentsioak, Entidad de Previsión Social Voluntaria de Empleo
Due to protectionism and the trade war, in the first part of “...long-term bonds the year the most defensive sectors of basic consumption continue to generate have fared the best, whereas in the second half of the year, and when many sectors had unsustainable valuations, there minimal returns and was a move towards greater value securities; financial credit spreads and automotive. The North American technology sector continues to drive the upward push, with the Nasdaq index generally ...” rising by 37.96%
As far as fixed income was concerned, there were 2 parts to the year; the first, in which long-term bonds performed well, and the second, where a change in long-term interest rate trends resulted in a much higher yield from subordinated financial bonds.
In any event, long-term bonds continue to generate minimum returns and credit spreads have generally been squeezed, making investment difficult. Volatility, which measures risk, has been low.
2019 Average Breakdown by asset type
Total FI 65% Equities 28% Others 5% Private Equity 2%
MK to MKT F.I. 42% F.I. at Maturity 13% Short term 10%
Investments continue to be made primarily in Euros (91%) and to a lesser extent in US Dollars (8%). Investment in Basque securities accounts for 10.10% of the total.
40 Market Performance
As regards direct investment, 2.46% of the Entity’s portfolio is invested in ORZA AIE, in which Geroa holds 50%. Orza’s mission is to invest in companies forming the industrial fabric of the Basque Country. Investments of Euros 4.66 million were carried out by Orza in the Basque Country in 2019.
In accordance with its commitment to Gipuzkoa’s society, in 2016 GEROA created a specific direct investment line for start-ups in collaboration with ELKARGI. In 2019 this initiative materialised with investment commitments in CIN GROUP and MODFIE of Euros 300,000 and Euros 100,000, respectively. Additionally, 4 capital increases were carried out in BUNT PLANET, CYBERSURGERY, KOOKITE and METAL 78 in amounts of Euros 99,869, Euros 400,000, Euros 250,000, and Euros 200,000, respectively.
Fund 2
The Fund 2 portfolio consists of the economic rights funding the pensions of members who are receiving their benefits as temporary annuities.
The Fund 2 portfolio has an asset value of Euros 47.93 million that consists of cash and fixed-income securities held to maturity, which are used to match the benefits paid out every month. The yield for the year was 2.74%.
ASSET CLASS WEIGHT YIELD CONTRIBUTION TO TOTAL Fixed Income 97.98% 2.79% 2.74% Short Term 2.02% 0.00% 0.00%
Brokerage Expenses 0.00% Depositary Expenses 0.00% Administration Expenses 0.00% 2.74%
*This yield does not guarantee or determine future yields
41 Geroa Pentsioak, Entidad de Previsión Social Voluntaria de Empleo
Member´s Funds “Major growth is not predicted in either The Entity’s equity, amounting to Euros 37.2 million, is made up of members’ funds, which cover the Euros countries or corporate 5.88 million corresponding to mandatory reserves (solvency profits...” margin, safety margin and minimum share capital) and voluntary reserves of Euros 31.32 million.
Assets mainly comprise fixed income securities, with Euros 3.9 thousand in loans to local companies and Euros 201 thousand in micro-loans to members, following the direct investment lines approved to boost the Gipuzkoa economy.
Outlook for 2020
The outlook for 2020 is positive, with the worst of the trade crisis appearing to have passed and encouraging signs in macroeconomic data, particularly in the manufacturing sector, the veritable Achilles heel of 2019.
Major growth is not predicted in either countries or corporate profits, but indications are that a possible recession is unlikely. Inflation remains stable and no major changes are expected. It appears unlikely that the Federal Reserve will touch interest rates throughout the year, though we will have to wait and see whether the current strength of the labour market will give rise to any tensions. The ECB is currently revising all its procedures, but no shifts in monetary policy are anticipated. Moreover, there is a certain sense of calm in emerging countries, despite possible tensions in Argentina and the Lebanon as they renegotiate their public debt.
42 Market Performance
“In the currencies In the currencies market, volatility is exceptionally low, with market, volatility is market consensus predicting a slight depreciation in the US dollar. exceptionally low...” In Europe, the decision on Brexit is confirmed, and the future relationship between the UK and Europe will have to be negotiated during the year. The EU commission’s new decarbonisation policy, the future of the automotive sector, and the implementation of 5G networks could be important market catalysts.
In the US, there are elections at the end of the year, and the president is embroiled in an impeachment process which is unlikely to prosper. In these elections, a victory for the democrats would only add to uncertainty, but given how the economy is performing, Trump’s re-election appears likely.
As for Fixed income, and principally in Europe, the scenario will continue being “no yield””. It will be practically impossible to obtain a positive return, due to both the levels of short and long-term interest rates and credit spreads.
Country 10-year rate at 12-31-2019
Germany -0.18% France 0.12% Spain 0.47% Italy 1.41% Portugal 0.44% USA 1.92% UK 0.82% Japan -0.01%
43 Geroa Pentsioak, Entidad de Previsión Social Voluntaria de Empleo
In the Equities market, analysts are predicting a start of “Concerning our year with moderate results due to movement in the price management, equities of shares, and corporate profits will be the subject of close scrutiny. Gains on the US stock exchange are expected to will account for around grow at a rate of 10%, compared to 8% or lower in Europe. 30% of the portfolio in Concerning our management, equities will account for 2020.” around 30% of the portfolio in 2020. With a view to avoiding elevated volatilities, hedging tools could be employed as in prior periods. The expected return for the year stands at around 4.34%, with a volatility of 6.64%. As happened last year, this is a consequence of fixed income being at practically zero and equities having modest revaluation expectations.
Events after the reporting period
On 11 March 2020, the World Health Organisation declared the outbreak of Coronavirus disease 2019 (COVID- 19) to be a pandemic, due to its rapid spread across the globe, having affected over 150 countries. The majority of governments are taking restrictive measures to contain the spread, including: isolation, confinement, quarantine and restrictions on the free movement of people, the closure of public and private premises (except for basic necessities and health services), border closures and a drastic reduction in air, sea, rail and land transport. In Spain, the government enacted Royal Decree 463/2020 of 14 March 2020, declaring a state of emergency to manage the health crisis triggered by COVID-19, which, a priori, will remain in force for 15 calendar days.
This situation is having a significant impact on the global economy due to the interruption or slowdown of supply chains and the substantial increase in economic uncertainty, evidenced by greater volatility in asset prices and exchange rates, and a drop in long-term interest rates.
The consequences derived from COVID-19 are considered an event after the reporting period that does not require an adjustment in the annual accounts for 2019, but must be disclosed in the annual accounts for 2020.
At the date the annual accounts were authorised for issue, the Entity has not been affected, nor does it expect to be significantly affected, by the impacts of COVID-19.
44 Annual Accounts
Annual Accounts Geroa Pentsioak, Entidad de Previsión Social Voluntaria de Empleo
Annual Accounts 31 December 2019
Directors’ Report 2019
(With Auditors’ Report Thereon) (Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.) GEROA PENTSIOAK, ENTIDAD DE PREVISIÓN SOCIAL VOLUNTARIA DE EMPLEO
Balance Sheets for the years ended 31 December 2019 and 2018
(Expressed in thousands of Euros)
(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)
A) ASSETS Note 2019 2018
A-1) Cash and cash equivalents 9 58,521 238,385 A-2) Financial assets held for trading 9 2,378 2,610 A-3) Other financial assets at fair value through profit or loss 9 1,808,308 1,366,647 I. Equity instruments 1,133,866 821,196 II. Debt securities 588,232 473,241 III. Hybrid instruments 86,210 72,210 V. Other - - A.4) Available-for-sale financial assets - - A.5) Loans and receivables 9 51,338 63,177 I. Debt securities - 3,447 II. Loans - - III. Deposits in financial institutions 41,042 51,979 V. Receivables arising out of social welfare activities 202 748 VI. Receivables arising out of reinsurance transactions - - VIII. Called-up members’ funds - - IX. Other receivables 10,094 7,003 A-6) Held-to-maturity investments 9 302,605 309,794 A-7) Hedging derivatives - - A-8) Reinsurers’ share of technical provisions - - A-9) Property, plant and equipment and investment property 8 479 511 I. Property, plant and equipment 479 511 II. Investment property - - A-10) Intangible assets 7 - - I. Goodwill - - III. Other intangible assets - - A-11) Investments in Group companies and associates 9 52,443 48,934 I. Investments in associates - - II. Investments in jointly controlled entities - - III. Investments in Group companies 52,443 48,934 A-12) Tax assets - - A-13) Other assets 24 25 I. Assets and reimbursement rights for long-term employee benefits - - III. Prepayments and accrued income 24 25 IV. Other assets - - A-14) Assets held for sale - -
TOTAL ASSETS 2,276,096 2,030,083
The accompanying notes form an integral part of the annual accounts for 2019.
GEROA PENTSIOAK, ENTIDAD DE PREVISIÓN SOCIAL VOLUNTARIA DE EMPLEO
Balance Sheets for the years ended 31 December 2019 and 2018
(Expressed in thousands of Euros)
(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)
A) LIABILITIES Note 2019 2018
A-1) Financial liabilities held for trading - - A-2) Other financial liabilities at fair value through - - profit or loss A.3) Debts and payables 9 1,738 1,711 I. Subordinated liabilities - - III. Payables arising out of social welfare activities - - IV. Payables arising out of reinsurance operations 582 371 VI. Bonds and other marketable securities - - VII. Payables to financial institutions - - IX. Other payables 1,156 1,340 A-4) Hedging derivatives - - A-5) Technical provisions 11 2,237,110 1,985,531 I. Provision for unearned contributions - - II. Provision for unexpired risks - - III. Provision for social welfare activities 2,237,110 1,985,531 IV. Provision for benefits - - V. Provision for profit-sharing - - VI. Other technical provisions - - A-6) Non-technical provisions 12 47 47 I. Provision for taxes and other legal contingencies - - II. Provisions for pensions and similar obligations - - III. Provision for amounts due to settlement pools - - IV. Other non-technical provisions 47 47 A -8) Other liabilities - - A-9) Liabilities associated with assets held for sale - -
TOTAL LIABILITIES 2,238,895 1,987,289
B) EQUITY B-1) Members' funds 10 37,201 42,794 I. Mutual fund 13,513 13,460 III. Reserves 29,281 32,425 V. Prior years’ surplus/shortfall - - VI. Other contributions from members - - VII. Shortfall for the year (5,593) (3,091) VIII. (Equalisation reserve) - - B-2) Valuation adjustments - - B-3) Grants, donations and bequests received - -
TOTAL EQUITY 37,201 42,794
TOTAL EQUITY AND LIABILITIES 2,276,096 2,030,083
The accompanying notes form an integral part of the annual accounts for 2019.
GEROA PENTSIOAK, ENTIDAD DE PREVISIÓN SOCIAL VOLUNTARIA DE EMPLEO
Income Statements for the years ended 31 December 2019 and 2018
(Expressed in thousands of Euros)
(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)
Note 2019 2018
I. SOCIAL WELFARE PLAN ACTIVITIES ACCOUNT (5,727) (3,101) I.1 Contributions earned, net of reinsurance 13 90,884 87,801 I.2 Revenue from property, plant and equipment and investments 9(b) 19,787 16,505 I.3 Revenue from investments linked to defined contribution pension plans 9(b) 546,000 461,966 I.4 Other technical income 658 710 I.5 Benefits, net of reinsurance 13 (38,956) (38,027) I.6 Change in other technical provisions, net of reinsurance (+ or -) 11 (251,579) 45,681 I.7 Share of profits - - I.8 Net operating expenses 13 (1,419) (1,447) I.9 Other technical charges (+ or -) - - I.10 Expenses on property, plant and equipment and investments 9(b) (12,975) (19,879) I.11 Expenses from investments linked to defined contribution pension plans 9(b) (358,127) (556,411) I.12 Subtotal (Result of the Social Welfare Plan Activity account of EPSVs) 13 (5,727) (3,101)
II. OTHER ACTIVITIES PERFORMED BY EPSVS ACCOUNT - - II.1 Contributions earned, net of reinsurance - - II.2 Revenue from property, plant and equipment and investments - - II.3 Other technical income - - II.4 Benefits, net of reinsurance - - II.5 Change in other technical provisions, net of reinsurance (+ or -) - - II.6 Share of profits - - II.7 Net operating expenses - - II.8 Other technical charges (+ or -) - - II.9 Expenses on property, plant and equipment and investments - - II.10 Subtotal (Result of Other Activities Performed by EPSVs account) - -
III. NON-SOCIAL WELFARE ACTIVITIES ACCOUNT 134 10 III.1 Revenue from property, plant and equipment and investments 9(b) 128 9 III.2 Expenses on property, plant and equipment and investments - 1 III.3 Other income 6 - III.4 Other expenses - - III.5 Subtotal (Result of Non-Social Welfare Activities Account) 134 10
III.10 SHORTFALL FOR THE YEAR (I.12+II.10+III.5) (5,593) (3,091)
The accompanying notes form an integral part of the annual accounts for 2019.
GEROA PENTSIOAK, ENTIDAD DE PREVISIÓN SOCIAL VOLUNTARIA DE EMPLEO
Statements of Recognised Income and Expense for the years ended 31 December 2019 and 2018
(Expressed in thousands of Euros)
(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)
2019 2018
A) STATEMENT OF RECOGNISED INCOME AND EXPENSE
I) SHORTFALL FOR THE YEAR (5,593) (3,091)
II) OTHER RECOGNISED INCOME AND EXPENSE - -
II.1 Available-for-sale financial assets - - II.2 Cash flow hedges - - II.3 Hedges of net investments in foreign operations - - II.4 Exchange and translation differences - - II.5 Adjustment of accounting mismatches - - II.6 Assets held for sale - - II.7 Actuarial gains/(losses) on long-term employee remuneration - - II.8 Other recognised income and expense - -
III) TOTAL RECOGNISED INCOME AND EXPENSE (5,593) (3,091)
The accompanying notes form an integral part of the annual accounts for 2019.
GEROA PENTSIOAK, ENTIDAD DE PREVISIÓN SOCIAL VOLUNTARIA DE EMPLEO
Statements of Recognised Income and Expense for the years ended 31 December 2019 and 2018
(Expressed in thousands of Euros)
(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)
B) STATEMENT OF TOTAL CHANGES IN EQUITY
Members’ Funds Grants Other donations contributions and Prior years’ from Surplus/(shortfall) Valuation bequests 2019 Mutual Fund Reserves surplus/shortfall members for the year adjustments received Total
CLOSING BALANCE 2018 13,460 32,425 - - (3,091) - - 42,794
I. Adjustments due to changes in accounting criteria ------II. Adjustments for errors ------
ADJUSTED OPENING BALANCE 2019 13,460 32,425 - - (3,091) - - 42,794
I. Total recognised income and expense - - - - (5,593) - - (5,593)
II. Transactions with members ------Increases in Mutual Fund ------(-) Reductions in Mutual Fund ------Conversion of financial liabilities into equity ------Increase (reduction) in equity resulting from a business combination ------Other transactions with members ------
III. Other changes in equity 53 (3,144) - - 3,091 - - - Transfers between equity line items 53 (53) ------Other changes - (3,091) - - 3,091 - - -
CLOSING BALANCE 2019 13,513 29,281 - - (5,593) - - 37,201
GEROA PENTSIOAK, ENTIDAD DE PREVISIÓN SOCIAL VOLUNTARIA DE EMPLEO
Statements of Recognised Income and Expense for the years ended 31 December 2019 and 2018
(Expressed in thousands of Euros)
(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)
B) STATEMENT OF TOTAL CHANGES IN EQUITY
Members’ Funds Grants Other donations contributions and Prior years’ from Surplus/(shortfall) Valuation bequests 2018 Mutual Fund Reserves surplus/shortfall members for the year adjustments received Total
CLOSING BALANCE 2017 13,734 23,501 - - 8,650 - - 45,885
I. Adjustments due to changes in accounting criteria ------II. Adjustments for errors ------
ADJUSTED OPENING BALANCE 2018 13,734 23,501 - - 8,650 - - 45,885
I. Total recognised income and expense - - - - (3,091) - - (3,091)
II. Transactions with members ------Increases in Mutual Fund ------(-) Reductions in Mutual Fund ------Conversion of financial liabilities into equity ------Increase (reduction) in equity resulting from a business combination ------Other transactions with members ------
III. Other changes in equity (274) 8,924 - - (8,650) - - - Transfers between equity line items (274) 274 ------Other changes - 8,650 - - (8,650) - - -
CLOSING BALANCE 2018 13,460 32,425 - - (3,091) - - 42,794
The accompanying notes form an integral part of the annual accounts for 2019.
GEROA PENTSIOAK, ENTIDAD DE PREVISIÓN SOCIAL VOLUNTARIA DE EMPLEO
Statements of Cash Flows for the years ended 31 December 2019 and 2018
(Expressed in thousands of Euros)
(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)
2019 2018 A) CASH FLOWS FROM OPERATING ACTIVITIES A.1) Social Welfare Activity 1. Proceeds from contributions 96,740 92,483 3. Proceeds from reinsurance ceded 4,744 4,768 4. Payments of reinsurance ceded (5,857) (4,682) 5. Benefits paid (43,494) (42,954) 7. Other operating proceeds 2,004 1,830 8. Other operating payments (2,023) (6,882) 9. Total cash proceeds from welfare activity (1+3+7) = I 103,488 99,081 10. Total cash payments for welfare activity (4+5+8) = II (51,374) (54,518) A.2) Other operating activities 3. Proceeds from other activities - - 4. Payments for other activities - - 5. Total cash proceeds from other operating activities (3) = III - - 6. Total cash payments for other operating activities (4)=IV - - A.3) Total net cash flows from operating activities (I+II+III+IV) 52,114 44,563 B) CASH FLOWS FROM INVESTING ACTIVITIES B.1) Proceeds from investing activities 1. Property, plant and equipment - - 2. Investment property - - 3. Intangible assets - - 4. Financial instruments 1,250,250 1,654,236 5. Investments in Group companies, jointly controlled entities and associates - - 6. Interest received 36,206 33,980 7. Dividends received 9,168 8,350 8. Business unit - - 9. Other proceeds relating to investing activities - - 10. Total cash proceeds from investing activities (1+2+3+4+5+6+7+8+9) = VI 1,295,624 1,696,566 B.2) Payments for investing activities 1. Property, plant and equipment (19) (37) 2. Investment property - - 3. Intangible assets - (5) 4. Financial instruments (1,527,483) (1,669,946) 5. Investments in Group companies, jointly controlled entities and associates - - 6. Business unit - - 7. Other payments relating to investing activities - - 8. Total cash payments for investing activities (1+2+3+4+5+6+7) = VII (1,527,502) (1,669,988) B.3) Total cash flows from/(used in) investing activities (VI–VII) (231,878) 26,578
GEROA PENTSIOAK, ENTIDAD DE PREVISIÓN SOCIAL VOLUNTARIA DE EMPLEO
Statements of Cash Flows for the years ended 31 December 2019 and 2018
(Expressed in thousands of Euros)
2019 2018
C) CASH FLOWS FROM FINANCING ACTIVITIES C.1) Proceeds from financing activities - - 1. Subordinated liabilities - - 2. Proceeds from mutual fund increase - - 3. Contributions from members - - 5. Other proceeds relating to financing activities - - 6. Total cash proceeds from financing activities (1+2+3+5) = VIII - - C.2) Payments for financing activities - - 2. Interest paid - - 3. Subordinated liabilities - - 4. Payments for reimbursement of contributions to members - - 5. Reimbursement of contributions to members - - 6. Other payments relating to financing activities - - 8. Total cash payments for financing activities (2+3+4+5+7)=IX - - C.3) Total net cash flows from financing activities (VIII–IX) - - Effect of exchange rate fluctuations (X) - - Total increase / decrease in cash and cash equivalents (A.3+B.3+C.3+-X) (179,764) 71,141 Cash and cash equivalents at beginning of period 238,285 167,144 Cash and cash equivalents at end of period 58,521 238,285
Cash and cash equivalent components at end of period 1. Cash in hand and at banks 58,521 238,285 2. Other financial assets - - 3. Bank overdrafts repayable on demand - - Total cash and cash equivalents at period end (1+2+3) 58,521 238,285
The accompanying notes form an integral part of the annual accounts for 2019.
GEROA PENTSIOAK, ENTIDAD DE PREVISIÓN SOCIAL VOLUNTARIA DE EMPLEO
Notes to the Annual Accounts
31 December 2019
(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)
(1) Nature and Principal Activities
Creation
Geroa Pentsioak, Entidad de Previsión Social Voluntaria de Empleo (hereinafter the Entity or Geroa) was incorporated on 9 January 1996 under the name Geroa Pentsioak, Entidad de Previsión Social Voluntaria, and changed its name to the current one on 1 June of 2016. Its sponsors are Asociación de Empresas de Gipuzkoa (ADEGI) – Gipuzkoako Enpresen Elkartea, Eusko Langilleen Alkartasuna/Solidaridad de Trabajadores Vascos (ELA/STV), Langile Abertzaleen Batzordeak (LAB), Federación Estatal de Comisiones Obreras del Metal de Gipuzkoa (CCOO) and Federación Estatal Siderometalúrgica de UGT de Gipuzkoa, all of which are founding members. The Entity commenced activity on 1 January 1996 and its registered office is in San Sebastian (Spain).
The nature and function of the Entity is subject to Law 5/2012 of 23 February 2012 governing Voluntary Social Welfare Entities (hereinafter “EPSVs”, as per their Spanish acronym), and Decree 203/2015 of 27 October 2015 which approved the Regulation implementing Law 5/2012. Additionally, it is also subject to Decree 87/1984 of 20 February 1984 and Decree 92/2007 of 29 May 2007 (to the extent of the provisions of both Decrees not repealed by Decree 203/2015), by virtue of the Order of 29 April 2009 and Decree 86/2010 of 16 March 2010 approving the adaptation of the Chart of Accounts of Insurance Entities to the specific characteristics of EPSVs.
Prevailing Regulations and Decrees governing EPSVs establish, inter alia, the following compulsory stipulations:
(a) Administrative expenses of EPSVs are those stated in its articles of association. In the case of entities that operate under the defined contribution system, administrative expenses are established based on the assets of each pension plan, or on the plan and its yield, and may not exceed the following annual limits:
• When they are calculated solely on the basis of the plan assets, 1.6% of the plan assets.
• When both variables are used, 1% of plan assets and 10% of the yield.
At the general assembly held on 12 April 2019, the members agreed to cap administrative expenses 0.42% of pension plan assets, including expenses inherent in collective investment undertakings and venture capital firms.
(b) Investments in assets must comply with the following criteria of diversification, dispersion and congruence:
− At least 70% of the assets of each pension plan must be invested in the following qualifying assets:
• Fixed income securities, equities and rights traded on regulated markets within the bounds of the OECD.
1
GEROA PENTSIOAK, ENTIDAD DE PREVISIÓN SOCIAL VOLUNTARIA DE EMPLEO
Notes to the Annual Accounts
• Shares and units of collective investment undertakings and mutual funds that comply with certain conditions regulated by Council Directive 85/611/CEE, and successive amendments, and Law 35/2003 governing collective investment undertakings, and successive amendments.
• Demand or term deposits less than or equal to 12 months, in financial institutions. However, by virtue of Ministry of Finance Order of 21 May 2013 and article 11.8 of Decree 92/2007 of 29 May 2007, term deposits of 7 years or less in financial institutions are considered qualifying assets for investment by EPSVs, when: they have their headquarters in a member state of the European Union; they are denominated in currencies traded on OECD currency markets; they are represented by book entries in liability accounts of the corresponding financial institutions; and they refer to the Financial Support Programme for SMEs, sole proprietorship and self- employed professionals for 2013, regulated by Decree 183/2013 of 19 March 2013.
• Real estate and rights in rem in immovable property.
• Mortgage loans, providing it is a first mortgage.
• Derivative financial instruments traded on organised markets.
− Assets must be sufficiently diversified. Investments in the assets of a single company listed in a regulated market may not exceed 5% of the Entity’s total assets, or 10% in the case of assets issued by companies of the same group. These limits are also applicable for derivative financial instruments.
− EPSVs cannot invest more than 2% of their assets in unlisted securities issued by a single entity, or more than 4% in the case of securities issued by companies of the same group.
− Investments in unlisted securities on regulated markets issued by sponsors or patrons of pension plans may not exceed 2% of the total plan assets.
− Investments in real estate may not exceed 20% of the total plan assets, and a single property may not exceed 10% of the plan assets.
− Investments in securities issued by venture capital firms or funds may not exceed 20% of the par value of total securities issued or units outstanding.
− Investments in a single collective investment undertaking, asset securitisation fund or securities investment fund can reach 20% of the assets of each plan.
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GEROA PENTSIOAK, ENTIDAD DE PREVISIÓN SOCIAL VOLUNTARIA DE EMPLEO
Notes to the Annual Accounts
(c) When an EPSV engages in activities other than those related to pension plans for retirement, death, permanent disability, long-term unemployment or serious illness, among others, it must clearly define the assets and liabilities of the activities, and under no circumstance may the rights and obligations be transferred among the different activities.
(d) The governing board shall approve the Entity’s investment policy through a written declaration of investment principles, which should be reviewed at least every three years.
At its meeting held on 12 December 2019, the governing board of the Entity approved the review of the declaration of investment principles for the following three years as of that date.
(e) EPSVs which have created more than one pension plan to cover contingencies must draw up an internal management, registration and accounting procedure that allows the rights and obligations of each plan to be attributed separately and independently.
At the meeting held on 1 June 2016, the governing board of the Entity agreed to amend the prevailing pension plan regulation, renaming it Geroa Pentsioak Plan de Previsión Social de Empleo. It was subsequently agreed to rename said plan to GEROA I Plan de Previsión Social de Empleo (hereinafter, Geroa I PPSE) from 1 January 2017. This plan will cover active, deferred and passive members who at that date are receiving life annuities (Note 2).
At the same meeting held on 1 June 2016, the governing board of the Entity agreed to create a new social welfare plan to be called GEROA II Plan de Previsión Social de Empleo (hereinafter, Geroa II PPSE), which will cover passive members entitled to a temporary annuity or a temporary annuity a with deferred life annuity (Note 2). This regulation came into force on 1 January 2017.
Both amendments were passed at the Entity’s extraordinary assembly held on 16 June 2016 and approved by the Financial Policy Directorate of the Department of Finance of the Basque Government through Resolution 96/2017 of 17 October 2017.
The Entity’s social welfare plans adequately identify their plan assets, which allows the economic rights of the members and beneficiaries of each plan to be precisely determined.
(f) EPSVs that assume biometric risks and/or guarantee the result of an investment or a certain level of benefits must create adequate technical provisions to cover the related obligations. Minimum technical provisions should be calculated using prudent prospective actuarial methods, taking into account all obligations related to benefits and contributions in accordance with the Entity’s pension options. This amount should be sufficient to finance current benefits and reflect the obligations deriving from pension entitlements accrued by ordinary members. Economic and actuarial assumptions used to evaluate liabilities should also be chosen prudently.
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GEROA PENTSIOAK, ENTIDAD DE PREVISIÓN SOCIAL VOLUNTARIA DE EMPLEO
Notes to the Annual Accounts
(g) The technical interest rate used in the calculation of technical provisions shall be determined on the basis of the internal rate of return of investments assigned to the pension plan. This may not exceed the estimated rate of inflation used to determine technical provisions by more than three percentage points, with a maximum limit of 5%.
At its meeting held on 12 December 2019, the Entity’s governing board agreed to reduce the technical interest rate applicable to the calculation of the mathematical provisions of Geroa I Plan de Previsión de Empleo from 2.5% to 2%.
(h) Entities must maintain sufficient and adequate assets to cover the technical provisions specified in the corresponding actuarial studies. If, during three consecutive years, no funds are available to cover the necessary technical provisions or when existing funds in a specific year are lower than 90% of the provisions, the Entity must draw up a rebalancing plan subject to the approval of Department of Justice, Employment and Social Security.
(i) EPSVs that incorporate pension plans to cover biometric risks or the result of an investment or a certain level of benefits, must permanently hold additional assets to those in which their technical provisions are materialised. These assets must be totally unencumbered and will serve as an available safety margin to absorb deviations between actual and foreseeable expenses and benefits. The safety margin must be equal to at least 4% of the technical provisions of those plans. At 31 December 2018 and the date these annual accounts were authorised for issue, the Entity complies with this requisite (Note 21).
(j) For EPSVs that have defined contribution pension plans, the safety margin must be at least 0.125% of the provisions for defined contribution pension plans in which the member assumes the investment risk. The safety margin must be fully appropriated at least at the end of each year. This safety margin will be created in a maximum period of ten years, as of 2016, with a minimum of one tenth per year of its amount. At 31 December 2019 and the date these annual accounts were authorised for issue, the Entity complies with this requisite (Note 21).
(k) The minimum Mutual Fund is Euros 50,000 and must be materialised in qualifying assets and be fully paid up.
Statutory activity
On 27 November 1995 the Basque Government approved the incorporation and articles of association of the Entity, and the inclusion thereof in the Basque Country Register of Voluntary Social Welfare Entities under number 178-G.
According to its articles of association, the scope of activity of the Entity, which is a not-for-profit organisation, is the Basque Country. The Entity’s objective is twofold:
• To protect ordinary members in the event of retirement, disability or death, the latter insofar as widowhood, orphanhood or similar circumstances are concerned, paying them, once they have been recognised as passive members, or their beneficiaries, the corresponding pension and benefit payments.
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GEROA PENTSIOAK, ENTIDAD DE PREVISIÓN SOCIAL VOLUNTARIA DE EMPLEO
Notes to the Annual Accounts
• To encourage its members to save by way of social welfare plans while protecting their rights.
The Entity has three types of members: founding sponsors, patrons and ordinary members (who, in turn, may be active or deferred). The main characteristics of which are as follows:
• The founding sponsor members are Asociación de Empresarios de Gipuzkoa (ADEGI) and the ELA, LAB, CCOO and UGT trade unions, whose sole purpose in this context is to promote saving through supplementary social welfare plans.
• Patron members are those who, in accordance with the established membership regulations, contribute to the maintenance and development of the Entity through the corresponding contributions made in their capacity as such and those made on behalf of the corresponding employees who are incorporated into the Entity as ordinary members.
Patron members are companies in the Gipuzkoa iron and steel sector which, as with their workers, are bound by the collective agreement of 1 December 1995 (Official Gipuzkoa Gazette of 3 January 1996) or superseding accords, were compulsorily incorporated into the Entity, without the need for subsequent individual ratification or acceptance, those from other sectors of economic activity which have been or will be compulsorily incorporated into the present regime as a result of similar agreements, and companies that do not have a collective labour agreement in the Basque Country but which voluntarily joined the aforementioned regime following their admission by the governing bodies of the Entity.
• Ordinary active members are all employees or workers from the Gipuzkoa iron and steel sector who are compulsorily incorporated into the present regime, without the need for subsequent individual ratification, as a result of the collective agreement reached for the iron and steel sector in Gipuzkoa, or superseding accords, and those from other companies affected by similar agreements who are incorporated compulsorily, or an a voluntary basis, following admission by the governing bodies of the Entity.
• Ordinary deferred members are associates who have ceased making contributions as a result of having suspended their working relationship with patron members, before the triggering event, but who retain their rights within the Entity.
• Passive members are individuals who, through their entitlement to receive benefits (retirement or disability), are recognised as such in accordance with the Entity’s articles of association and regulations, and who have been ordinary members of the Entity.
Beneficiaries of the Entity are individuals who, as successor in title of the deceased ordinary or passive member, are entitled to economic rights from the Entity. Beneficiaries are those persons designated according to the order established in the Entity’s regulations
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GEROA PENTSIOAK, ENTIDAD DE PREVISIÓN SOCIAL VOLUNTARIA DE EMPLEO
Notes to the Annual Accounts
In 2019 patron members totalled 8,794 companies, while ordinary members totalled 114,627 individuals (9,294 companies and 113,298 individuals, during 2018).
The Entity’s funds mainly comprise the initial one-off Mutual Fund contributions of its founding members and the regular fixed contributions from both its patron members and individual associates (ordinary active members), which are determined by the corresponding agreements. Regular contributions may vary across different sectors of activity, but can never exceed the amount agreed for the iron and steel sector in Gipuzkoa, and may be modified periodically by applying a percentage of the contribution base for workers’ common contingencies.
Contributions are paid monthly and comprise a percentage of each worker’s Social Security base, 50% of which is paid by the associate employee (ordinary member) and withheld from their salary, and 50% by the company (patron member). In the event of temporary disability, maternity or paternity leave or temporary lay-off procedures, both the patron and ordinary member will continue to honour their contributions. The contribution percentages in the different sectors covered by the Entity for 2019 are as follows:
Adecco Outsourcing, S.A. Since July 2019 2.3%
Asedir Gestión, S.L. Since January 2009 4.6%
Aspace Since January 2011 2.9%
Aspace Viviendas y Residencias Since January 2008 2.0%
Atención Sanitaria Tercera Edad Since January 2003 1.0%
Bidelan Gipuzkoako Autobideak, S.A. Since January 2009 4.6%
Casino Kursaal Since January 2006 4.0%
Cementos Rezola Since January 2008 4.3%
Cerámica de Gipuzkoa Since January 2003 3.5%
Comercio de la Piel de Gipuzkoa Since January 2000 1.6%
Comercio del Metal de Gipuzkoa Since January 2000 2.0%
Construcción de Gipuzkoa Since January 2009 4.0%
Clece, S.A. Since March 2019 3.0%
Clece, S.A. – Donostiako Lamiak Since October 2004 1.5%
Comercio General de Gipuzkoa Since January 2009 0.4%
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GEROA PENTSIOAK, ENTIDAD DE PREVISIÓN SOCIAL VOLUNTARIA DE EMPLEO
Notes to the Annual Accounts
Ecología, Reciclaje y Medio Ambiente, S.L. – EKO REC Since January 2018 1.0%
Electroquímica de Servicio de Gipuzkoa Since January 2007 4.0%
Federación de Entidades de Previsión Social Voluntaria de Euskadi Since January 2009 4.6%
Gureserbi, S.L. Since August 2007 2.0%
Grupo Radio Popular Since January 2006 1.5%
Industrias Químicas Irurena, S.A. Since January 2008 1.0%
Industria de la Madera de Gipuzkoa Since January 2000 2.0%
Industria del Mueble de Gipuzkoa Since January 2000 1.0%
Instalaciones Polideportivas de Titularidad Pública de Gipuzkoa Since January 2010 1.0%
Itesa Producción Since January 2004 1.0%
ITV Gipuzkoa Since January 2006 4.0%
Izpia Media, S.L. Since January 2005 1.0%
Katea Lantegiak Since January 2010 4.0%
Kemen Manguitos, S.L. Since January 2009 4.3%
Kursaal Producciones Since January 2004 1.0%
Lagun Izpi, S.L. Since January 2004 1.5%
Lansolar Ingenieros, S.L. Since January 2019 4.6%
Lending Service, S.L. Since January 2005 2.5%
Legaia Since January 2009 4.0%
Limpieza de Gipuzkoa Since January 2004 2.5%
Locales, Espectáculos y Deportes de Gipuzkoa Since January 2006 1.0%
Manufacturas Oría, S.L. Since January 2010 4.6%
Mayoristas de Frutas de Gipuzkoa Since January 2010 3.0%
Oficinas y Despachos de Gipuzkoa Since January 2009 0.4%
Omey Kayak, S.L. Since January 2005 1.6%
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GEROA PENTSIOAK, ENTIDAD DE PREVISIÓN SOCIAL VOLUNTARIA DE EMPLEO
Notes to the Annual Accounts
Panaderías de Gipuzkoa Since January 1999 1.2%
Papel-Cartón de Gipuzkoa Since August 2019 1.4%
Savera Since January 2009 4.6%
Siderometalúrgico de Gipuzkoa Since January 2009 4.6%
Silam, S.A. Since January 2005 0.5%
Talleres Protegidos Gureak, S.A. Since January 2009 0.4%
Textil de Gipuzkoa Since January 2000 1.6%
Trainelec, S.L. Since May 2007 4.0%
Transitarios de Gipuzkoa Since January 2002 3.0%
Transporte de Mercancías por Carretera Since January 2004 1.5%
Vidrio de Gipuzkoa Since January 2003 3.5%
Zahor Since January 2011 4.6%
(2) Benefit Coverage
Benefits comprise the financial recognition of the entitlements of the Entity’s passive members or beneficiaries deriving from the materialisation of contingencies covered by the Entity. When a contingency materialises, passive members or beneficiaries receive the liquidating value of their accrued entitlements.
At the extraordinary general assembly held on 28 June 2000, the members approved certain amendments to the Entity's articles of association in order to enhance or increase each active member’s consolidated disability and death entitlements, thus an additional benefit (additional capital) was created. This was obtained by multiplying the average contribution made to the Entity by the ordinary member and the patron member in respect of the ordinary member’s entitlements for the last six months, by the number of months remaining from the materialisation of the contingency until the legal retirement age.
In the event of disability or death of a deferred member, the corresponding benefits comprise the consolidated individual entitlements deriving from the regular contributions of the deceased ordinary member and the patron member, and any yield and gains generated through the management of funds after the Entity’s management expenses have been settled.
By virtue of the resolution adopted by the governing board of the Entity on 18 December 2012 to amend article 9A of the articles of association, disabled members with a disability rating of 45% or more will be entitled to a retirement pension from the age of 56 providing they are not active and are entitled to retirement under the Social Security regime.
8
GEROA PENTSIOAK, ENTIDAD DE PREVISIÓN SOCIAL VOLUNTARIA DE EMPLEO
Notes to the Annual Accounts
On 19 December 2006 the Entity entered into a risk cession contract, with effect 1 January 2007, with the reinsurance entity Santa Lucia (formerly AVIVA), and on 14 June 2012, entered into an additional risk cession contract with another reinsurance entity, VidaCaixa, with effect 1 January 2012.
Each contract covers 50% of the risk of death, total permanent disability, absolute permanent disability and severe disability.
In 2019, the Entity handed over 3% of withheld contributions to each of the reinsurers to cover the risk benefits described above (Euros 2,854 thousand and Euros 2,822 thousand, respectively).
In 2018, in the case of Santa Lucia the premium was 2.45% from January to March, 2.65% from April to October and 3% from November onwards. In the case of Vidacaixa, 2.45% from January to March, 2.65% from April to November and 3% from December onwards (Euros 2,403 thousand and Euros 2,280 thousand respectively).
Both contracts are for annual periods, are tacitly renewed each year and provide for the possibility of sharing in reinsurance profits. No interest was accrued in this regard in 2019 and 2018.
After the new drafting of the Regulation approved at the ordinary general assembly held on 15 April 2015, the former benefits regime remains applicable for members whose benefits vested prior to 31 December 2014, by virtue of the first and second transitional provisions of the aforementioned Regulation. Additionally, for these members only, their benefits in the form of actuarial-based annuities are constant and not subject to revaluation. However, when the yield (prior to the excess risk being transferred to income) obtained in a year exceeds the technical interest rate, it will generate a right to an improvement of the annuity of 70% of the excess, once the reserve for all vested annuities until 31 December 2014 has been appropriated.
Adaptation in 2015 of the benefits payment model
At its meeting held on 9 December 2014, the governing board of the Entity approved the transition to a new benefits payment model. This agreement was passed at the Entity’s extraordinary general assembly held on 13 January 2015.
After following the recommendations of the Basque Government, the new benefits model is reflected in the Benefits Regulation approved at the ordinary general assembly held on 15 April 2015, and in the amendment of the Entity’s articles of association approved at the extraordinary general assembly held on 17 December 2015.
This change in annuities model was implemented in two distinct stages:
- Transitional period between 1 January 2015 and 30 June 2015: Continuity of the old model of life annuities, where the technical interest rate used to calculate technical provisions was reduced from 3.5% to 1.5%, the solvency margin of 6% was covered by the recipient and the individual capitalisation of each member's contributions in their economic rights increased from 90% to 93%, with 7% earmarked for risk hedging.
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GEROA PENTSIOAK, ENTIDAD DE PREVISIÓN SOCIAL VOLUNTARIA DE EMPLEO
Notes to the Annual Accounts
- Period beginning 1 July 2015: Introduction of a new benefits payment model which establishes that the payment of benefits will depend on the number of years’ of annuities that can be generated with the member’s economic rights. Benefits shall be paid in the form of annuities providing the "Amount of Income Generated (AIG)" is reached at the time the benefit is paid for each of the cases established below. The Amount of Income Generated is calculated as follows:
AIG year1 = CBCC max year0 * %max year0
Whereby:
AIG year1: Amount of income generated for year 1. CBCC max year0: Maximum contribution base for common contingencies for year 0. %max year0: Maximum contribution percentage of the Entity for year 0.
The amount will be rounded up to the closest integer.
Thus, 4 tranches are established:
Tranche 1: If the economic rights are insufficient to pay a monthly annuity over 5 years at least equivalent to the AIG, the benefit will be paid in the form of capital.
Tranche 2: If the economic rights are sufficient to pay a monthly annuity between 5 and 20 years at least equivalent to the AIG, the benefit will be paid either in capital or a temporary annuity between 5 and 20 years.
Tranche 3: If the economic rights are sufficient to pay a monthly annuity between 20 years and the years remaining to reach 65 years of age plus 25 years, at least equivalent to the AIG, the benefit will be paid in the form of a temporary annuity between the 20 years and the years remaining to the legal retirement age plus 25 years.
Tranche 4: If the economic rights are sufficient to pay a monthly annuity until the age of 65 plus 25 years, at least equivalent to the AIG, the benefit will be paid as a temporary annuity until the legal retirement age plus 25 years, as well as a deferred life annuity (paid from the end of the temporary annuity until death, without reversal) after the temporary annuity has been consumed. The deferred life annuity will be covered when capital is transformed into annuity, subtracting the corresponding amount from the individual economic rights. The Entity will calculate a homogeneous cost for all tranches. Exceptionally the deferred life annuity will be voluntary and the cost of applying it will be the actual cost (Table PERM/F-2000C) if the benefit is requested one year after the legal retirement age.
Monthly widowhood or spousal equivalent benefits, resulting from the death of an active member, shall be paid in the form of annuities, with no deferred life annuity. Orphanhood benefits for children under the age of 25 or those with a disability rating of 65% or higher, resulting from the death of an active member, will be paid in the form of capital, in proportion to the years remaining until the orphan reaches the age of 25, with the age of the disabled child deemed to be that of the youngest child. If there is more than one child, each shall receive the same monthly annuity, if not, payment will be received in a lump sum. Actuarial annuities of the deferred life annuity of the final tranche established in the model will not be reversed.
10
GEROA PENTSIOAK, ENTIDAD DE PREVISIÓN SOCIAL VOLUNTARIA DE EMPLEO
Notes to the Annual Accounts
At the extraordinary general assembly held on 16 June 2016, certain amendments to the articles of incorporation were approved in respect of incorporating gender equality into the wording, including the new model based on two Regulations (Note 1) and modifying the previous section, whereby the recipient has the option to receive the benefit in the form of capital if there are less than 5 years remaining until they reach the age of 25.
For the case of benefits arising from the contingencies of absolute permanent disability or severe disability, the member may choose to have their annuity calculated based on the AIG, or twice the AIG, thereby reducing the term thereof, and to receive or not the deferred life annuity.
This agreement does not entail a change in the contingencies covered by the Entity, rather the establishment of a new system of paying benefits, different from and replacing the previous one.
Temporary annuities will be calculated initially using an interest rate of 1%, and, as they are payable later, are deemed to be growing at an annual rate of 0.5%.
Annually, if market conditions allow a higher yield to be gained, annuities will obtain a share of the gains of 100% of the excess return on 1% of the assets allocated to cover these annuities, thereby increasing the monthly amount to be received by a homogeneous percentage for all members.
The Department of Finance of the Basque Government approved said Regulation on 30 June 2015, and it became fully effective in the Entity as of 1 July 2015. Additionally, on 11 January 2016, the Department of Finance of the Basque Government issued a resolution approving the amendment concerning the adaptation of the articles of association to the Entity’s Benefits Regulation, and the inclusion thereof in the Basque Country Register of Voluntary Social Welfare Entities.
(3) Basis of Preparation of the Annual Accounts
(a) True and fair view
The accompanying annual accounts have been prepared on the basis of the accounting records of the Entity. The 2019 annual accounts have been prepared in accordance with the provisions applicable to EPSVs issued by the Department of Justice, Employment and Social Security and the Department of Finance of the Basque Government, and the accounting principles established in the adaptation of the General Chart of Accounts to Voluntary Social Welfare Entities in the Basque Country, to give a true and fair view of the equity and financial position of the Entity at 31 December 2019 and the results of its operations, changes in equity and cash flows for the year then ended.
The directors of the Entity consider that the annual accounts for 2019, authorised for issue on 17 March 2020, will be approved with no changes by the shareholders at their general assembly.
(b) Mandatory accounting principles not applied
The Entity has not omitted any mandatory accounting principles when preparing these annual accounts.
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GEROA PENTSIOAK, ENTIDAD DE PREVISIÓN SOCIAL VOLUNTARIA DE EMPLEO
Notes to the Annual Accounts
(c) Critical issues regarding the valuation and estimation of relevant uncertainties and judgements used when applying accounting principles
Accounting estimates and judgements and other estimates and assumptions have to be made when applying the Entity’s accounting principles to prepare the annual accounts. A summary of the items requiring a greater degree of judgement or which are more complex, or where the assumptions made are significant to the preparation of the annual accounts is as follows:
• Mathematical provisions are determined using actuarial calculations. These valuations are based on key assumptions including the discount rate (technical interest rate) and mortality and survival rates. Key assumptions may vary from actual conditions due to changes in economic and market circumstances and could lead to variations in technical provisions.
• Analysis of impairment of financial instruments and of the fair value of assets not traded on active markets.
Although estimates are calculated by the Entity’s directors based on the best information available at 31 December 2019 and 2018, future events may require changes to these estimates in subsequent years. Any effect on the annual accounts of adjustments to be made in subsequent years would be recognised prospectively, without affecting prior years’ annual accounts.
(d) Comparative information
The balance sheet, income statement, statement of changes in equity, statement of cash flows and the notes thereto for 2019 include comparative figures for 2018, which formed part of the annual accounts approved by members at the general assembly held on 12 April 2019.
Certain amounts for 2018 have been reclassified in this year's annual accounts in order to make them comparable with those of the present year and facilitate their comparison. The reclassifications were as follows:
Thousands of Euros Debit Credit Balance sheet - Assets
Cash and cash equivalents - 2,610 Financial assets held for trading 2,610 -
Statement of Cash Flows
Cash flows from investing activities - 2,610 Increase/decrease in cash and cash equivalents 2,610
(e) Items reflected in several line items
No assets or liabilities have been recognised in two or more balance sheet line items.
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GEROA PENTSIOAK, ENTIDAD DE PREVISIÓN SOCIAL VOLUNTARIA DE EMPLEO
Notes to the Annual Accounts
(f) Changes in accounting criteria
There were no changes in accounting criteria in 2019 or 2018.
(g) Correction of errors
There were no adjustments due to correction of errors in 2019 or 2018.
(h) Functional and presentation currency
The figures disclosed in the annual accounts are expressed in thousands of Euros, the Entity’s functional and presentation currency, rounded off to the nearest thousand.
(i) Income and expense allocation criteria
Income and expenses are allocated on an accruals basis, considering the actual flow of the goods and services they represent, irrespective of when the corresponding monetary or financial flows take place.
The income statement adequately separates income and expenses for the period by activity, in accordance with the disclosure rules established by prevailing legislation (Pension plan activities of EPSVs, Other activities carried out by EPSVs, and Non-social welfare activities account).
Within each activity, the respective income and expenses related to the transactions are allocated to the corresponding income statement account. Income and expenses of investments funded through members’ funds and of other resources directly related to social welfare transactions are allocated to the “Non-social welfare activities account” in the income statement.
Expenses are classified by function in the income statement. Nevertheless, when this is not possible, then reasonable, objective, verifiable cost accounting allocation criteria are applied.
(4) Distribution of Surplus/Application of Shortfall
The proposed application of the shortfall for 2019 that the Governing Board of the Entity has proposed for approval by the members at their general assembly, and the approved application of the shortfall for 2018, are as follows:
Thousands of Euros 2019 2018 Basis of allocation Shortfall for the year (5,593) (3,091)
(5,593) (3,091)
Allocation Reserves – Reserves for actuarial risks - - Voluntary reserves (5,593) (3,091)
(5,593) (3,091)
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GEROA PENTSIOAK, ENTIDAD DE PREVISIÓN SOCIAL VOLUNTARIA DE EMPLEO
Notes to the Annual Accounts
(5) Significant Accounting Policies
The accompanying annual accounts have been prepared in accordance with accounting principles established in the Spanish General Chart of Accounts for Insurance Entities adapted for Voluntary Social Welfare Entities, as per Decree 86/2010 of 16 March 2010 and the provisions of Decree 92/2007 of 29 May 2007, both issued by the Basque Government.
(a) Intangible assets
(i) Initial recognition
Intangible assets are measured at cost or cost of production, less any accumulated amortisation and impairment.
Computer software acquired and produced by the Entity, including website development costs, is recognised when there is evidence of technical success and costs are clearly timed. Computer software maintenance costs are charged as expenses when incurred.
(ii) Subsequent costs
Subsequent costs incurred on intangible assets are taken to expense, unless they increase the expected future economic benefits attributable to the intangible asset.
(iii) Useful life and amortisation rates
The Entity assesses whether the useful life of each intangible asset acquired is finite or indefinite. An intangible asset is regarded by the Entity as having an indefinite useful life when there is no foreseeable limit to the period over which the asset will generate net cash inflows.
Intangible assets with finite useful lives are amortised on a straight-line basis by allocating the depreciable amount of an asset on a systematic basis over its useful life, by applying the straight-line method over the following years of estimated useful life:
Years
Computer software 1 - 3
The Entity reviews the residual value, useful life and amortisation method for intangible assets at each reporting date. Changes to initially established criteria are accounted for as a change in accounting estimates.
(iv) Impairment
The Entity measures and determines impairment to be recognised or reversed based on recoverable amount, which is the higher of fair value less costs to sell and value in use. Impairment of intangible assets, or a reversal of impairment when the circumstances that gave rise to it have ceased to exist, is recognised as an expense or income, respectively, in the income statement.
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GEROA PENTSIOAK, ENTIDAD DE PREVISIÓN SOCIAL VOLUNTARIA DE EMPLEO
Notes to the Annual Accounts
(b) Property, plant and equipment
(i) Initial recognition
Property, plant and equipment are measured at cost of acquisition. Property, plant and equipment are carried at cost less any accumulated depreciation and impairment.
(ii) Depreciation
Property, plant and equipment are depreciated by allocating the depreciable amount of the asset on a systematic basis over its useful life. The depreciable amount is the cost of an asset, less its residual value.
Property, plant and equipment are depreciated on a straight-line basis over the following estimated useful lives:
Years
Buildings 33 Furniture and installations 10 Information technology equipment 3
The Entity reviews residual values, useful lives and depreciation methods at each financial year end. Changes to initially established criteria are accounted for as a change in accounting estimates.
(iii) Subsequent costs
Subsequent to initial recognition of the asset, only the costs incurred which increase capacity or productivity or which lengthen the useful life of the asset are capitalised. The carrying amount of parts that are replaced is derecognised. Costs of day-to-day servicing are recognised in the income statement as incurred.
(iv) Impairment
The Entity measures and determines impairment to be recognised or reversed based on recoverable amount, which is the higher of fair value less costs to sell and value in use. Impairment of property, plant and equipment, or a reversal of impairment when the circumstances that gave rise to it have ceased to exist, is recognised as an expense or income, respectively, in the income statement.
(c) Financial instruments
(i) Classification and separation of financial instruments
Financial instruments are classified on initial recognition as a financial asset, a financial liability or an equity instrument in accordance with the economic substance of the contractual arrangement and the definitions of a financial asset, a financial liability and an equity instrument.
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GEROA PENTSIOAK, ENTIDAD DE PREVISIÓN SOCIAL VOLUNTARIA DE EMPLEO
Notes to the Annual Accounts
The Entity classifies financial instruments into different categories based on the nature of the instruments and management’s intentions on initial recognition.
Regular way purchases or sales of financial assets, understood as those in which the reciprocal obligations of the parties must be met within the time frame established generally by regulation or convention in the marketplace concerned and cannot be settled by differences, are recognised at the trade date or the settlement date.
(ii) Offsetting principles
A financial asset and a financial liability are offset only when the Entity currently has the legally enforceable right to offset the recognised amounts and intends either to settle on a net basis or to realise the asset and settle the liability simultaneously.
(iii) Financial assets and financial liabilities held for trading
Financial assets or financial liabilities held for trading are those which are classified as held for trading from initial recognition.
Financial assets and financial liabilities held for trading are initially recognised at fair value. Transaction costs directly attributable to the acquisition or issue are recognised as an expense when incurred.
After initial recognition, they are recognised at fair value through profit or loss. Fair value is not reduced by transaction costs incurred on sale or disposal. Accrued interest and dividends are recognised separately.
(iv) Financial assets at fair value through profit or loss
Financial assets and financial liabilities at fair value through profit or loss are initially recognised at fair value. Transaction costs directly attributable to the acquisition or issue are recognised as an expense in the income statement.
After initial recognition, they are recognised at fair value through profit or loss. Fair value is not reduced by transaction costs incurred on sale or disposal. Accrued interest and dividends are recognised separately. When investments are materialised in assets and it is deemed that the available information cannot be fully contrasted with third parties and the application of market value would give rise to a gain, this gain is not recognised.
(v) Loans and receivables
Loans and receivables comprise trade and non-trade receivables with fixed or determinable payments that are not quoted in an active market other than those classified in other financial asset categories. These assets are initially recognised at fair value, including transaction costs, and are subsequently measured at amortised cost using the effective interest method.
16
GEROA PENTSIOAK, ENTIDAD DE PREVISIÓN SOCIAL VOLUNTARIA DE EMPLEO
Notes to the Annual Accounts
Nevertheless, financial assets which have no established interest rate, which mature or are expected to be received in the short term, and for which the effect of discounting is immaterial, are measured at their nominal amount.
(vi) Held-to-maturity investments
Held-to-maturity investments are debt securities with fixed or determinable payments and fixed maturity traded on an active market and that the Entity's management has the positive intention and ability to hold to maturity, other than those classified in other categories. The measurement criteria applicable to financial instruments classified in this category are the same as those applicable to loans and receivables.
(vii) Equity investments in Group companies, associates and jointly controlled entities
Investments in Group companies, associates and jointly controlled entities are initially recognised at cost, which is equivalent to the fair value of the consideration given, including transaction costs, and are subsequently measured at their underlying net book value, net of any accumulated impairment.
(viii) Interest and dividends
Interest is recognised using the effective interest method.
Dividends from investments in equity instruments are recognised when the Entity is entitled to receive them. If the dividends are clearly derived from profits generated prior to the acquisition date because amounts higher than the profits generated by the investment since acquisition have been distributed, the carrying amount of the investment is reduced.
(ix) Derecognition of financial assets
Financial assets are derecognised when the contractual rights to the cash flows from the financial asset expire or have been transferred and the Entity has transferred substantially all the risks and rewards of ownership.
Debt or equity instruments which form part of portfolios of similar instruments which have the same rights, except when the instruments sold and their individualised cost can be clearly identified, are measured and derecognised at weighted average cost.
On derecognition of a financial asset, the difference between the carrying amount and the sum of the consideration received, including any cumulative gain or loss deferred in recognised income and expense, is recorded in the income statement
(x) Impairment of financial assets
A financial asset or a group of financial assets is impaired and impairment losses are incurred if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset and the event or events have an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated.
17
GEROA PENTSIOAK, ENTIDAD DE PREVISIÓN SOCIAL VOLUNTARIA DE EMPLEO
Notes to the Annual Accounts
The Entity recognises impairment of loans and receivables and debt instruments when estimated future cash flows are reduced or delayed due to debtor insolvency.
For equity instruments, objective evidence of impairment exists when the carrying amount of an asset is uncollectible due to a significant or prolonged decline in its fair value.
(xi) Fair value
The fair value of financial assets is determined mainly in reference to quoted prices in active markets.
Hybrid financial instruments are recognised at fair value both on initial recognition and on subsequent measurement and any changes in fair value are recognised in the income statement. Transaction costs directly attributable to the acquisition are recognised in the income statement.
(xii) Financial liabilities
Financial liabilities, including trade and other payables, that are not classified as held for trading or as financial liabilities at fair value through profit or loss are initially recognised at fair value less any transaction costs directly attributable to the issue of the financial liability. After initial recognition, liabilities classified under this category are measured at amortised cost using the effective interest method.
Nevertheless, financial liabilities which have no established interest rate, which mature or are expected to be settled in the short term, and for which the effect of discounting is immaterial, are measured at their nominal amount.
(d) Cash and cash equivalents
Cash and cash equivalents include cash on hand and demand deposits in financial institutions. They also include other short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. An investment normally qualifies as a cash equivalent when it has a maturity of less than three months from the date of acquisition.
(e) Technical provisions
(i) Provisions for defined contribution pension plans in which the member assumes the investment risk
These are provisions created in order to meet the obligations assumed with members as a result of the Entity’s social welfare activity.
18
GEROA PENTSIOAK, ENTIDAD DE PREVISIÓN SOCIAL VOLUNTARIA DE EMPLEO
Notes to the Annual Accounts
The Entity debits “Change in other technical provisions, net of reinsurance” with a credit to “Provision for social welfare activities - Provisions for defined contribution pension plans in which the member assumes the investment risk” for increases in pension plan assets. Likewise, the Entity credits “Change in other technical provisions, net of reinsurance” with a debit to “Provision for social welfare activities - Provisions for defined contribution pension plans in which the member assumes the investment risk” for decreases in pension plan assets.
(ii) Mathematical provision
The mathematical provision covers actuarial liabilities, estimated by the Entity and calculated via independent actuarial studies, which comprise the future obligations of vested benefits being paid in the form of annuities.
The main assumptions used to calculate this provision at 31 December 2019 and 2018 are as follows:
2019 2018
- Life table immediate annuities PERM/F – 2000P PERM/F - 2000C - Life table deferred annuities PERM/F – 2000P PERM/F – 2000P - Mortality table (death sum) PASEM/F 2010 GKM/F-95 - Technical interest rate immediate annuities 2.0% per annum 2.5% per annum - Technical interest deferred annuities 2.0% per annum 2.0% per annum - Growth in pensions 0% per annum 0% per annum
(f) Recognition of income and expenses
Income and expenses are recognised on an accruals basis, rather than upon collection or payment.
Dividends are generally recognised as income when their distribution is approved and announced at the respective board of directors or annual general shareholder meetings.
(g) Commitments with personnel
Pursuant to article 21 of the Gipuzkoa Office Workers’ Collective Labour Agreement, applicable to Entity personnel, workers with at least 25 years’ service who voluntarily leave the Entity are entitled to receive between two and four months’ salary, based on their length of service when leaving. The Entity recorded the corresponding provision for the liability accrued at 31 December 2019 and 2018 (Note 12).
(h) Foreign currency transactions
Foreign currency transactions are initially translated into the functional currency using the exchange rates prevailing at the transaction date. Foreign currency gains and losses arising on the settlement of these transactions and the translation into Euros of monetary assets and liabilities denominated in foreign currencies at the closing exchange rate are recognised in the income statement.
19 GEROA PENTSIOAK, ENTIDAD DE PREVISIÓN SOCIAL VOLUNTARIA DE EMPLEO
Notes to the Annual Accounts
Non-monetary items in foreign currency which are measured in terms of historical cost are translated using the exchange rates at the date when fair value was determined.
The equivalent Euro values of the total assets held by the Entity in foreign currency at 31 December are as follows:
Thousands of Euros 2019 2018
US Dollar 254,073 206,103 Pound Sterling 29,189 32,828 Norwegian Krone 1,991 2,267 Japanese Yen 45 -
285,298 241,198
The equivalent Euro values of assets, classified by nature, held by the Entity in foreign currency at 31 December are as follows:
Thousands of Euros 2019 2018
Cash and cash equivalents 4,438 13,697 Financial assets held for trading 1,510 1,801 Other financial assets at fair value through profit or loss 279,350 225,700
285,298 241,198
(i) Income tax
In accordance with prevailing legislation, Voluntary Social Welfare Entities are exempt from paying income tax. Consequently, they are entitled to be reimbursed for any withholdings made on capital gains, except implicit gains on financial assets withheld at source. However, companies or entities subject to the general income tax regime are required to comply with their formal income tax obligations.
(j) Environmental issues
The Entity considers that it complies substantially with environmental protection laws. During 2019 and 2018 the Entity has not incurred any significant costs or investments for this item, nor has it deemed it necessary to recognise any provision, as, given the Entity's activity, there are no significant risks or contingencies which could affect these annual accounts.
(k) Related party transactions
Transactions between Group companies are recognised at the fair value of the consideration given or received. The difference between this value and the amount agreed is recognised in line with the underlying economic substance of the transaction.
20 GEROA PENTSIOAK, ENTIDAD DE PREVISIÓN SOCIAL VOLUNTARIA DE EMPLEO
Notes to the Annual Accounts
(l) Criteria for reclassifying expenses by function
As mentioned in Note 3(i) the distribution criteria used are, basically, the nature of the expenses, the dedication of personnel and fixed assets related to the activity.
(m) Income from accrued contributions and benefits
“Contributions earned, net of reinsurance” in the accompanying income statement reflect the contributions made during the year by the Entity's ordinary and patron members.
Amounts disbursed are recognised as “Benefits, net of reinsurance” in the accompanying income statement.
(6) Information on the Nature and Risk Level of Financial Instruments
The activities of an EPSV are exposed to various financial risks: market risk (interest rate risk, price risk and currency risk), credit risk and liquidity risk.
The financial risk management of the Entity is focused on establishing the necessary mechanisms to control exposure to changes in interest rates, prices, exchange rates, as well as to credit and liquidity risk. Royal Decree 92/2007 of 29 May 2007, which regulates certain activities of EPSVs, specifies a range of regulatory ratios that limit this exposure and which are controlled by the Entity.
In accordance with article 4.1c) of Decree 92/2007, the Entity has a Declaration of Investment Principles (DIP) which explains the assets the Entity invests in and the techniques employed in managing them.
A summary of the policies and risk management procedures performed by the Entity is as follows:
(a) Market risk
Considering the nature of the risk factors, within market risk we can distinguish among the following:
• Interest rate risk
Interest rate risk is the risk of loss due to changes in interest rates in the various currencies in which the Entity holds positions.
The Entity is exposed to this risk by investing in both public and private debt instruments, term deposits made in financial institutions and money market instruments. Variable rate issues expose the Entity to interest rate risk on cash flows while fixed rate issues expose the Entity to interest rate risk on fair value.
To measure interest rate risk, the Entity uses the weighted average term to maturity of the debt securities portfolio (Macaulay duration), and modified duration to measure the price sensitivity of the portfolio to changes in interest rates.
21
GEROA PENTSIOAK, ENTIDAD DE PREVISIÓN SOCIAL VOLUNTARIA DE EMPLEO
Notes to the Annual Accounts
• Price risk
Price risk is defined as losses in equities from adverse movements in the price of shares or indices
Price risk can also be understood as changes in the volatility of share prices, in the relationship between the prices of different shares, and the yield spread between shares and bonds.
The Entity is exposed to price risk on investments in listed securities held in its portfolio.
• Currency risk
Currency risk is the risk of change in market value of positions held in currencies other than the functional currency as a result of exchange rate fluctuations.
This risk is measured based on the net position held in each currency and the volatility of the exchange rates of those currencies.
The Entity invests in both domestic and international markets, placing most of its investments in the Eurozone.
Investments held by the Entity in foreign currency assets at 31 December 2019 and 2018 are indicated in Note 5(h).
Market risk is measured using the VaR (Value at Risk) method. The VaR method estimates the maximum potential loss that could be expected from an adverse, but normal, movement from any of the identified parameters affecting market risk. This estimate is expressed in monetary terms and refers to a specific date, at a given confidence level and a specified time horizon.
(b) Credit risk
This refers to the potential loss due to failure by a counterparty to comply with some or all of its obligations. Credit risk exists over the life of a transaction, but may vary from one day to another due to settlement procedures and changes in valuations.
There are two types of credit risk:
• Counterparty risk
This is the loss that would be incurred in the event of non-compliance by a counterparty, as the position would need to be placed on the market again.
• Issuer risk
This is the risk of insolvency of an issuer due to changes in their economic and financial circumstances, resulting in them defaulting on the securities they issued when they mature. Issuer risk is also deemed the potential adverse change in the market value of an issuer’s securities due to a change in the market’s perception of their solvency.
22 GEROA PENTSIOAK, ENTIDAD DE PREVISIÓN SOCIAL VOLUNTARIA DE EMPLEO
Notes to the Annual Accounts
Credit risk is managed by groups. Credit risk arises from cash and cash equivalents, financial instruments, deposits with banks and financial institutions, including receivables and committed transactions. Diversification and dispersion limits are regularly monitored.
The rating of debt securities held by the Entity at the end of 2019 and 2018 is as follows:
Thousands of Euros Other financial assets at fair value 2019 (*) through profit or loss Deposits in Held-to-maturity financial Geroa I PPSE Debt securities Hybrid instruments investments institutions Total
AAA rating 34,717 5,044 16,558 - 56,319 AA rating 95,481 10,911 25,490 - 131,882 A rating 193,113 68,251 126,292 20,028 407,684 BBB rating 155,897 - 46,909 - 202,806 BB rating 84,434 - 18,791 - 103,225 B rating 5,882 - - - 5,882 CC rating 2,601 - - - 2,601 Unassigned 16,107 2,004 10,994 6,010 35,115
588,232 86,210 245,034 26,038 945,514
Geroa II PPSE
A rating - - 8,789 - 8,789 BBB rating - - 35,423 - 35,423 Unassigned - - 2,863 - 2,863
- - 47,075 - 47,075
Gestora
AA rating - - 2,499 2,499 A rating - - - 15,004 15,004 BB rating - - 3,998 3,998 B rating - - 3,999 - 3,999
- - 10,496 15,004 25,500
588,232 86,210 302,605 41,042 1,018,089
23
GEROA PENTSIOAK, ENTIDAD DE PREVISIÓN SOCIAL VOLUNTARIA DE EMPLEO
Notes to the Annual Accounts
Thousands of Euros Other financial assets at fair value 2018 (*) through profit or loss Deposits in Held-to-maturity financial Geroa I PPSE Debt securities Hybrid instruments investments institutions Total
AAA rating 14,532 4,747 7,414 - 26,693 AA rating 27,796 5,662 6,551 30,076 70,085 A rating 191,273 58,746 151,053 - 401,072 BBB rating 199,366 - 77,463 2,000 278,829 BB rating 28,665 - 7,499 - 36,164 B rating 418 - 4,999 - 5,417 CCC rating 2,433 - - - 2,433 CC rating 2,086 - - - 2,086 Unassigned 6,672 3,055 23,947 6,008 39,682
473,241 72,210 278,926 38,084 862,461
Geroa II PPSE
A rating - - 9,412 - 9,412 Unassigned - - 21,456 - 21,456
- - 30,868 - 30,868
Gestora
BBB rating - - - 13,895 13,895
- - - 13,895 13,895
473,241 72,210 309,794 51,979 907,224
(*) Includes interest accrued at 31 December
(c) Liquidity risk
We can distinguish between two types of liquidity risk:
• Liquidity risk on cash forecasts
This is the risk of being unable to meet payment commitments due to an inadequate cash flow structure.
The Entity regularly monitors forecast cash reserves based on expected cash flows.
The Entity's control and management of liquidity ensures that there are enough liquid resources available to meet payment commitments. To measure this risk, the Entity tracks the following ratio:
Total contributions + Assets maturing < 1 year Total benefits
• Market liquidity risk
This is the risk of the Entity being unable to unwind a position in a timely manner, without suffering distortions in the market price and cost of the transaction.
Liquidity risk depends on the concentration of certain products or currencies and instability in the markets.
24
GEROA PENTSIOAK, ENTIDAD DE PREVISIÓN SOCIAL VOLUNTARIA DE EMPLEO
Notes to the Annual Accounts
The risk is assessed considering the relationship between different markets, the depth of each market, the term of products not yet matured and other factors. It is also associated with the possibility that a large-volume transaction on a particular instrument may have an unpredictable effect on the market price of the instrument.
Liquidity risk is quantified adjusting risk measures to reflect the time needed to unwind a certain position. This adjustment is known as liquidity factor.
In illiquid markets, trading margin tends to be wide, which increases this cost.
A related phenomenon is the risk of a sudden and unexpected decrease in liquidity, even in traditionally liquid markets, due to significant movements in price or volatility.
(7) Intangible Assets
Details of intangible assets and movement during 2019 and 2018 are as follows:
Thousands of Euros 31.12.17 Additions 31.12.18 Additions 31.12.19
Computer software Cost 902 5 907 - 907 Accumulated amortisation (894) (13) (907) - (907)
8 (8) - - -
The cost of fully amortised intangible assets in use at 31 December 2019 is Euros 907 thousand (Euros 907 thousand at 31 December 2018).
At 31 December 2019 and 2018 no intangible assets are subject to collateral, title restrictions or pledged as security for liabilities.
The Entity has no firm commitments to purchase/sell intangible assets at 31 December 2019 and 2018.
25
GEROA PENTSIOAK, ENTIDAD DE PREVISIÓN SOCIAL VOLUNTARIA DE EMPLEO
Notes to the Annual Accounts
(8) Property, Plant and Equipment
Details of property, plant and equipment and movement during 2019 and 2018 are as follows:
Thousands of Euros 31.12.17 Additions 31.12.18 Additions 31.12.19
Cost Buildings 737 - 737 - 737 Furniture and installations 731 36 767 6 773 Information technology equipment 181 1 182 13 195
1,649 37 1,686 19 1,705
Accumulated depreciation Buildings (328) (18) (346) (19) (365) Furniture (623) (23) (646) (24) (670) Information technology equipment (167) (15) (183) (8) (191)
(1,118) (56) (1,175) (51) (1,226)
531 (19) 511 (32) 479
Details of the cost of fully depreciated property, plant and equipment in use at 31 December are as follows:
Thousands of Euros 2019 2018
Furniture and installations 527 527 Information technology equipment 183 183
710 710
The Entity has taken out insurance policies to cover the risk of damage to its property, plant and equipment. Entity management considers the coverage of these policies to be sufficient.
The Entity has no firm commitments to purchase/sell items of property, plant and equipment at 31 December 2019 and 2018.
All assets included under this balance sheet heading are used by the Entity for its activity.
No items of property, plant and equipment are subject to collateral, title restrictions or pledged as security for liabilities.
26
GEROA PENTSIOAK, ENTIDAD DE PREVISIÓN SOCIAL VOLUNTARIA DE EMPLEO
Notes to the Annual Accounts
(9) Financial Instruments
(a) Classification of financial assets and liabilities by category
The classification of financial assets and liabilities by category at 31 December, expressed in thousands of Euros, is as follows:
Other financial assets at fair value through profit or loss Investments Cash and Financial assets Hybrid Held-to- in Group cash held financial Equity Debt Loans and maturity companies and 2019 equivalents for trading instruments instruments securities receivables investments associates TOTAL
Equity instruments: - - - 1,133,866 - - - 52,443 1,186,308 Shares - - - 296,635 - - - 52,443 349,077 Investment fund
units - - - 774,359 - - - - 774,359 Venture capital fund units
- - - 62,872 - - - - 62,872 Fixed income securities - - - - 588,232 - 302,605 - 890,837 Hybrid instruments - - 86,210 - - - - - 86,211 Deposits in financial institutions - - - - - 41,042 - - 41,042 Receivables arising out of social welfare activities Other receivables: - - - - - 10,296 - - 10,296 Receivables from public
entities - - - - - 6,194 - - 6,194 Remaining receivables - - - - - 4,102 - - 4,102 Other financial assets 2,378 ------2,378 Cash 58,521 ------58,521
TOTAL 58,521 2,378 86,210 1,133,866 588,232 51,338 302,605 52,443 2,275,593
Debts and Financial liabilities held for FINANCIAL LIABILITIES payables trading Total
Derivatives - - - Other payables: Tax and social security 303 - 303 Other financial liabilities 1,435 - 1,435
TOTAL 1,738 - 1,738
27
GEROA PENTSIOAK, ENTIDAD DE PREVISIÓN SOCIAL VOLUNTARIA DE EMPLEO
Notes to the Annual Accounts
Other financial assets at fair value through profit or loss Investments Cash and Financial assets Hybrid Held-to- in Group cash held financial Equity Loans and maturity companies and 2018 equivalents for trading instruments instruments Debt securities receivables investments associates TOTAL
Equity instruments: - - - 821,196 - - - 48,934 870,130 Shares - - - 210,163 - - - 48,934 259,097 Investment fund units - - - 556,742 - - - - 5,567,742 Venture capital fund units - - - 54,291 - - - - 54,291 Fixed income securities - - - - 473,241 3,447 309,794 - 786,482 Hybrid instruments - - 72,210 - - - - - 72,210 Deposits in financial institutions - - - - - 51,979 - - 51,979 Receivables arising out of social welfare activities - - - - - 748 - - 748 Other receivables: - - - - - 7,003 - - 7,003 Receivables from public entities - - - - - 7,003 - - 7,003 Remaining receivables ------Other financial assets ------Cash 240,995 ------240,995
TOTAL 240,995 - 72,210 821,196 473,241 63,177 309,794 48,934 2,029,547
Debts and Financial liabilities held for FINANCIAL LIABILITIES payables trading Total
Derivatives - - - Other payables: Tax and social security 299 - 299 Other financial liabilities 1,412 - 1,412
TOTAL 1,711 - 1,711
28
GEROA PENTSIOAK, ENTIDAD DE PREVISIÓN SOCIAL VOLUNTARIA DE EMPLEO
Notes to the Annual Accounts
(b) Net losses and gains by financial instrument category
Net losses and gains by financial instrument category are as follows:
Thousands of Euros 2019 2018
Income from equity instruments - dividends 9,547 9,391 Interest income 35,178 35,129 Gains on change in fair value of financial instruments: 469,089 363,894 Gains on disposal of financial instruments 43,652 61,836 Gains on financial futures 3,602 3,284 Transfers of fund commissions 24 122 Exchange gains 1,753 1,214 Other 2,070 3,610
Total investment income 565,915 478,480
Management charges for property, plant and equipment and investments 1,552 1,545 Intermediation and brokerage charges 308 566 Custodian expenses 544 413 Other management charges for property, plant and equipment and investments 700 566 Losses on change in fair value of financial instruments: 318,755 540,201 Losses on disposal of financial instruments 22,875 19,038 Losses on financial futures 26,254 14,078 Exchange losses 1,666 1,407
Total investment expenses 371,102 576,269
29
GEROA PENTSIOAK, ENTIDAD DE PREVISIÓN SOCIAL VOLUNTARIA DE EMPLEO
Notes to the Annual Accounts
(c) Classification by maturity The expected maturity of financial assets and liabilities at 31 December, for those that have a fixed or determinable maturity by each category, expressed in thousands of Euros, is as follows:
2019 Financial assets 2024 and 2020 2021 2022 2023 thereafter Total Cash and cash equivalents 58,521 - - - - 58,521 Other financial assets at fair value through profit or loss 106,107 68,196 32,405 77,265 390,469 674,442 Held-to-maturity financial assets (Geroa I PPSE) 108,898 30,325 19,234 5,043 81,534 245,034 Held-to-maturity financial assets (Geroa II PPSE) - - - - 47,075 47,075 Held-to-maturity financial assets (Gestora) 10,496 - - - - 10,496 Loans and receivables 51,338 - - - - 51,338
TOTAL 335,360 98,521 51,639 82,308 519,078 1,086,906
Financial liabilities 2024 and 2020 2021 2022 2023 thereafter Total Debts and payables 1,738 - - - - 1,738 Financial liabilities held for trading ------TOTAL 1,738 - - - - 1,738
2018 Financial assets 2023 and 2019 2020 2021 2022 thereafter Total Cash and cash equivalents 240,995 - - - - 240,995 Other financial assets at fair value through profit or loss 130,510 74,849 36,438 66,129 237,393 545,451 Held-to-maturity financial assets (Geroa I PPSE) 121,098 27,078 30,351 25,459 74,940 278,926 Held-to-maturity financial assets (Geroa II PPSE) - - - - 30,869 30,869 Loans and receivables 63,177 - - - - 63,177
TOTAL 555,780 101,927 66,789 91,588 343,202 1,159,418
Financial liabilities 2023 and 2019 2020 2021 2022 thereafter Total Debts and payables 1,711 - - - - 1,711 Financial liabilities held for trading ------TOTAL 1,711 - - - - 1,711
30
GEROA PENTSIOAK, ENTIDAD DE PREVISIÓN SOCIAL VOLUNTARIA DE EMPLEO
Notes to the Annual Accounts
(d) Other financial assets at fair value through profit or loss
Details at 31 December are as follows:
Thousands of Euros 2019 2018
Equity instruments 1,133,866 821,196 Shares 296,635 210,163 Investment fund units 774,359 556,742 Venture capital fund units 62,872 54,291
Debt securities 588,232 473,241 Hybrid instruments 86,210 72,210
1,808,308 1,366,647
The maximum exposure to credit risk at the reporting date is the fair value of each of the securities classified under this category.
Accrued income not due from debt securities and hybrid instruments in this heading amounted to Euros 7,052 thousand at 31 December 2018 (Euros 8,742 thousand at 31 December 2018).
The annual interest rate of debt securities at 31 December 2019 ranges between 0% and 13% (0% and 10.75% at 31 December 2018).
At 31 December 2019, practically all the Entity's securities were deposited or in the process of being deposited at BNP Paribas.
31
GEROA PENTSIOAK, ENTIDAD DE PREVISIÓN SOCIAL VOLUNTARIA DE EMPLEO
Notes to the Annual Accounts
At 31 December 2019 and 2018, details of pending disbursements in venture capital firms on committed investments and the fair value of the units are as follows:
Thousands of Euros 2019 2018
Fair value 62,872 54,291 Pending disbursement 36,584 38,272 Committed investment 95,388 87,650
At 31 December 2019, the Entity had a provision for the decline in value of debt securities amounting to Euros 1,711 thousand (Euros 2,442 thousand in 2018).
At 31 December 2019 and 2018 no financial instruments are subject to collateral, title restrictions or pledged as security for liabilities.
(e) Investments in Group companies and associates
Details of these investments at 31 December 2019 and 2018 are as follows:
Thousands of Euros 2019 2018
Equity instruments Shares 52,443 48,934
Additions in 2019 and 2018 mainly reflect the increase in the underlying net book value of the investment in Orza, Gestión y Tenencia de Patrimonios, A.I.E.
At 31 December 2019 and 2018 there are no impairment losses on investments in Group companies and associates.
Details of investments in subsidiaries at 31 December 2019 and 2018, of the activities they carry out and their equity, according to their latest available unaudited financial statements, are shown in the Appendix, which forms an integral part of this note.
32
GEROA PENTSIOAK, ENTIDAD DE PREVISIÓN SOCIAL VOLUNTARIA DE EMPLEO
Notes to the Annual Accounts
(f) Held-to-maturity investments
Details by issuer of this portfolio at 31 December are as follows:
Thousands of Euros 2019 2018 Geroa I PPSE Basque Country government debt securities 49,425 59,355 Spanish government debt securities 17,975 8,065 SPIRE 11,870 - Italian government debt securities 10,359 65,425 Vidrala 10,000 - Goldman Sachs 9,768 9,817 Papeles y Cartones de Europa 6,799 5,415 PITCH1 6,576 6,551 Allianz SE 6,558 6,726 El Corte Inglés 6,200 4,499 Bank of America 5,007 - Citigroup 5,005 5,018 Cobra 5,000 - FADE - 9,404 Douro Finance BV - 7,089 Construcciones y Auxiliar de Ferrocarriles 1,200 6,150 Teknia Manufacturing Group, S.L. 700 5,965 Euskaltel, S.A. 4,798 5,074 Other issuers 87,794 78,872
245,034 278,926
Geroa II PPSE Douro Finance BV 19,001 12,443 Silverback Finance DAC 8,789 9,412 Argentum Capital, S.A. 8,711 9,013 SPIRE 7,710 - PHOTOSONLAR 2,864 -
47,075 30,868
Gestora Other issuers 10,496 -
302,605 309,794
Explicit accrued interest not due on debt securities under this heading amounted to Euros 6,607 thousand at the 2019 reporting date (Euros 6,702 thousand at the 2018 reporting date).
The annual interest rate at 31 December 2019 ranges between 0.05% and 6.65% (0.14% and 6.65% at 31 December 2018).
33
GEROA PENTSIOAK, ENTIDAD DE PREVISIÓN SOCIAL VOLUNTARIA DE EMPLEO
Notes to the Annual Accounts
(g) Loans and receivables
Details at 31 December are as follows:
Thousands of Euros 2019 2018
Debt securities - 3,447 Deposits in financial institutions Fixed income 41,042 51,979 Receivables arising out of social welfare activities 202 748 Other receivables Taxation authorities 6,194 7,003 Other receivables 3,900 -
51,338 63,177
At 31 December 2019, the Entity had a provision of Euros 1,831 thousand for deposits in financial institutions.
Accrued interest not due on the assets of this heading at 31 December 2019 amounted to Euros 33 thousand (Euros 79 thousand at 31 December 2018).
The nominal annual interest rate of deposits at 31 December 2019 ranges between 0.05% and 0.15% (0% and 1.15% at 31 December 2018).
“Taxation authorities” at 31 December 2019 mainly includes Euros 6,169 thousand in withholdings on account of capital gains in 2019 (Euros 6,993 thousand at 31 December 2018 in withholdings on account of capital gains in 2018).
(h) Cash and cash equivalents
Details of this caption at 31 December are as follows:
Thousands of Euros 2019 2018
Demand deposits in financial institutions and cash 58,521 238,385
The interest rate on current accounts of the Entity ranged between -0.50% and 1.06% in 2019 (0% and 0.4% in 2018).
34 GEROA PENTSIOAK, ENTIDAD DE PREVISIÓN SOCIAL VOLUNTARIA DE EMPLEO
Notes to the Annual Accounts
(i) Debts and payables
Details at 31 December are as follows:
Thousands of Euros 2019 2018
Taxation authorities, other 274 275 Social Security 29 23 Payables arising out of reinsurance operations 582 371 Accrued expenses and deferred income 478 728 Benefits payable 218 135 Other 157 179
1,738 1,711
All debts and payables are current, so their carrying amount is the same as their par value and there is no significant risk of exposure to changes in interest rates.
All the Entity's debts are in Euros, so there is no exposure to currency risk.
(j) Derivatives transactions
At 31 December, the Entity had the following open positions in derivative financial instruments:
2019 Market Underlying Number of value Type asset Maturity contracts (thousands of Euros)
Buy-Futures GBP March 2020 50 6,266 Buy-Futures USD March 2020 644 80,880 Buy-Futures JPY March 2020 20 2,501 Buy-Futures Eurostoxx50 DVD December 2022 and 2023 200 2,338 Sale-Futures Bund March 2020 250 42,623
2018 Market Underlying Number of value Type asset Maturity contracts (thousands of Euros)
Buy-Futures GBP March 2019 50 6,267 Buy-Futures USD March 2019 644 80,996 Buy-Futures MXN March 2019 40 878 Buy-Futures Eurostoxx50 DVD December 2022 and 2023 200 1,993 Sale-Futures Mini S&P March 2019 20 2,188 Sale-Futures Bund March 2019 300 49,062
Financial futures contracts are settled daily on the organised markets EUREX and CME.
35
GEROA PENTSIOAK, ENTIDAD DE PREVISIÓN SOCIAL VOLUNTARIA DE EMPLEO
Notes to the Annual Accounts
Guarantees extended at 31 December 2019 for the open positions in financial futures amounted to Euros 2,175 thousand (Euros 2,694 thousand at 31 December 2018) and are presented in "Financial assets held for trading" on the asset side of the balance sheet.
(k) Fair value of financial assets and financial liabilities
The fair value of the held-to-maturity investment portfolio compared to its carrying amount at 31 December is as follows:
Thousands of Euros Fair Carrying Gain 2019 value amount (Loss)
Held-to-maturity investments 315,735 302,605 13,130
Thousands of Euros Fair Carrying Gain 2018 value amount (Loss)
Held-to-maturity investments 324,135 309,794 14,341
As indicated in Note 5.c), the Entity's financial assets are recognised in the balance sheet at fair value, except for cash and cash equivalents, loans and receivables, held-to-maturity investments in Group companies and associates.
In order to obtain fair value, quoted prices in active markets have been used in all cases.
For the remaining financial assets and liabilities at 31 December 2019 and 2018, it has been estimated that there are no significant differences between their carrying amount and their fair value.
(10) Equity
Details of the Entity's members’ funds at 31 December are as follows:
Thousands of Euros 2019 2018
Mutual Fund 13,513 13,460 Reserves 29,281 34,425 Reserves for actuarial risks 7,782 12,551 Voluntary reserves 19,101 17,423 Safety margin 2,398 2,451 Shortfall for the year (5,593) (3,091)
37,201 42,794
Movement in equity items during 2019 and 2018 is shown in the statement of changes in equity.
36
GEROA PENTSIOAK, ENTIDAD DE PREVISIÓN SOCIAL VOLUNTARIA DE EMPLEO
Notes to the Annual Accounts
(a) Mutual Fund
This comprises the fund created by the initial one-off contributions made by the founding sponsor members in accordance with the Regulation on Voluntary Social Welfare Entities. It also includes the contributions made upon the integration in prior years of Sidero-Zahar, Entidad de Previsión Social Voluntaria. Details at 31 December are as follows:
Thousands of Euros 2019 2018
Contributions from founding sponsor members 8,596 8,596 Contributions from Sidero-Zahar, Entidad de Previsión Social Voluntaria 7,432 7,432
16,028 16,028
Application of mutual fund (117) (117) Transfer to reserves (2,398) (2,451)
13,513 13,460
Sidero – Zahar, Entidad de Previsión Social Voluntaria was incorporated in 1997 with the aim of supplementing retirement, disability, widowhood, family and absolute orphanhood benefits below the national minimum wage for beneficiaries entitled to other income which, upon incorporation of the entity, was not being received and which, taken as a whole and added to the benefit, exceeded the national minimum wage.
Its beneficiaries were pensioners under the general Social Security regime who, when the entity was incorporated, were beneficiaries of the supplementary pension scheme established in the collective labour agreement for the Gipuzkoa iron and steel industry, and those declared beneficiaries by the Entity’s governing board on account of being entitled to certain benefits at 31 December 1996, even if they were recognised as such subsequent to that date.
As of 1999, the census of beneficiaries was updated, and in 2002, the application and transfer of the surplus to the Geroa Pentsioak, Entidad de Previsión Social Voluntaria mutual fund was approved at the Entity's extraordinary general assembly. On 12 January 2004, the complete dissolution of Sidero – Zahar, Entidad de Previsión Social Voluntaria was approved.
(b) Reserves
Article 20 of the articles of association states that the Entity will permanently hold additional assets to those in which its mathematical provisions materialise, in the form of reserves. These assets must be free of all foreseeable obligations and will be used as an available solvency margin to absorb deviations between actual and foreseeable expenses and benefits.
37
GEROA PENTSIOAK, ENTIDAD DE PREVISIÓN SOCIAL VOLUNTARIA DE EMPLEO
Notes to the Annual Accounts
At the assembly held on 7 May 2003, it was agreed to create a life annuities risk reserve, placing it in 25% of the defined benefit commitments of reinsurance. At 31 December 2019, this reserve is recognised as “Reserves – Reserves for actuarial risks” under members’ funds.
At the general assembly held on 12 April 2019, it was agreed to appropriate Euros 53 thousand to the safety margin with a charge to the Mutual Fund (Euros 274 thousand with a charge to the Mutual Fund as approved at the general assembly held on 26 April 2018).
(11) Technical Provisions
At 31 December 2019 and 2018, this balance sheet caption comprises the provisions established by the Entity to honour the consolidated rights of associates (provisions for defined contribution pension plans in which the member assumes the investment risk), vested obligations paid in the form of annuities (mathematical provision) and regulatory obligations (other technical provisions).
Details at 31 December are as follows:
Thousands of Euros 2019 2018
Provision for social welfare activities 2,237,110 1,985,531 Mathematical provision immediate annuities 78,162 68,461 Mathematical provision deferred annuities 56 31 Provisions for defined contribution plans in which the member assumes the investment risk (active members) 2,110,690 1,885,546 Provisions for defined contribution plans in which the member assumes the investment risk (Temporary annuities children ≤ 25 years old) 268 277 Provisions for defined contribution plans in which the member assumes the investment risk (Temporary annuities GEROA II) 47,934 31,216
Movement in technical provisions in 2019 and 2018 is as follows:
Thousands of Euros Defined contribution Mathematical pension plan provision provisions Total
Balance at 31 December 2017 70,601 1,960,611 2,031,212
Change in other technical provisions, net of reinsurance (2,109) (43,572) (45,681) Distribution of 2017 surplus - - - Transfers - - -
Balance at 31 December 2018 68,492 1,917,039 1,985,531
Change in other technical provisions, net of reinsurance 9,726 241,853 251,579 Allocation of 2018 shortfall - - - Transfers - - -
Balance at 31 December 2019 78,218 2,158,892 2,237,110
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GEROA PENTSIOAK, ENTIDAD DE PREVISIÓN SOCIAL VOLUNTARIA DE EMPLEO
Notes to the Annual Accounts
At 31 December 2019 and 2018, the most relevant information on assets attributable to members and beneficiaries (mathematical provision and provisions for defined contribution plans in which the member assumes the investment risk) of the Entity are as follows:
Geroa I PPSE Geroa II PPSE Total 2019 2018 2019 2018 2019 2018
Technical provisions 2,189,119 1,954,283 47,991 31,248 2,237,110 1,985,531 Number of units 85,579,483 83,877,594 1,989,321 1,330,975 - - Value of each unit (in Euros) 25.579953 23.299227 24.095897 23.454061 - - Annualised yield 9.79% (4,84%) 2.74% 2.66% - - Number of active members 114,627 113,298 - - 114,267 113,298 Number of passive/ beneficiary members 2,024 1,712 1,114 665 2,024 2,377
“Provision for social welfare activities – Provisions for defined contribution pension plans in which the member assumes the investment risk” includes temporary annuities totalling Euros 48,202 thousand (Euros 31,494 thousand at 31 December 2018), corresponding to the consolidated rights of passive members whose benefit vested after 31 December 2014 (excluding, if applicable, the deferred life annuity corresponding to Tranche 4 of the new benefits model (Note 2), recognised under “mathematical provisions” of the same caption).
The Entity has an actuarial study dated 31 December 2019, conducted by an independent actuary following generally accepted assumptions and financial actuarial calculations at the time they were performed. This study established that the present actuarial value of the future pension obligations benefits already vested at 31 December 2019, and the enhancement stipulated in article 10.6 of the articles of association based on the loss incurred by the Entity in 2019 (Note 2), amounts to Euros 78,218 thousand, which is included under “Mathematical provisions” in the accompanying balance sheet (Euros 68,492 thousand at 31 December 2018). At 31 December 2019 and 2018, deferred life annuities corresponding to Tranche 4 (Note 2) of the new benefits model (Note 2) are included under “Mathematical provision”, for amounts of Euros 1 thousand and Euros 4 thousand, respectively.
At its meeting held on 12 December 2019, the governing board of the Entity agreed to modify the technical bases for calculating the mathematical provisions of the Geroa I Plan de Previsión de Empleo, applicable as of 31 December 2019, the survival tables PERM/F 2000P and the mortality tables PASEM/F 2010. It also agreed that the technical interest rate applicable to these provisions would be 2%. These modifications entailed an additional charge to mathematical provisions of Euros 9,356 thousand, which has been taken to the income statement.
At 31 December 2019, “Reserves” amounting to Euros 26,883 thousand (Euros 29,968 thousand at 31 December 2018), together with the application of the 2019 shortfall to reserves for a negative amount of Euros 5,593 thousand (Note 4) (negative Euros 3,091 thousand at 31 December 2018), correspond to the funds established by the Entity to assume possible deviations in the actuarial commitments of the life annuities, as established at the Entity's general assembly (Note 10).
(12) Non-technical Provisions
The provision for pensions and obligations at 31 December 2019 and 2018 derives from the commitments acquired by the Entity in respect of employee retirement bonuses (Note 5(g)).
39
GEROA PENTSIOAK, ENTIDAD DE PREVISIÓN SOCIAL VOLUNTARIA DE EMPLEO
Notes to the Annual Accounts
(13) Income and Expenses
(a) Classification of expenses by function
In compliance with Decree 86/2010 of 16 March 2010, the Entity has distributed expenses initially classified by nature which, because of their purpose, should be reclassified by function. For the purpose of this reclassification, the following should be taken into account:
– Expenses attributable to benefits primarily include the expenses of personnel who manage the benefits, and the amortisation/depreciation of fixed assets related to this activity, commissions paid for management of the benefits and expenses incurred for processing services;
– Administrative expenses primarily include the cost of contribution-related dispute resolution services, the cost of collecting contributions, the cost of ceded reinsurance, in particular, the expenses of personnel involved in those functions, and the amortisation/depreciation of related fixed assets.
– Expenses attributable to investments primarily include the cost of managing both internal and external investments, the latter comprising fees, commissions and brokerage fees, the expenses of personnel involved in those functions, and the amortisation/depreciation of related fixed assets.
– Other technical expenses are those that form part of the social welfare activities account, but which in application of the criteria established, cannot be charged to one of the aforementioned functions, primarily general management expenses.
(b) Change in other technical provisions, net of reinsurance
Details of “I.6 Change in other technical provisions, net of reinsurance” of the income statement at 31 December are as follows:
Thousands of Euros 2019 2018
Contributions earned, net of reinsurance (90,884) (87,801) Benefits, net of reinsurance 38,956 38,027 Investment income (565,787) (478,471) Investment expenses 371,102 576,290 Other technical income (658) (710) Net operating expenses 1,419 1,447 Result of social welfare plan activities account (5,727) (3,101)
251,579 45,681
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GEROA PENTSIOAK, ENTIDAD DE PREVISIÓN SOCIAL VOLUNTARIA DE EMPLEO
Notes to the Annual Accounts
At 31 December 2019 and 2018, the Entity presents administrative expenses by function, in compliance with Decree 86/2010 of 16 March 2010, classifying them as follows in the income statement:
Expenses 2019 Expenses attributable to attributable to Administrative Intermediation Custodian investments benefits expenses (*) expenses expenses (Note 9) Total
Administrative Expenses 206 1,419 308 544 611 3,088
Expenses 2018 Expenses attributable to attributable to Administrative Intermediation Custodian investments benefits expenses (*) expenses expenses (Note 9) Total
Administrative Expenses 201 1,449 566 413 514 3,143
(*) During 2019 and 2018, no income has been accrued from the Entity’s share in the gains of risk cession reinsurance contracts (Note 2). (*) Implicit commissions on investments in collective investment undertakings and venture capital funds amounted to Euros 5,311 thousand in 2019 (Euros 6,011 thousand in 2018).
(14) Taxation
In accordance with tax legislation regulating EPSVs, the Entity is exempt from paying income tax and is entitled to be reimbursed for withholdings made on finance income (see Note 5(i)).
In accordance with prevailing legislation, taxes cannot be considered definitive until they have been inspected by the taxation authorities or before the inspection period of four years has elapsed. At 31 December 2019 the Entity has open to inspection by the taxation authorities all main applicable taxes for the last four years. The directors of the Entity do not consider that significant additional liabilities would arise in the event of an inspection.
(15) Related Party Transactions
In 2019 and 2018 the Entity did not engage in any transactions with related parties outside the normal course of business (collecting contributions from patron members, and paying benefits to members and beneficiaries).
Details of balances and transactions with related parties in 2019 and 2018 (expressed in thousands of Euros) are as follows:
Group and jointly controlled entities 2019 2018
Balance sheet Investments in Group companies 52,443 48,934
Income statement Investment income - dividends - 10
41
GEROA PENTSIOAK, ENTIDAD DE PREVISIÓN SOCIAL VOLUNTARIA DE EMPLEO
Notes to the Annual Accounts
The only significant transactions carried out during the period with Group companies are the collection of dividends distributed by these companies, which are shown in the Appendix to the accompanying annual accounts.
(16) Average Headcount and Employee Benefits
The average headcount, distributed by category, for 2019 and 2018 is as follows:
Average headcount 2019 2018
Managing director 1 1 University graduates 9 8 Administrative staff 12 13
22 22
Distribution by gender of the Entity's governing board and personnel at 31 December 2019 and 2018 is as follows:
2019 2018 Male Female Total Male Female Total
Governing board 16 10 26 19 7 26 Managing director - 1 1 - 1 1 University graduates 4 5 9 4 4 8 Administrative staff 2 10 12 2 11 13
34 14 58 34 14 58
During 2019 and 2018, the Entity had no employees with a disability rating of 33% or more.
Details of personnel expenses at 31 December 2019 and 2018 are as follows:
Thousands of Euros 2019 2018
Wages and salaries 1,025 937 Employee benefits expense 266 227 EPSV contributions 20 18
1,311 1,182
Personnel expenses at 31 December 2019 and 2018 have been recognised by function, in compliance with Basque Government Decree 86/2010.
42
GEROA PENTSIOAK, ENTIDAD DE PREVISIÓN SOCIAL VOLUNTARIA DE EMPLEO
Notes to the Annual Accounts
(17) Information on Environmental Issues
During the years ended 31 December 2019 and 2018 the Entity has not made any investments or incurred any expenses of an environmental nature, nor are any environment-related projects in progress.
At 31 December 2019 and 2018 the Entity considers that no significant contingencies exist concerning possible litigation, indemnities or other items connected with the environment and, accordingly, no provision has been made in this regard.
The Entity has not received any environment-related income or grants during the years mentioned above.
(18) Average Supplier Payment Period “Reporting Requirement". Third Additional Provision of Law 15/2010 of 5 July 2010
Information on the average supplier payment period in 2019 and 2018 is as follows:
Days 2019 2018
Average supplier payment period 1 1 Transactions paid ratio 1 1 Transactions payable ratio - -
Amount (Euros) 2019 2018
Total payments made 2,386 1,315 Total payments outstanding 156 179
(19) Information Relating to the Members of the Governing Board and Senior Management
At 31 December 2019 and 2018 the members of the governing board have accrued no remuneration in respect of salaries, allowances or other items, nor have they any balances with the Entity as regards advances or loans. During 2019, senior management (comprised of 7 persons at 31 December 2019 and 2018) has accrued Euros 538 thousand in respect of remuneration and EPSV contributions (Euros 527 thousand in 2018).
At 31 December 2019 and 2018 the Entity has no obligations regarding pensions or life insurance with either former or current members of the governing board, nor has it assumed any guarantees on their behalf.
43 GEROA PENTSIOAK, ENTIDAD DE PREVISIÓN SOCIAL VOLUNTARIA DE EMPLEO
Notes to the Annual Accounts
(20) Regulatory Compliance
(a) Decree 92/2007 of 29 May 2007 regulating certain EPSV activities
The aim of Decree 92/2007 of 29 May 2007 is to provide EPSVs and welfare plans with a more effective, solvent and rigorous framework for the benefit of ordinary members and beneficiaries, through the development and regulation of certain subject areas.
The Fifth Transitional Provision of said Decree established that compliance with article 11 of Decree 92/2007, on financial investments, was mandatory from 1 January 2010, and that investments in assets must adhere to certain criteria of safety, yield, liquidity, diversification, dispersion, terms and congruence. The Entity adopted the criteria established in this article on 1 January 2010.
The main impacts of the Decree regarding accounting principles and the valuation of investments are contained in article 11. At 31 December 2019, the Entity complies with the obligations set out in article 11.
At 31 December 2019, the Entity has certain assets not classed as qualifying, as established in article 11.3 of Decree 92/2007, with a carrying amount of Euros 5,320 thousand corresponding to American ETFs. As they do not comply with the UCIT directive, the Basque Government has recommended classing them as non-qualifying.
The Entity considers that American ETFs comply with article 11.3.ii) of Decree 92/2007, as they in turn comply with article 30 d) of Law 35/2003 on collective investment undertakings, since they are supervised by the American SEC (Securities and Exchange Commission), a body deemed equivalent to the European Union Law- making body, and which ensures cooperation among authorities.
On 29 October 2009, the Entity requested authorisation from the Department of Finance of the Basque Government to hold these assets in its portfolio, based on the possible economic damage that members could suffer as a result of divestments. On 17 December 2009, the Basque Government's Department of Finance issued a resolution authorising an extension to the deadline for adapting the Entity's portfolio to the criteria established in article 11.3 of Decree 92/2007. Nonetheless, the Entity may not make further acquisitions of non- qualifying assets, and must inform the Basque Government’s Department of Finance of the balance of said assets.
(b) Spanish Ministry of Finance and Public Administration Order of 29 April 2009
Spanish Ministry of Finance and Public Administration Order of 29 April 2009 implements certain provisions of Decree 92/2007 of 29 May 2007.
44 GEROA PENTSIOAK, ENTIDAD DE PREVISIÓN SOCIAL VOLUNTARIA DE EMPLEO
Notes to the Annual Accounts
This Order focuses on three areas:
• Proper segregation in the allocation of rights and obligations to the different activities that can be performed by EPSVs.
• Development of those subject matters in the normal course of business of EPSVs which entail a higher risk due to the use of certain financial instruments.
• Development of the transparency of EPSVs.
At 31 December 2019, the Entity complies with the obligations contained in the Order of 29 April 2009, except for certain assets not classed as qualifying, as established in article 9 of the Order. Specifically, Euros 15,754 thousand corresponds to securities which have been assigned a credit rating lower than A by three of the main rating agencies, including two assets totalling Euros 12,699 thousand issued by BBVA with a DBRS rating of A and Euros 34 thousand in a fund not classed as UCIT which is in the process of being dissolved.
(21) Statement of Coverage of Technical Provisions and Statement of Solvency Margin
According to article 10 of Decree 92/2007 of May 29 2007, amended by the Eighth Final Provision of Basque Government Decree 203/2015 of 27 October 2015, the minimum safety margin for absorbing deviations between the expected and actual expenses and benefits correspond to the following:
- For defined benefit pension plans, the minimum safety margin required is 4% of the uninsured mathematical provisions related to these plans.
- For defined contribution pension plans in which the member assumes the risk of the investment, the minimum safety margin is 0.125% of the technical provisions related to these plans. According to the Second Transitional Provision of Decree 203/2015 of 27 October 2015, this safety margin can be set up for a maximum of ten years, starting in 2017, with a minimum of one tenth per year of its amount.
Based on the aforementioned regulations, each year the Entity must have unencumbered assets covering this safety margin.
45 GEROA PENTSIOAK, ENTIDAD DE PREVISIÓN SOCIAL VOLUNTARIA DE EMPLEO
Notes to the Annual Accounts
The calculations carried out by the Entity for 2019 and 2018 on the statement of solvency margin are as follows:
Thousands of Euros 2019 2018
Mutual Fund 13,513 13,460 Reserves – Safety margin 2,398 2,451 Reserves - Reserve for actuarial risks 7,782 12,551 Reserves - Voluntary reserves 19,101 17,423 Reserves - Reserve for actuarial risks - Pending allocation of shortfall (Note 4) - - Reserves - Voluntary reserves - Pending allocation of shortfall (Note 4) (5,593) (3,091)
37,201 42,794
Technical provisions relating to solvency 2,158,892 1,917,039 Mathematical provisions relating to solvency 78,218 68,492
Total provisions relating to solvency 2,237,110 1,985,531
Legal minimum safety margin - Defined Contribution (0.125% of related provisions) (*) 2,699 2,396 Legal minimum safety margin - Defined Benefit (4% of non-reinsured mathematical provisions) 3,129 2,740
Total safety margin required 5,828 5,136
Safety margin surplus/(shortfall) 31,373 37,658
Taking into account the transition period of 10 years established in the Second Transitional Provision of Decree 2013/2015 of 27 October 2015 (Note 1).
(22) Other Information
Audit fees invoiced by KPMG Auditores, S.L., the firm auditing the annual accounts of the Entity for the year ended 31 December 2019, amount to Euros 27 thousand (Euros 26 thousand invoiced by KPMG Auditores, S.L. at 31 December 2018), which includes the total fees for services rendered during the year, irrespective of the date of invoice.
(23) Events after the Reporting Period
On 11 March 2020, the World Health Organisation declared the outbreak of Coronavirus disease 2019 (COVID- 19) to be a pandemic, due to its rapid spread across the globe, having affected over 150 countries. The majority of governments are taking restrictive measures to contain the spread, including: isolation, confinement, quarantine and restrictions on the free movement of people, the closure of public and private premises (except for basic necessities and health services), border closures and a drastic reduction in air, sea, rail and land transport. In Spain, the government enacted Royal Decree 463/2020 of 14 March 2020, declaring a state of emergency to manage the health crisis triggered by COVID-19, which, a priori, will remain in force for 15 calendar days.
This situation is having a significant impact on the global economy due to the interruption or slowdown of supply chains and the substantial increase in economic uncertainty, evidenced by greater volatility in asset prices and exchange rates, and a drop in long-term interest rates.
46 GEROA PENTSIOAK, ENTIDAD DE PREVISIÓN SOCIAL VOLUNTARIA DE EMPLEO
Notes to the Annual Accounts
The consequences derived from COVID-19 are considered an event after the reporting period that does not require an adjustment in the annual accounts for 2019, but must be disclosed in the annual accounts for 2020.
At the date the annual accounts were authorised for issue, the Entity has not been affected, nor does it expect to be significantly affected, by the impacts of COVID-19.
47
Appendix
GEROA PENTSIOAK, ENTIDAD DE PREVISIÓN SOCIAL VOLUNTARIA DE EMPLEO
Details of Group companies 31 December 2019 and 2018
(Free translation from the original in Spanish. In the event of discrepancy, the Spanish-language version prevails.)
Thousands of Euros Registered Principal % Carrying Dividends Equity (net of) Net 2019 office activity investment amount received Asset surplus/shortfall surplus/shortfall
Orza Gestión y Tenencia Asset de Patrimonios, A.I.E. San Sebastian management 50% 52,443 - 105,253 97,868 7,019 (Spain)
Thousands of Euros Registered Principal % Carrying Dividends Equity (net of) Net 2018 office activity investment amount received Asset surplus/shortfall surplus/shortfall
Orza Gestión y Tenencia Asset de Patrimonios, A.I.E. San Sebastian management 50% 48,934 10 98,256 91,803 6,064 (Spain)
Orza Gestión y Tenencia de Patrimonios, A.I.E. is not listed on the stock exchange.
All amounts shown as dividends received from investments in Group companies during 2019 and 2018 were paid in cash.
This Appendix forms an integral part of note 5(e) to the annual accounts for 2019, in conjunction with which it should be read. Lugaritz Pasalekua 27 20018 Donostia (Gipuzkoa) www.geroa.eus