Employers, singly or as a group, may establish, on a voluntary basis, an occupational pension plan for their employees.

Plans may result from bargaining at the company level between employer and employee representatives. Industry-wide pension plans may be based on a collective agreement between trade unions and employers' associations.

Profession-wide associations of self-employed persons may, on a voluntary basis, establish a pension plan for their members.

All plans: Pension plans*, as a contractual agreement between the plan sponsor(s) and the employees/associations, are not subject to approval. However, the authorization/notification process for pension funds implies compliance with several requirements regarding the pension plan.

Plan membership is voluntary for covered employees.

Pension plans can either be implemented through pension funds or contracts with an insurance company. In the former case, plan sponsors can choose either to establish a closed pension fund or to join an open pension fund through a collective adhesion.

Closed pension funds: Plans may be implemented through the establishment of a closed pension fund.

Closed pension funds may be established at the initiative of employers, either singly or as a group, or by agreement between employers' associations and trade unions. A closed pension fund is only related to the sponsor(s) of this plan. If several employers sponsor a plan to be implemented through the establishment of a closed pension fund, a business or associative connection between them is required. For example, a business connection between employers exists if they belong to the same financial group and an associative connection exists if they belong to the same industry employers' association.

Closed pension funds must be established through a written contract to be signed between the plan sponsor(s) and a pension fund management entity (a pension fund management company or a life insurance company), which must, among other elements, regulate:

- the fund management rules;
- if the plan is contributory, rules for representation of members and beneficiaries;
- rules governing the rights of members upon termination of employment before retirement;
- whether a minimum rate of return is guaranteed and whether the pension fund management entity or the plan sponsor(s) bears the investment risk in this case;
- rules governing the rights of members and beneficiaries in the case of the fund being wound up;
- whether loans can be granted to members.

Also, a management contract must be signed between the plan sponsor(s) and the pension fund management entity, which must, among other elements, regulate:

- the fund's investment policy;
- the maximum management fee.

The pension fund management entity and the plan sponsor(s) must submit a joint request for authorization of the closed fund to the ASF. In the case of a pension fund implementing a defined benefit or hybrid plan, a technical and actuarial plan must also be submitted for authorization. The establishment of closed pension funds financing defined contribution plans which do not result from collective bargaining is not subject to authorization, but it shall be notified to the ASF within 30 days from the signing of the establishment contract.

Open pension funds: Plans may be implemented by affiliating covered employees to an open pension fund (through adhesion) established by a pension fund management entity (a pension fund management company or a life insurance company) through buying units in the open fund. Open pension funds are open to the sponsoring of more than one pension plan, where there are no requirements for business and associative connections between sponsors.

The open pension fund management entity must submit a request for authorization of the open fund to the ASF, together with the management regulations, which must, among other elements, regulate:

- the method for calculating units;
- the fund's investment policy;
- whether a minimum rate of return is guaranteed;
- circumstances under which the fund can be wound up;
- the maximum management fee and the maximum and minimum limits on unit issuance and redemption fees.

Direct insurance: Plans may be implemented through group insurance contracts entered into with a life insurance company.

Besides occupational pension schemes, personal pension schemes are also allowed. They mainly correspond to individual membership of open pension funds (of a defined contribution type) and retirement saving schemes, usually designated as Planos Poupança Reforma (PPR). The latter can be funded by pension funds (in which case they are classified as open pension funds that only allow individual membership), insurance contracts or investment funds.

* Legal definition of "Pension plan (scheme)": the program that defines the terms/conditions stipulating which retirement benefits are granted in old age, disability or also in the event of a surviving family relation, or any other equivalent contingency, in accordance with the provisions of the present diploma (=Decree-Law 12/2006).

All pension funds: Fund assets are managed by the pension fund management entities, which are also responsible for collecting the contributions, benefits administration and investment of fund's assets (see section Institutional framework).

When choosing the composition of the assets, the pension fund management entity must take into account the aims and objectives that should be achieved, especially in terms of appropriate levels of safety, quality, return and liquidity of investments, ensuring compliance with the principles of diversification and dispersion of risks.

The investment policy of a pension fund should be adequate to its specificities, in particular taking into account the type of pension fund, the nature of the benefits covered by the pension plan, the characteristics of the underlying population, the duration of liabilities and the level of funding of the liabilities.

In addition to these general principles, the assets of a pension fund should respect the following prudential limits:

Real Estate: 20% for PPR pension funds, either directly or through investment funds;

Loans: 40% limit for securities lending;

Bank deposits: 20% for PPR pension funds;

Global investment limit in foreign assets:
- 30% limit to investment in a different currency from the one in which responsibilities are denominated (limit can be exceeded if currency risk is hedged);
- 15% limit for investment in assets not traded in a EU or OECD regulated market. For PPR pension funds, the limit is 10% (limit can be exceeded for non-PPR pension funds if relevant credit risk is hedged);

Investment limit in single issuer/issue:
- Investment limit per issuer 10%, or 5% if in companies related to fund's sponsors;
- Investment limit for companies in the same economic group or related with the fund management entity is 20% for non-PPR pension funds and 15% for PPR pension funds;
-10% limit for investment in non-harmonized investment funds (that do not respect Directive 2009/65/CE) for non-PPR pension funds and 5% for PPR pension funds. Investment in a single non-harmonised investment fund is limited to 2%;

Self-investment / Conflicts of interest:
- The fund is not allowed to own securities issued by the pension fund management entity or by companies that are members of its governing bodies or that hold, directly or indirectly, more than 10% of its share capital or voting rights, except if the securities are traded in regulated markets.
- The fund is not allowed to own securities issued by the sponsors or by companies related with them, except if traded in regulated markets.
- The fund is not allowed to own assets issued by companies where more than 10% of voting rights belong to governing bodies of the fund management entity or to people with familiar ties to those governing bodies except if traded in regulated markets.
- The fund is not allowed to own assets issued by a company that shares any constituent of its governing bodies with the governing bodies of the fund management entity, except if traded in regulated markets.

A minimum guaranteed rate of return may be defined in the establishment contract in the case of closed funds and in the management regulations in the case of open funds.

Pension fund assets must be kept by an autonomous custodian, which has the following responsibilities:

- to receive on deposit or register financial instruments and documents representing the assets making up pension funds;
- to maintain up-to-date chronological records of all operations and prepare a quarterly inventory of the items with which they have been entrusted.

In addition, a custodian may:
- undertake the purchase and sale of financial instruments and exercise subscription and option rights;
- collect the earnings produced by the fund's investments and cooperate with the pension fund management entity in carrying out asset operations;
- make payments of pensions to beneficiaries, according to the instructions of the pension fund management entity.

Under specific conditions and remaining responsible towards pension funds, members and beneficiaries, pension fund management entities are allowed to outsource the asset management function to credit institutions, life insurance companies, and investment managing companies as long as they are duly authorized in the EU or OECD and to other pension fund management entities.

Moreover, pension fund management entities are responsible for defining the statement of investment policy and have to take into account the best interest of members and beneficiaries. There is a regulation in place that defines the requirements that the statement of investment policy must fulfill. In practice, for closed pension funds, the plan sponsors have an influence in the determination of the investment policy, as there is a dialogue between pension fund management entities and plan sponsors. A distinction must be made with the open pension funds in which the pension fund management entities are the only ones responsible for the definition of the investment policy, because the pension fund holds several pension plans and their corresponding plan sponsors.

Direct insurance: Occupational pension plans which are financed through insurance contracts are covered by the Solvency II legal framework. PPR insurance contracts are subject to the investment restrictions indicated above for PPR pension funds, without prejudice to the Solvency II legal framework, which is subsidiarily applicable to them.

Where defined benefit plans provide for survivorship pensions, the pension is usually 60 per cent of the deceased member's accrued old-age pension.

In the case of defined contribution plans, survivors usually receive the deceased member's accumulated capital as a lump sum.

The total benefits are usually split between eligible survivors as under the social security scheme.

It is common for defined benefit plans to consider this benefit. The benefit formula is usually identical to the retirement benefit, but based on the service and salary at age of disability. In the case of defined contribution plans, disabled members usually receive the accumulated capital as a lump sum.

All plans: Assets are held by the pension fund management company, or life insurance company, separate from the assets of the sponsoring employer(s).

All pension funds: Pension fund assets may only be used to satisfy pension claims and for paying management and custodian fees. The assets must not be used to meet any other obligations, namely those of the sponsoring employer(s), pension fund management entities and custodians. It is not permitted to offer pension fund assets to third parties as a guarantee or to grant credit on behalf of a pension fund, unless it is a loan to plan members provided for in the plan rules.

Fund assets must be kept by a custodian.

In what concerns the valuation / funding of liabilities for defined benefit plans financed by pension funds:
a) plans are usually funded using the actuarial measure of liabilities compliant with the international accounting standards, i.e. PBO based method (with salary projection), discount rate based on the AA corporate bond yield of appropriate maturity and appropriate mortality table defined by the actuary (‘funding scenario');
b) there is a minimum funding rule of the level of liabilities, established by ASF Regulation no. 21/1996 and applicable to all defined benefit plans, which is based on an ABO type method (without salary projection), with fixed discount rate (4,5%) and a specific mortality table (TV 73/77) (‘minimum funding scenario'). The main purpose of this requirement is to establish a minimum safety net and it does not prejudice the use of more appropriate assumptions in the ‘funding scenario';
c) in addition, for the specific case of pension funds from the banking sector, the applicable sectorial regulation, issued by the Portuguese Central Bank, defines other rules for calculating the amount of liabilities, provided that the resulting amount is not lower than the ‘minimum funding scenario' referred in b).

In case of over-funding, the ASF may authorize the return of the surplus to the sponsor(s). In case of under-funding, the pension fund management entity is responsible for proposing to the sponsor(s) the regularisation of the situation. If, within one year counted from the date of verification of the under-funding situation, a suitable recovery plan has not been established, the management entity should wind up the pension fund or collective adhesion. Within 15 days counted from the date of verification of an under-funding situation of the present expected value of pensions in payment, the management entity should advise the sponsor(s) to make the necessary additional contributions within the deadline of 180 days. If the contributions are not made, the pension fund or collective adhesion should be wound up.

In relation to pension fund management entities, insurance undertakings are subject to Solvency II legal framework.
Pension fund management companies should have a solvency margin and a guarantee fund.

The solvency margin should be calculated according to the following rules:
a) in cases where the management company bears the investment risk, the solvency margin should be equal to 4% of the amount of the relevant pension funds;
b) in cases where the management company does not bear the investment risk, the solvency margin should be equal to:
- 1% of the amount of the relevant pension funds, as long as the amount intended to cover management expenses is fixed for a period of more than five years;
- 25% of the total net administrative expenses of the previous financial year, as long as the amount intended to cover management expenses is not fixed for a period of more than five years;
c) the amount of the solvency margin may not, however, be less than the following percentages of the amount of the relevant pension funds:
- up to 75 million euros - 1%;
- in the excess amount - 0.1%.

The guarantee fund should be equal to one-third of the solvency margin and not lower than 800 thousand euros.

If the solvency margin is found to be insufficient or the guarantee fund is below the minimum defined, the pension fund management company should submit a short-term financing plan to the ASF.

Pension fund management entities must appoint an actuary to prepare separate annual actuarial reports for each defined benefit and hybrid plan managed. The pension fund management entity must submit the reports to the ASF.

Pension fund management entities must submit annual accounts to the ASF. Annual accounts must be duly certified by an auditor and include copies of the management report, balance sheet, profit and loss account and any other financial statements.

Direct insurance: In the case of plans implemented through insurance contracts, the solvency and reporting requirements are those applicable to life insurance companies under the Solvency II legal framework and the national correspondent provisions.

All plans: Custodians must be dully authorized credit institutions or other investment undertakings established in the EU.

Auditors have to be certified according to the "Ordem dos Revisores Oficiais de Contas" (Portuguese Statutory Auditor Association).

Appointed actuaries must be certified and registered with the ASF. In order for this certification to be granted, they must fulfil certain requirements concerning education and professional experience.

All pension funds: The winding-up of a pension fund is subject to the authorization of the ASF.

If a pension fund is wound up and the assets are insufficient to cover the liabilities, the claims are satisfied in the following order:

- management and custodian fees and other expenses relating to the fund;
- in the case of contributory plans, refunds of members' own contributions;
- annuity premiums to guarantee pensions in payment;
- annuity premiums to guarantee the payment of pensions related to members whose age is equal or higher than the normal age of retirement established in the scheme;
- the amount relative to the fully funded value of liabilities resulting from vested rights in respect of which the conditions set forth in the scheme have already occurred at the date of termination;
- the amount related to the fully funded value of liabilities resulting from vested rights in respect of which the conditions set forth in the scheme have not occurred at the date of termination;
- Pensions is formation (accrued rights) of members without vested rights;
- funds accumulated to guarantee the indexation of pensions in payment, provided that it is contractually specified.

The winding-up of a pension fund management entity or a sponsor must not precipitate the winding-up of the fund. Management of the fund by another qualified entity must be guaranteed before a pension fund management entity may be wound up.

Direct insurance: The winding up of insurance companies is subject to the authorization and supervision of the ASF.

All plans: The pension fund management entity (or, if contractually specified, the plan sponsor(s) or the monitoring committee) must provide members with information concerning the plan.

Plan members may lodge complaints about the actions of a pension fund management company or insurance company with the ASF, which will receive, examine and give an opinion on these complaints. The ASF may take legal action in defence of pension fund members' interests.

Initial information to be given to members includes: plan rules, statement of investment policy, copy of the management regulations (in the case of an open pension fund) and main characteristics of the plan (vested rights, portability, fees and risks associated to the pension plan).

Plan members can have, upon request, a copy of annual accounts of the pension fund as well as information regarding their vested rights and an estimate of their future pension benefits (in case of defined contribution plans). On an annual basis, plan members are entitled to receive an annual statement of their accumulated rights or capital, financial situation of the pension fund and access to annual accounts, inter alia.

- EUR 400 per year for persons aged less than 35 years;
- EUR 350 per year for persons aged between 35 and 50 years;
- EUR 300 per year for persons aged more than 50 years.

Taxable income above EUR 7,410 per year: 20 per cent of employee contributions are tax-deductible up to a maximum that varies between 0 and EUR 100, depending on the level of taxable income (these limits are established for the overall tax benefits).

- cover all permanent employees;
- calculate benefits objectively and equally for all members; and
- pay benefits from the social security retirement age.

In plans which comply with these requirements and which do not provide for vesting, employer contributions are tax-deductible up to a limit of 5 per cent of salary (25 per cent if the employee is not covered by the social security scheme). Employer contributions in plans that do provide for vesting are fully tax-deductible.

Employer contributions in plans not providing vesting are not taxable as fringe benefits for employees. Employer contributions in plans providing vesting are taxable as fringe benefits for employees if they exceed 15 per cent of salary (25 per cent if the employee is not covered by the social security scheme).

All plans: Taxable pension income (see below) is exempt from income tax if, together with social security pensions, it does not exceed EUR 4,104 per year. Pension income exceeding this limit is subject to income tax.

Pension benefits are only considered as taxable pension income if the contributions were tax-deductible (employer contributions in plans not providing vesting). If contributions were taxed (vested rights), only that part of the pension which constitutes interest is considered as taxable pension income.

Lump-sum benefits are, for tax purposes, divided into contribution and interest components.

If contributions were taxed (vested rights), the entire contribution component is tax-exempt. If contributions were tax-deductible (employer contributions in plans not providing vesting), one-third of the contribution component is tax-exempt up to the limit of EUR 11,704.70 per year.

If contributions were taxed, the interest component is taxed at 8 per cent. If contributions were tax-deductible, the interest component is taxed at 21.5 per cent on condition that the contributions made in the first half of the contract represent less than 35 per cent of the total contributions, otherwise, the interest component is taxed at 20 per cent if the retiree has been a member for between five and eight years or at 10 per cent if the retiree has been a member for more than eight years. If the retiree has been a member of the plan for less than five years, the interest component is taxed at 25 per cent.