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Under the proposal, pension funds would reportedly be able to value part of their Spanish sovereign debt portfolios at market maturity. The decision to switch from mark-to-market to market maturity would rest with pension fund managers and trustees, who would determine whether such a move were appropriate for their schemes. The proposal, despite being optional, has already caused some divisions between pension funds and trade unions, according to consultants familiar with the situation.
Unlike the mark-to-market valuation, which takes into account the potential risk of a Spanish default by valuing the bond issued at a lower price and higher yield, the market-to-maturity valuation implies that the coupon on the bond will remain exactly the same as the yield, ignoring the potential risk of default.
The government's proposal would therefore aim to incentivise local pension schemes to hold a large portion of their investments in sovereign debt. Pension funds, however, pointed out that this would lead them to prioritise Spanish sovereign debt over other fixed income products such as corporate debt, which traditionally provides a greater risk/return profile.
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