ANNUALREPORT

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ACTUARY`S REPORT

AUDITOR`S REPORT

ANNUAL ACCOUNTS

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31

34

GENERAL INFORMATION

A YEAR OF CHANGES

GEROA: 2016 IN NUMBERS

20 YEARS TOGETHER

GOVERNING BODIES

OUR TEAM

STRATEGIC PLAN

MARKET REPORT

SOCIETY

4

GENERAL INFORMATION

GEROA PENTSIOAK, EMPLOYMENT EPSV, with NIF V20.548.244, began its activity in 1996 and is registered in the Official Euskadi E.P.S.V. Register with the number 178-G.

Registered address:Paseo de Lugaritz, 27 Bajo 20018 San SebastiánGipuzkoa

Telephone: 943 317022Fax: 943 317280www.geroa.eus

The sponsoring members are:ADEGI, with registered address at Paseo Mikeletegi 52, 20009 Donostia-San Sebas-tián, Gipuzkoa

And the trade unions:ELA, with registered address at Calle Consu-lado, 8 - 20011 San Sebastián, GipuzkoaLAB, with registered address at Calle Poko-pandegi, 9 - 20018 San Sebastián, GipuzkoaCC.OO., with registered address at Calle Carlos I, 1 - 20011 San Sebastián, GipuzkoaUGT, with registered address at Calle Cata-lina de Erauso, 7 - Donostia-San Sebastián, Gipuzkoa.

The Organisation's Governing Bodies are composed equally of employers and trade unions.

MISSION

GEROA PENTSIOAK is an employment EPSV comprised, in equal parts, of Employers and Trade Unions, the objective of which is to supplement the state pension of the workers from the companies of the member sectors. With this objective, the contributions, made in the same way during the working life of the workers, are managed by a technical team charged with the duty of managing them in an independent, efficient and sustai-

nable manner in the long term, with the aim of reducing the loss of purchasing power of the pensioners.

VISION

To be an Organisation in which our members feel they play a part and where they value the comparative advantage that it offers them in being able to maintain their quali-ty of life during their retirement, as well as protecting them against situations such as disability and death.

5Independence

Parity

Closeness to Members

Social Commitment an Responsability

Professional approach to the commitments acquired

OUR VALUES

6

A YEAR OF CHANGES01

7

2016 has brought about many changes at GE-ROA, with transformations in practically all areas of the Organisation: in management, adapting to the new regulations; in communication, with the collaboration of a specialised company, and in investments, focusing on Social Responsibili-ty. And all of this without forgetting to achieve a return, which continues to rise, thanks to the tireless work undertaken.

We have just completed a year in which our return reached 5.76%, well above the CPI of 1.6%. A great deal of effort was made during the year to ensure that our members’ savings grew; once again achieving an increase in the value of their money and, therefore, their peace of mind in re-tirement.

At GEROA, in addition to the evident econo-mic achievement, we have also continued with our activities in a number of areas, both to im-prove our management and to better respond to the needs and concerns of our members as well as those of the Basque business community in general and Gipuzkoa in particular.

In accordance with what is set out in the 2016-2018 Strategic Plan, several subjects have kept us occupied during 2016:

MANAGEMENT & COMMUNICATION

In 2016 we faced the ISO 9001 audit, thereby continuing along the path of commitment to ex-cellence in management started a few years ago. A path that we started on four years ago with the adoption of the Advanced Management Mo-del officially announced by EUSKALIT and which will lead us, in 2017, to face an appraisal by that organisation.

Another of our objectives is to maintain sol-vency and minimise the risks for our members. To achieve this, we consider that we should fo-llow a different investment strategy for the wor-kers who are contributing than that followed for those who are already receiving GEROA bene-fits. This has resulted in us implementing im-portant IT changes in order to manage this new operation.

Aware that this work should not remain un-

disclosed and in the aim of achieving greater transparency and satisfaction for our members, during 2016 we also carried out an assessment of our communications and a strategic reflection on how to improve them.

During this process, which included in-depth interviews with people from different compa-nies and with various responsibilities, we tried to understand how people view GEROA. This pro-cess has allowed us to address a series of chan-ges, including, for example, an overhaul of the Organisation’s corporate image. An identity that now better reflects the characteristics and ob-jectives of our Organisation. We have also begun to galvanise communications with our members as well as with Basque society in general.

INVESTMENT

In this area of GEROA and within the Organisation's social responsibility policies, du-ring November we presented 2 new lines of in-vestment to help start-up companies. With a to-tal investment of €5.5M and in accordance with the agreement unanimously adopted by ADEGI, the trade unions and ELKARGI, these lines will become a permanent feature of the Organisa-tion.

They will complement the other two existing lines - ORZA and microcredit loans to entrepre-neurial partners that have been operational sin-ce 2013 and for which the concession procedure has been improved.

More specifically, we have established a new alliance by visiting all the Gipuzkoa Develop-ment Agencies, informing them of the existen-ce of this aid so that they can support us in the task of transferring it to the members who arrive at their offices in search of help in setting up a business. In this way a dual objective has been achieved: on the one hand, a greater and better knowledge of this type of financing and, on the other hand, the arrival of better prepared pro-jects at GEROA, due to the professionalism of these agencies.

REGULATORY ADAPTATIONS

On another note, 2016 was a year in which we

8

worked on adapting our Articles of Association and Regulations as established in Law 5/2012, dated 23 February, concerning Voluntary Social Welfare Provision Institutions.

This same Law includes a section on Good Governance, on which we had already begun to work in advance, following the guidelines of the European legislation, thanks to our direct par-ticipation in PENSIONS EUROPE, the European Federation of Pension Plans. This new legislation is very demanding when it comes to upholding operating policies and procedures for decision making. For this reason we have had to create two new functions, Internal Audit and Risk Ma-nagement, which, although not required until 2018, we decided to bring forward, due to their importance.

GEROA & SOCIETY

Socially Responsible Investment

During 2016 we included the criteria of So-cially Responsible Investment within the GEROA asset selection protocols, which led to the dra-fting of our own policy, reaffirming our com-mitment to society.

This involved a person from our team carrying out an in-depth analysis of the criteria followed by managers of the funds in which we participa-te and breaking down the elements that make up these types of investments.

Moreover, we are signatories of a petition that UNPRI (UN Principles for Responsible In-vestment) has made to the Rating Agencies, in which it requests that they incorporate these cri-teria in their evaluations.

Our work is not restricted to the organisation’s own functions. We always try to add more value to society.

As proof of this, during 2016, as in previous years, two people from the team gave an Ad-vanced Investments course to members of the

Federation of Voluntary Social Welfare Provision Institutions (FEPSV), in the aim of contributing knowledge to the industry.

GEROA also participated, for the second consecutive year, in the Pegasus programme of the Novia Salcedo Foundation, together with ELKARKIDETZA and ITZARRI, offering talks to encourage the culture of forward planning among youngsters, as well as making donations so that the Youth Employment Campaign of the Decade can move forward.

Elsewhere, and also altruistically, two people from the organisation take part in EUSKALIT as external assessors, playing their part in impro-ving management in the Basque business world.

THE TEAM

At a more internal level and continuing with our commitment to the professional improve-ment of GEROA workers, we have tackled a new training plan focused on the development of skills, which completes and improves their work profile, allowing us to offer a better service.

The recognition given by the Fund Society to our investment director, Ramón Nieto, as one of the 100 best fixed income managers in the world, is also noteworthy and a source of pride.

A year of hard work, initiatives and good news, which spurs us on to continue trying to make Voluntary Social Welfare Provision an in-creasingly widespread and beneficial reality, not only for our members but also for the business community and Basque society in general.

All of this has been in response to GEROA’s concerns about getting closer to our members so that they understand our Mission and our distinct qualities, as well as our efforts to foster pride in belonging to an Organisation that works for and on behalf of them.

9

02 2016 IN NUMBERS

10

(1 in every 3 workers in Gipuzkoa)

105,235ACTIVE MEMBERS

COLLECTIVE

149,558DEFERRED MEMBERS

1,763PASSIVE MEMBERS

42.79 YEARSAGE

67% 33%MEN WOMEN

604BENEFICIARIES

83.4MILLION €

(∆ 0.9%)

CONTRIBUTIONS COMPANIES

CONTRIBUTIONS

20DIFFERENT

SECTORS

47.99

TO 3,126

YEAR 2016For €1,891,241

YEAR 2017

MEMBERS

BENEFITSWITH ADDITIONAL

CAPITAL

MINIMUM AMOUNT OF

ANNUITY

OUTGOINGMOVEMENTS

MILLION € 42.91 IN CAPITAL

5.08 IN ANNUITIES WITHOUTINCOMING MOVEMENTS

2,421 Retirements351 Total Per. Disab.

160 Absol. Per. Disab.6 Severe Invalidity

188 Death

€9,790,476of wich

€3,763,913 is additional capital

343€166

110

€168

PRESTACIONES

BENEFITS

( 0.52%)9,390

11

ATTENTION IN EUSKERA

85%

SATISFACTION

89%OF OUR MEMBERS

RECOMMENDEDGEROA

THE HIGHESTSOLVENCY MARGIN

IN EUSKADI

52%

COMMITMENT WITH OUR MEMBERS

AVERAGE SUPPLIER PAYMENT PERIOD (A.S.P.P.) = 1

0.12%ADMINISTRATION

COSTS

0.24%THIRD PARTY

FEES

0.02%BROKERAGE

RATE

50.47%TURNOVER

RATIO

GEROACOMMITTED TEAM

20PEOPLE

1,813MILLION €

(∆ 7.2%)

FUND SIZE

FUND SIZE

€32,381

PROFITS€13,977 (40%)

CONTRIBUTION€18,404 (60%)

(Average savingsof a worker since 1996)

INVESTMENTS

DIVERSIFICATION

ONE OF THE ONLY 10 SPANISH

PENSIONS FUNDS

SUPPORTING UNPRI

SOCIALLYRESPONSIBLEINVESTMENTS

12%

INVESTMENTIN EUSKADI

59%30%

11%

IN FIXED INCOME

IN EQUITIES

OTHER

6.48%RETURN FROM

THE OUTSET

AGAINST A CPIOF 2.28%

5.76%AGAINST A CPI

OF 1.6%

RETURN2016

2.50%FIXED INCOME

2.45%EQUITIES

0.81%OTHER

Contributionby Assets

12

GEROA, 20 YEARS TOGETHER03

13

During its 20 year history, GEROA has undergone many changes and transformations. Changes that we have always addressed with the principal goal of supplementing the pensions of our members, encouraging the cultu-re of forward planning and playing our part in promoting the Basque industrial community.

We can find the seed from which GEROA grew back in 1970. That was the year in which the “Complemento Sidero” (Iron and Steel in-dustry Supplement) was created, a contribution made by workers and companies in order to supplement the iron and steel workers’ pensions which fell short of the Minimum Inter-professio-nal Salary.

Years later, in 1995, the Toledo Pact was sig-ned to address the problems arising from the changes foreseen in the population figures that would have repercussions on Social Security in the future.

Based on these two foundation stones, GE-ROA was created in 1996 using the Complemento Sidero surpluses, since, at that time, the majority of workers fortunately retired with an amount in excess of the MIS.

Learning from the best practices for supplementary pensions which were those that existed in northern Europe, ADEGI and the ELA, LAB, CC.OO and UGT trade unions reached a joint agreement, via collective bargaining, for the creation of this iron and steel EPSV, the baseline sector for Gipuzkoan industry. In the first year, it should be noted that this sector had subscrip-tion contributions of 1.50%. Nowadays, these have increased to 4.60%.

Until that time, only some large companies applied this formula and therefore GEROA be-came the flagship throughout Spain for pension plans at industry level. Subsequently, there was a stream of new partners up to 2010 when it rea-ched the current 20 sectors, thus, extending the provisions that today are proving to be so ne-cessary.

FIRST STEPS

One year after GEROA started up, an occupa-tional accident risk benefit was included so that, in the event that it resulted in absolute disabili-ty, major invalidity or death, the member would receive a fixed amount of 1,000,000 pesetas. This change was the first step in supplementing unexpected events during working life.

In accordance with the regulations in force at any time, most of GEROA's investments are made in listed markets but in 1999 and in com-pliance with another of our main objectives of promoting the industrial community, GEROA be-gan to make direct investments In Basque com-panies.

In addition, in the same year and in order to offer better care for the growing number of members and to accommodate a management team in line with the project, GEROA changed its location.

CONTINUALLY EVOLVING

In the year 2000, to provide greater cove-rage, the Organisation's Articles of Association were amended, with effect from 2001, to include Addi-tional Capital in the disability and death in service benefits of working members. With this approach, GE-ROA takes responsibility for what the member would have contributed un-til the moment of his/her retirement,

whether or not it involved an accident. Up to now, more than 70 million euros have been paid out for this item, which is highly valued by the Organisation's members.

In line with the idea of becoming a true supple-ment to the state pension that is paid monthly, in that same year, the payment of benefits in the form of inco-me was incorporated, thus compensating the loss of purchasing power of our pensioners.

The additional capital of

the benefits reached more

than 70 million euros

38,706 benefits have been generated for an amount of 466 million euros

14

Thus, in 2002, two important decisions were made that reinforced the boost to income. Firstly, they were revalued for the first time in 2003, with it being noteworthy that, to date, their va-lue has increased by more than 40%. Secondly, a Reserve was created which guaranteed the pa-yment of benefits for all the GEROA members who achieve 25% of the annuity commitments, a solvency well above the 4% required by law, a true milestone in the history of the Organisation.

GEROA's efforts are not limited to just its members, which is why, in the same year, the constitution of ORZA was addressed within the alliance with ELKARKIDETZA. ORZA is an asso-ciation for channelling investment outside the listed markets. One of the strengths of ORZA is that, in addition to investing in business projects primarily in the Basque Country, it also offers help and support for managing them. Due to the strength of this alliance, ORZA has not only con-solidated, but is also expanding its business lines to also include smaller business projects.

OPENING UP MORE PATHS

2009 was, without doubt, a year of technological changes for GEROA and its associated companies. Specifically, it was the year in which the Orga-nisation began the system of collecting contributions via

bank direct debits.

This was a very important improvement that dramatically improved the operational speed of the system for both the companies and the Or-ganisation itself.

Since its inception, GEROA had focused on the most developed countries in terms of pen-sions because it wanted to learn about the expe-rience of other similar organisations, both locally and internationally. Specifically, since 2010, GE-ROA has been involved in PENSIONS EUROPE, a European Pension Fund Association, which has made it possible to share all the information in a timely and up-to-date manner and to anticipate

the activities carried out in the countries leading on matters of social welfare provision.

In the same vein, the GEROA Director has held the vice presidency of the Basque Federa-tion of EPSV since 2011, which involves having both a voice and a vote in the area of social wel-fare provision at regional level as well as sharing the experiences learned. In fact, in 2016, the Bas-que Social Welfare Provision Council was crea-ted, in which GEROA presides over the EPSV employment group, which, in addition to being an honour, means being at the epicentre of de-cision making as far as social welfare provision is concerned.

CLOUDS ON THE HORIZON

2013 was a complicated year for GEROA, a consequence of the activation of the Labour Re-form, promulgated in 2012.

After numerous meetings, discussions, dis-putes and comings and goings, employers and unions finally agreed to maintain the mandatory contributions for all sectors that were members of GEROA.

Thus, contributions have continued to be made normally, although their volume has de-creased due to the underlying economic situa-tion in recent years.

The ignorance of many companies and wor-kers about the operating model of GEROA has caused insecurity. For this reason and in the same year, GEROA decided to carry out a sig-nificant improvement in the management area and began its journey towards implementing the EUSKALIT Advanced Management Model.

The economic crisis also had implications for GEROA, since many of the workers making contribu-tions to the Organisation became unemployed. This generated a debate within GEROA on the advisabili-ty or not of incorporating Unemployment Benefit.

More than 9,000

companies make monthly contributions

39% of a member's equity contributed since 1996 corresponds to the profits

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After a thorough analysis and relevant discus-sions with both LANBIDE and the State Employ-ment Service (SEPE), it was concluded that the incorporation of the GEROA Benefit would en-tail the suspension of the Employment Service economic aid (RGI) for all its members, including those who did not request it, causing an overall loss. Thus, to offer an alternative during this in-terruption to working life, it was agreed to open up a line of Microcredit loans with advantageous conditions for all unemployed GEROA members who had a business idea, in order to help them to get started.

RECOGNITIONS AND CHANGE OF MODEL

This being the case, in 2014 GEROA received the Prize for the Best Spa-nish Pension Fund, awarded by the prestigious magazine, IPE (Investment & Pensions Europe: leading European publication on pensions), in recognition of its pioneering role as an industry organisa-tion, emphasising its good management and low costs.

In a more internal environment and con-tinuing with its desire to improve, GEROA ob-tained both the ISO 9001 Certification and the Diploma for Commitment to Advanced Manage-ment, indicating the well-chosen path taken by the Organisation in achieving this management model.

The model for paying annuities, in force un-til then, aroused distrust among GEROA pen-sioners, in the belief that they would die before receiving all their rights. Benefiting from the re-lationships maintained at international level and after analysing systems in other countries such as Denmark and Chile, in 2015 a change was made in the manner of paying benefits, moving to a system of temporary annuities. In this way the members or their beneficiaries would always receive all of their savings.

OTHER ALLIANCES

Also in 2015, GEROA, together with ITZA-RRI and ELKARKIDETZA, signed a collaboration agreement relating to the PEGASUS Programme that works for the promotion of youth employ-ment. Since then, GEROA has not only participa-ted by offering talks to encourage the culture of forward planning but also by making donations that help to carry this programme forward.

Continuing with GEROA’s social commitment, at the end of 2015 the Organisation joined UN-PRI (UN Principles for Responsible Investment), which requires investments to be based upon social responsibility criteria.

Continuing along this path, and reinforcing its commitment to support the entrepreneurship and innovation of Gipuzkoan companies, at the end of 2016 GEROA, in collaboration with ADEGI, the trade unions and ELKARGI, presented 2 new areas of activity: firstly, investing in the capital of these new companies and, secondly, supporting them to continue and establish roots.

This broad range of views that the social re-presentatives (ADEGI and the 4 trade unions) showed at the time, their good work and understanding during the Organisation's 20 years of history, and the uncea-sing work of a team that began with 6 people and which now numbers 20, have allowed GEROA to not only become the leader of industry-based social wel-fare provision at national level, but also to be used as an example in several European countries as a lever for the local economy, due to it dedicating part of its assets to investments in Basque com-panies.

To 20 more years working for our members, FOR YOU.

The average return is 6.48%,

ahead of the cpi of 2.27%.

thus, the first 6 euros invested, are worth more

than 22 today More than 250,000 members

Of which more than 100,000 are active,

1 in every 3 workers in Gipuzkoa

16

The Governing bodies are the General As-sembly and the Governing Board and they are composed equally of the Adegi Employers’ As-sociation and the ELA, LAB, CC.OO. and UGT tra-de unions.

These were the various positions in 2016:

President:

Joseba Villarreal Olaizola(ELA representative)

Vice President:

Nerea Zamacola(ADEGI representative)

Secretary:

Oihan Ostolaza(LAB representative)

Treasurer:

Patxi Sasigain(ADEGI representative)

GOVERNING BODIES

None of the members of the Governing Bodies receive remuneration for their representation in the Organisation.

BOARD OF DIRECTORS

UGT 1

LAB 4

CC.OO. 2

ELA 6

ADEGI 13

GENERAL ASSEMBLY

UGT 4

CC.OO. 8

ELA 25

LAB 16

ADEGI 53

04

17

One of the basic pillars of GEROA is its hu-man team.

At GEROA, the knowledge, skills and abilities of its people are a differentiating element and it therefore seeks to offer its employees the possi-bility to train and to develop a professional ca-reer within the Organisation.

OUR TEAM

The objective is to have an established and qualified team to perform the services that the Organisation offers its members.The proof of this is that training is the factor most valued by the staff themselves.

19

21%

79%

41.21 years

100%

42%

84%

68.42%

876

42%

20

25%

75%

42.05 years

100%

40%

85%

80%

879

40%

2015 2016

Staff

% Men

% Women

Average age

% Indefinite contracts

% With higher degree

% Bilingual staff

% Start who have participated in training sessions

No. of hours training

% Part-time staff

05

On another note, in 2016 the BOGA team was established, comprising the organisation's leaders, responsible for the company's main operational and functional processes, the mission of which is to manage and lead the Strategy and Continuous Improvement of all the Processes systematically, impro-ving external communication with members and internal communication and relationships.

18

STRATEGIC PLAN06

19

Our strategic plan for 2016-2018 has several fundamental pillars:

Continuous Improvement:

We continue with our commitment to Quality and in 2016 we retained our ISO certificate. We are also making progress with the Euskalit Ad-vanced Management Model, aiming to become recognised in 2018.

Regulatory Adaptations:

The publication of the new Regulation under the EPSV Act has forced us to adapt our own Articles of Association and Regulations, as well as to redefine some of the key functions of the Organisation in order to adapt to the new regu-lations on risk management.

Communication:

After a thorough analysis, we have realised that our members do not understand the cha-racteristics of our Organisation or the purpose of it. For this reason we have begun to work on this, in collaboration with a specialist company.

Our staff:

Training is one of the cornerstones of our Organisation and we have therefore been wor-king to define a systematic training plan aimed at offering good service to our members at all times. We have also added an extra person to our team.

GEROA and Society:

In this area we are working in two fields, the first of which is promoting the Basque Industrial community and, with this in mind, we have sig-ned a Collaboration Agreement with ELKARGI and another with the Gipuzkoa Development Agencies to finance various business projects. Secondly, we want to promote the culture of forward planning and for this reason we conti-nue to participate in the PEGASUS Programme with the Novia Salcedo Foundation and to share our knowledge as speakers on the EPSV Federa-tion courses.

Socially Responsible Investment:

Continuing along the path started in 2015 when we joined UNPRI, in 2016 we included the Principles for Responsible Investment in our as-set selection protocols and we are developing our own PRI policies.

Separation of portfolios with differentiated risk profiles:

In our quest to maintain the highest solvency standards, one of our concerns when faced with a scenario of low interest rates was to manage the investment portfolio for members who are receiving payments differently from those who are still in the accumulation period, since their risk profile is different. To achieve this we have had to adapt our regulations as well as our IT processes and investment strategies.

07

20

MARKET REPORT

21

EQUITIES

EurostoxxGermany

FranceSpain

ItalyUK

USAJapan

Global

0.70%6.87%4.86%-2.01%10.20%14.43%9.54%0.42%5.32%

PERFORMANCE OF THE INDICES

FIXED INCOME

German BondFrench Bond

Spanish BondItalian Bond

UK BondUS Bond

Japanese BondGlobal Index

EU Credit

4.31%3.81%5.52%0.77%7.55%0.84%1.88%2.94%3.33%

CURRENCIES

DollarYen

Sterling

3.32%6.18%13.47%

RAW MATERIALS

OilGold

AgricultureMetals

54.98%7.13%2.10%19.92%

MARKET TRENDS

The year began very abruptly with a very significant drop in the financial markets, mainly

in the emerging countries and in raw materials given the fear caused by lower growth by Chi-na. Global growth was revised downward, the US Federal Re-serve deferred the interest rate hike and the European Central Bank extended the incentive programme until interest rates

became negative and many of the government curves in the short term were left at that level. The fear of the possibility of global deflation te-rrified the markets.

In June, an unforeseen event occurred; the result of the referendum on the departure of the United Kingdom from the European Union,

known as Brexit. The British electorate, by a small margin, decided to leave the Euro-pean Union as provided for in the Treaty of Lisbon. The tremor that shook British po-litics was of such magnitude that the main leaders of the parties presented their resig-

nations, starting with the prime minister, Came-ron. A 2-year negotiation period will begin once Article 50 of the Lisbon Treaty is requested. This request is expected to take place in March

2017. According to all indications, Brexit will be "tough" and will involve the exit of the United Kingdom from the single market.

The year closed with the reality of another unexpected event that had been considered low probability - the victory of Trump in the United States elections. The victory of the most anti-establish-ment candidate has added a great deal of uncertainty regarding his mandate, in terms of changes in world trade, international relations, interest rates, relationship with the FED, etc., etc. Also, questions about the interfe-rence of Russia's secret services in the United States elections have added even more doubts concerning the future of the administration of the first world power.

In any event, since Trump's victory the mar-ket has reacted very positively. There has been a huge turnover of assets, indicating greater growth and more protectionism. His idea of abandoning a multilateral policy and focusing on "America first" will cause friction with natural partners such as Western Europe. He supports Brexit in a clear way and it remains to be seen whether threats against free trade agreements such as NAFTA and TPP will be carried out or not.

22

With respect to the Fixed Income return va-lued at market price and subject to volatility, the organisation has been reducing the assets with the worse profitability-risk combination, mainly reducing the ultra-long government bonds which, due to their low profitability and excessive dura-tion, imply a risk that is not offset by its profita-

The performance of the investment portfolio has been positive, at 5.76%.

The Organisation's compound return since in-ception is 6.48%.

OUR PORTFOLIO

The volatility of net asset value during the fiscal year was 7.33%. The Sharpe ratio, a mea-sure which calculates risk-adjusted return, is 0.79. In a model portfolio with similar charac-teristics, the target return would be 3.71%, the volatility 6.40% and the Sharpe would be 0.58.

Managing the year to minimise the risks and the work of the managers has borne fruit; the Alpha generated by them amounted to 3.50% compared to the model portfolio. As an example of the above, the internally managed portfolios give the following result: in Variable Income the return was 11.67%, not including options hed-ging, while Internally managed Fixed Income was 5.12%.

2016 PROFITABILITY BREAKDOWN6.00%

5.00%

4.00%

3.00%

2.00%

1.00%

0.00%0.33%

0.59%

1.58%0.57%

2.50% 0.19% 5.76%

SHORTTEAM

FIAT MATURITY

FOMKT TO MKT OTHER EQUITY

PRIVATEEQUITY TOTAL

8.00%PROFITABILITY

6.00%

4.00%

2.00%

0.00%

-2.00%

-6.00%

-4.00%

-8.00%31/12/15

“OU

T” w

ins

Trum

p w

ins

3.71%

BENCHMARK

BrexitFear of a “Crash” in China US Elections

31/01/16 29/02/16 31/03/16 30/04/16 31/05/16 30/06/16 31/07/16 31/08/16 30/09/16 31/10/16 30/11/16 31/12/16

GEROA5.76%

• Equity Cover• Reduce financials• Increase in industrial materials, consumer and low

• Reduce Fixed Income• Cover Roll Over• Short Term Structures• Increase Telecoms• Reduce Real State• Increase emerging F.I. and equities

• Allocations• Increase Financials materials• Cover Roll Over• Purchase of callable bonds• Increase emerging F.I.

PORTFOLIO BREAKDOWN

EQUITY

OTHER

MKT TO MKT F.I.F.I. AT MATURITY

PRIVATE EQUITY

TOTAL FIXED INCOME

SHORT TERM F.I.

59.22% 30.99%

12.57%

15.66%29.80%

6.85%4.13%

23

bility. The Organisation rotated bonds with issuer repurchase options that provide a greater return with a shorter duration. Exposure to emerging markets increased in both local currency and do-llar currency.

In the Equity section the year had several pha-ses; in the first part of the year the weighting of the financial sector was reduced and was increa-sed in cyclical securities. By contrast, during the second part of the year, positions were taken in the financial sector in the face of the new interest rate forecast. Exposure to the real estate sector was reduced and replaced by other sectors such as infrastructure and telecommunications.

The geographical exposure in variable income was similar to that of other years, mainly in Europe and the USA.

Investment in foreign currency was approxi-mately 10%, mostly in dollars, with the remaining 90% being in euros. The Organisation was very proactive when covering positions in foreign cu-rrencies for the purpose of limiting risks.

The investment portfolio stood at 1.795 billion euros at the end of the financial year, including liquidity and the amount committed in Futures and excluding accrued and uncollected interest. Investment in Basque Country and Navarre secu-rities amounted to 12%.

The criterion used for the valuation of the Organisation's Investment Portfolio is that of fair value or market value, except for a percentage of fixed income that amounted to 12.57% at year-end.

The Organisation also committed to Socially Responsible policies in its investments for each type of asset in which GEROA invests. Non-fi-nancial aspects were incorporated into the in-vestment decision-making by using exclusion strategies, "Best in class" and minimum require-ments for environmental, social and good gover-nance criteria.

As a new approach and due to the high vola-tility expected, at the beginning of the year the organisation established a hedging strategy with options to hedge part of the portfolio. The result was good and represented approximately 0.50% of the total return, having also contributed to re-ducing the total risk of the portfolio.

Regarding Direct Investment, the organisa-tion invested 2.51% of the portfolio in ORZA AIE.

GEROA PENTSIOAK EPSV has a 50% stake in the organisation that was set up to invest in Basque companies.

During 2016, Orza made investments to a value of: 7.7 million euros.

The company Orza AIE is valued at cost, less the provisions for valuation adjustments, plus rea-lised and unrealised capital gains.

Lastly, and in accordance with its commitment to Gipuzkoa society, GEROA expanded its direct investment line, defining a specific strategy for in-novation and new companies in Gipuzkoa with the collaboration of Elkargi.

FORECASTS FOR 2017

2017 has begun with a great deal of political uncertainty due to the arrival of the new Ameri-can administration. The first moves of the Trump administration appear to be protectionist measu-res. How all of this will affect world trade will be very important. In Europe we face several political events, mainly elections and Brexit, and these will be crucial.

Furthermore, the outlook of the European eco-nomy is improving very gradually, while the Ame-rican economy is in the process of normalisation and an increase in interest rates. The actions of the central banks will not be so important and they will be tending towards normalisation and a with-drawal of incentives. The fixed income return is still low and has to be compensated for by higher risk assets, which complicates the manager's work since, on the one hand, it is difficult to predict the objective return and, on the other hand, an en-vironment of low volatility implies a danger of over-valuation of financial assets in general. Some markets, like the American one, are at highs. The benefits that are discounted in 2017 for American companies are around 13%, compared to 10.50% for European companies. The return that the mar-ket discounts for this is 13%, compared to 10.50% for European companies.

24

SOCIETY08

25

GEROA maintains a firm commitment to So-ciety, working in several areas:

CONTRIBUTION TO PROMOTING YOUTH EMPLOYMENT AND A CULTURE OF FORWARD PLANNING

Due to a colla-boration agreement with the Novia Sal-cedo Foundation to

participate in the PEGASUS Project, along with two other EPSVs, Elkarkidetza and ITZARRI, GEROA gave 11 lectures on the various pension systems in existence. In addition, it participated financially in this programme to support youth employment.

On another matter, 2 people from our team took part as speakers in the EPSV's inves-tment management workshop, organised by the EPSV Federation.

DEVELOPMENT OF THE BASQUE INDUS-TRIAL COMMUNITY

In this regard, there were two notable miles-tones in 2016. Firstly, the signing of an agreement with ELKARGI for provi-ding Capital to new com-panies and, secondly, the redefining of the proto-col for granting micro-

credit loans to entrepreneurial members, having reached an agreement with the Gipuzkoa Deve-lopment Agencies to improve communication and receive better prepared projects.

IMPROVING MANAGEMENT

GEROA collaborates and supports the im-provement in the competitiveness of Basque companies through the participation of two of its employees in the Euskalit Evaluation Club. In

this way it shows its willingness to share its

knowledge, experience and know-how, which is fundamental in helping other Basque organisa-tions to be more effective and efficient, offering an external, expert and independent view. They participated in 2 complete Evaluations and a comparison during 2016.

COMMITMENT TO EUSKERA

We renewed the Bai Euskarari, Zerbitzua euskeraz certificate for another year.

We continue working so that all our professionals can speak to members and others in Euskera. In this regard, 4 of our emplo-yees attended Euskera courses during 2016, one of them having obtained the EGA qualification.

SOCIALLY RESPONSIBLE INVESTMENT

GEROA PENTSIOAK EPSV has been a signa-tory to the 6 Principles for Responsible Investment, promoted by the United Nations, since December 2015. These principles are intended to help institu-tional investors integrate environmental, social and good governance matters into their decision-making processes and asset ma-nagement practices, the-reby improving long-term results.

By signing these Principles, GEROA PENT-SIOAK EPSV publicly commits to their adoption and implementation. With this in mind, in 2016 we established the policies of Socially Respon-sible Investment by the organisation and we are convinced that this will improve our ability to meet the commitments made to our members and that our investment activities are more in line with the wider interests of society.

GEROA PENTSIOAK EPSV is a signatoryto the united nations principles for responsible investment (unpri)

26

UNPRI UNDERTAKINGS

1. We will incorporated ESG issues into our inves-tment analysis and decission-making processes.

2. We will be active owners and incorporatedESG issues into our ownership practices and po-licies.

3. We will seek appropriate disclosure on ESGissues by the entities in wich we invest.

4. We will promote the acceptance and imple-mentation of the Principles within the investment industry.

5. We will work together in order to enhance oureffectiveness in implementing the Principles.

6. We will report our on our activities and pro-gress towards implementing the Principles.

VOTE AT SHAREHOLDER MEETINGS

Direct vote at 61 shareholder meetings of the companies in wich we invest.

We have represented the interests of our partners, always ensuring the long-

term sustainability of the company and always working to environmental,

social and governance criteria.

DEPOSITS, CURRENT ACCOUNTS, SAVINGS ACCOUNTS, TERM DEPOSITS, CURRENCIES AND THE LIKE100% of the entities have their head offices in EU countries.100% of the cash has a rating of more than 70 in the Sustai-nalytics or RobecoSAMrankings.(We do not have data for 8.41%)

FIXED INCOME FROM PUBLIC DEBT AND GOVERNMENT AGENCIES100% issued by countries with a high or very high Human Development Index (HDI) according to the United Nations.

STRUCTURED PRODUCTS AND DERIVATIVESMore than 90% of the investments have a rating of more than 70 in the Sustainalytics or RobecoSAM rankings.(We do not have data for 12,66%)

ENTERPRENEURSHIP AND INNOVATIONUndertaking to invest €5.5 million in a fund for StartUps in Gipuzkoa.

FIXED INCOME CORPORATE CONVERTIBLES OR EQUITY100% issued by countries with a a high or very high Human Development Index (HDI) according to the United Nations.

More than 87% of the investments has a rating of more than 70 in the Sustainalytics or RobecoSAMrankings.

(We do not have data for 24,61%)

We do not invest in tobacco, pornography or gambling.

FUNDS, ETF AND INVESTMENT THROUGH CAPITAL RISK ENTITIESMore than 97% is invested through management entities which incorporate environmental, social and governance factors to their investment and management policies.More than 85% is invested through management entities that are signatories of the United Nations Principles for Responsible Investment (UNPRI).ORZA: Investments in the business fabric principally in Gipuzkoa, Bizkaia, Araba and Navarra. Investment in innovation, biotechnology, energy efficiency companies, etc.

INICIATIVES

Collaboration with UNPRI on the “PRI statement on ESG in Credit rating” initiative to ask the leading ratings

agencies to incorporate environmental, social and governance factors to their

rankings.

SOCIALLY RESPONSIBLE INVESTMENT (GEROA PENTSIOAK EPSV data at 31st December 2016)

Signatary of:

*: Sustainalytics or RobecoSAM ranking; measure and compare the companies' environmental, social and governance criteria.

27

09 ACTUARY'S REPORT

ELKARGO PROFESIONALA / PROFESSIONAL ASSOCIATION A 020641

PRELIMINARY_____

Euskal Herriko Unibertsitatea / University of the Basque Country, has been commissioned by GEROA E.P.S.V. to provide a valuation of their pension commitments as at 31.12.2015, based on the new wording of the Regulations of the Organisation, approved by the Board of Governors on 23 March 2010 and ratified at the Ordinary Assembly on 16 April 2010.

To this end, this organisation has provided us with the financial and personal data necessary to carry out this study.

BENEFITS EVALUATED_

In accordance with the specifications of the regulations, we distinguish between pensions due before and after 1 May 2010:

1) Pensions due before 01/05/2010:

All are actuarial Annuities: Annuity that implicitly entails some condition of survival for its payment. They may be

a) Lifetime annuities without reversion.

b) Lifetime annuities with lifetime reversion in favour of the spouse of 50% of the

amount of annuity currently payable.

c) Lifetime annuities with temporary reversion in favour of children under 25 years of

age of 9% of the amount of annuity currently payable for each child with a limit of

50%.

All annuities are monthly and constant.

2) Pensions due from 01/05/2010:

All are actuarial annuities: Annuity that implicitly entails some condition of survival for its payment. They may be

28

ELKARGO PROFESIONALA / PROFESSIONAL ASSOCIATION A 020642

a) Lifetime annuities without reversion.

b) Lifetime annuities with lifetime reversion in favour of the spouse of 60% of theamount of annuity currently payable.

All annuities are monthly and constant.

For annuities due from 01/05/2010 only, which does not have any right to reversion, the right to a capital payment on death is recognised for an amount equal to a percentage of the mathematical provision calculated for the original annuity at the time of death when it occurs in the first six year of income. The percentage to be applied to the mathematical provision will be:

• 60% for death during the first year of the annuity• 50% for death during the second year of the annuity• 40% for death during the third year of the annuity• 30% for death during the fourth year of the annuity 20% for death during the fifth

year of the income• 10% for death during the sixth year of the annuity

Those people who are receiving a lifetime annuity as a result of a reversion will not be entitled to payment of a capital sum.

CENSUS DATA_

• Number of liabilities: 2,146 (1,517 men and 629 women).

• Average age: 59.53 years.

29

ELKARGO PROFESIONALA / PROFESSIONAL ASSOCIATION A 020643

ACTUARIAL FINANCIAL HYPOTHESES_

• Reference date: 31/12/2016. • Survival Table (income): PERM/F-2000C published in the Insurance and

Pension Funds General Directorate resolution dated 3 October 2000• Mortality Table (capital death benefit): GKM/F-95 • Technical interest rate: 2.5% annual net cash. • Growth in pensions: 0%

VALUATION_

The total current value of specified pensions valued at 31/12/2016 is:

Total monthly pensions: € 284,515.96 (including the revaluation of 1.26% for this year)

Current Pensions Value at 31/12/2016: € 70,947,844.54

This current value includes the value of any commitments in respect of the capital guaranteed in case of death of the annuitant (€ 48,087.65).

An annex is attached that includes the individual details for the valuation attributable to the income.

The actuary is at the disposal of GEROA E.P.S.V. to provide any clarifications or explanations that may be deemed appropriate.

AITOR BARAÑANO ABASOLO

Chartered Actuary No.70 of the Association of Actuaries of the Basque Country

Bilbao, 10 January 2017.

30

31

10 AUDITOR'S REPORT

32

33

34

11 ANNUAL ACCOUNTS

GEROA PENTSIOAK, ENTIDAD DE PREVISIÓN SOCIAL VOLUNTARIA DE EMPLEO (previously, GEROA PENTSIOAK, ENTIDAD DE PREVISIÓN SOCIAL VOLUNTARIA) Annual accounts and Administrators’ Report for 2016

35

Note 31.12.2016 31.12.2015 A) ASSETS A-1) Cash and cash equivalents 9 179,649 173,370 A-2) Liquid financial assets held for trading 9 - 1,224

III. Derivatives - 1,224 A-3) Other financial assets at fair value through profit or loss 9 1,356,530 1,141,395

I. Equity instruments 805,983 679,366

II. Debt securities 492,712 447,234

III. Hybrid financial instruments 57,835 14,795 A-4) Financial assets held for sale - - A-5) Loans and receivables 9 29,542 34,047

I. Debt securities 270 455

III. Deposits in credit institutions 26,061 25,038

V. Credits for operations of social welfare 238 224

IX. Other loans 2,973 8,330

A-6) Held-to-maturity investments 9 241,324 320,520 A-7) Derivatives held for hedging - - A-8) Reinsurers’ share of technical provisions 11 - -

IV. Other technical provisions - - A-9) Property, plant and equipment and investment property 8 548 536

I. Property, plant and equipment 548 536 A-10) Intangible assets 7 31 11

III. Other intangible assets 31 11 A-11) Investment in group companies and associates 9 45,020 42,219

III. Investments in associates 45,020 42,219 A-12) Tax assets - - A-13) Other assets 92 38

A-14) Assets held for sale - - TOTAL ASSETS 1,852,736 1,713,360

(*) Presented only and exclusively for comparison purposes.

36

Note 31.12.2016 31.12.2015

A) LIABILITIES A-1) Financial liabilities held for trade - 51

A-2) Other financial liabilities at fair value through profit and loss - - A-3) Debts and payables 9 2,535 497

IV. Debts for reinsurance transactions 262 123

IX. Other payables 2,273 374 A-4) Derivatives held for hedging - - A-5) Underwriting reserves 11 1,812,874 1,683,176

III. Reserve for pension activities 1,812,874 1,683,176 Mathematical reserve 70,954 71,887

Reserves linked to defined contribution plans in which the member assumes the investment risk 1,741,920 1,611,289 IV. Claims reserve - -

V. Profit-sharing reserve - -

VI. Other underwriting reserves - - A-6) Non-Underwriting reserves 12 47 47

IV. Other non-Underwriting reserves 47 47 A-8) Remaining liabilities - - A-9) Liabilities linked to assets held for sale - - TOTAL LIABILITIES 1,815,456 1,683,771

B) EQUITY B-1) Members’ funds 10 37,280 29,589

I. Members’ fund 15,911 15,911 III. Reserves 13,673 19,920 V. Profit from previous years - - VI Other contributions - - VII. Profit of the year 7,696 (6,242) VIII. (Equalization reserve) - - B-2) Measurment adjustments - - B-3) Received subventions, donations and legates - -

TOTAL EQUITY 37,280 29,589

TOTAL EQUITY AND LIABILITIES 1,852,736 1,713,360

(*) Presented only and exclusively for comparison purposes.

37

Note 2016 2015

I. SOCIAL WELFARE PLAN ACTIVITY ACCOUNT 5,626 (7,663)

I.1 Subscriptions for the year, net of reinsurance 79,331 78,526 I.2 Income from fixed assets and investments 9.2 19,046 19,147 I.3 Income from investments linked to defined contribution plans 9.2 467,590 439,644 I.4 Other Technical Income 79 9 I.5 Benefits for the Year, Net of Reinsurance (45,075) (47,115) I.6 Change in Other Underwriting reserves, Net of Reinsurance (+ or -) 11 (129,693) (118,959) I.7 Profit-shares - - I.8 Operating expenses 13 (835) (895) I.9 Other Technical Expenses (+ ó -) - - I.10 Loss from fixed assets and investments 9.2 (15,061) (15,749) I.11 Loss from investments linked to defined contribution plans 9.2 (369,756) (362,271) I.12 Subtotal (Results from Social Welfare Plan Activity Account) 5,626 (7,663)

II. OTHER ACTIVITIES PERFORMED ACCOUNT - -

II.1 Subscriptions for the year, net of reinsurance - - II.2 Income from fixed assets and investments - - II.3 Other Technical Income - - II.4 Benefits for the Year, Net of Reinsurance - - II.5 Change in Other Underwriting reserves, Net of Reinsurance (+ or -) - - II.6 Profit-shares - - II.7 Operating expenses - - II.8 Other Technical Expenses (+ ó -) - - II.9 Loss from fixed assets and investments - - II.10 Subtotal (Results from other activities performed account) - -

III. NON SOCIAL WELFARE PLAN ACTIVITY ACCOUNT 2,070 1,421

III.1 Income from fixed assets and investments 10,007 8,219 III.2 Loss from fixed assets and investments (7,937) (6,798) III.3 Other income - - III.4 Other losses - - III.5 Subtotal (Results from Non social Welfare Plan Activity Account) 2,070 1,421

III.10 PROFIT FOR THE YEAR (I.12+II.10+III.5) 7,696 (6,242)

(*) Presented only and exclusively for comparison purposes.

38

A) STATEMENT OF RECOGNISED INCOME AND EXPENSES

2016 2015 (*)

I) PROFIT FOR THE YEAR 7,696 (6,242)

II) OTHER RECOGNISED INCOME AND EXPENSE - -

II.1 Available-for-sale financial assets - -

II.2 Cash flow hedges - -

II.3 Net investment hedging on foreign operations - -

II.4 Differences on exchange and conversion - -

II.5 Correction of accounting asymmetries - -

II.6 Assets held for sale - -

II.7 Actuarial gains/(losses) for long-term employee compensation - -

II.8 Other recognised income and expenses - -

III) TOTAL RECOGNISED INCOME AND EXPENSE 7,696 (6,242)

(*) Presented only and exclusively for comparison purposes.

39

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41

2016 2015 A) CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES A.1) Pension Plans Activity 1. Subscriptions received 83,364 82,629 3. Proceeds from ouotward reinsurance 3,718 3,537 4. Outward reinsurance payment (4,033) (4,104) 5. Benefits paid (48,544) (50,407) 7. Other operating proceeds 5,792 321 8. Other operating payments (2,714) (2,138) 9. Total Cash collections related to pension activities (1+3+7)=I 92,874 86,487 10. Total Cash payments related to pension activities (4+5+8)=II (55,291) (56,649) A.2) Other operating activities 3. Proceeds from other activities - - 4. Payments from other activities - - 5. Other collections related to operating activities (3)=III - - 6. Other payments related to operating activities (4)=IV - - A.3) Cash Flows from operating activities (I+II+III+IV) 37,583 29,838 B) CASH FLOWS FROM INVESTMENT ACTIVITIES B.1) Collections 1. Property, plant and equipment - - 2. Inversiones inmobiliarias - - 3. Intangible assets - - 4. Financial instruments 572,144 558,026 5. Shares of stock in Dependent, Multi-group and Associated Entities - 6. Collected interests 37,180 34,689 7. Collected dividends 6,669 3,672 8. Business unit - - 9. Other collections related to investment activities - -

10. Total Cash collections from investment activities (1+2+3+4+5+6+7+8+9)=VI 615,993 596,387 B.2) Payments 1. Property, plant and equipment (57) (15) 2. Inversiones inmobiliarias - - 3. Intangible assets (36) (6) 4. Financial instruments (647,297) (571,638) 5. Shares of stock in Dependent, Multi-group and Associated Entities - - 6. Business unit - - 7. Other collections related to investment activities - - 8. Total Cash collections from investment activities (1+2+3+4+5+6+7)=VII (647,297) (571,659) B.3) Cash flows from investment activities (VI-VII) (31,304) 24,728

42

2016 2015 (*) C) CASH FLOW FROM FINANCING ACTIVITIES C.1) Collections 1. Subordinated liabilities - - 2. Mutual Fund - - 3. Contributions - - 5. Other collections related to financing activities - - 6. Cash collection from financing activities (1+2+3+5)=VIII - - C.2) Payments 2. Interests - - 3. Subordinated liabilities - - 4. Payments due to reimbursements - - 5. Reimbursements - - 7. Other payments related to financing activities - - 8. Cash payments from financing activities (2+3+4+5+7)=IX - - C.3) Cash flow from financing activities (VIII-IX) - - Effect of exchange rate fluctuations (X) - - Net increase/(decrease) in cash and cash equivalents (A.3+B.3+C.3+-X) 6,279 54,566 Cash and cash equivalents at beginning of the year 173,370 118,804 Cash and cash equivalents at end of the year 179,649 173,370 Cash and cash equivalents at end of the period 1. Cash 174,425 166,253 2. Other financial assets 5,224 7,117 3. Bank overdrafts repayable on demand - -

Total cash and cash equivalents end of the year (1+2+3) 179,649 173,370

(*) Presented only and exclusively for comparison purposes.

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1. Nature and principal activities Geroa Pentsioak, Entidad de Previsión Social Voluntaria de empleo (hereinafter the Entity or Geroa) was incorporated on 9 January 1996, under the corporate name of Geroa Pentsioak, Entidad de Previsión Social Voluntaria, modifying the name for the current name on 1 June of 2016. Its founding members were Asociación de Empresarios de Gipuzkoa (ADEGI) – Gipuzkoako Entrepresarien 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. The Entity commenced activity on 1 January 1996 and its registered offices are located in San Sebastian (Spain). In the year 2015, Decree 203/2015 of 27 October was published, which approves the Regulation of Law 5/2012 of February 23, on Voluntary Social Security Entities, which has partially repealed Decree 87 / 1984 and 92/2007. During the 2016 financial year, the Entity's performance has been subject to the requirements established by Law 5/2012 of February 23, on Voluntary Social Security Entities and by Decree 203/2015 of October 27, which approved the Regulation of Law 5/2012 of February 23, Voluntary Social Security Entities. In addition, Decree 87/1984 of 20 February and Decree 92/2007 of 29 May have been applied (in what has not been repealed in both Decrees by Decree 203/2015), By the Order of April 29, 2009 and by Decree 86/2010 of 16 March approving the adaptation of the Accounting Plan of the Underwriters to the specificities of the EPSV On March 6, 2012 was published in the Official Bulletin of the Basque Country, Law 5/2012 of 23 February on the Voluntary Social Welfare Entities, which repealed Law 25/1983 of 27 October. The Entities must comply with the new law from the day following its publication in the Official Bulletin of the Basque Country, although the Constitutional Court agreed to hear a constitutional challenge brought by the President of the Government, represented by the State Advocacy against twelve articles of Law 5/2012: 14th-2, 19.2, 28, 23.1), 24, 26.1, 32.1, 46.2, 57.2, 58.1.c), 58.2 and 60.1. On June 12, 2014, the Constitutional Court delivered its judgment 97/2014, partially upholding the constitutional challenge, and consequently, declaring them unconstitutional and void Articles 14.a-2, 19.2, 22, 23.1), 32.1, 46.2, 58.1.c), 58.2 and 60.1. Based on the legal interpretation made by management and the members of the Governing Board of the Entity, the rules of the Basque Government remains fully in force for E.P.S.V. engaged exclusively in welfare activities, as is the case Geroa Pentsioak, E.P.S.V. This approach has been endorsed on December 2, 2014, by the Department of Treasury and Finance of the Basque Government through the statement issued on that date, where it is stated that "in relation to the financial reporting framework for EPSVs not engaged in insurance activities, the applicable regulations is established in Decree 92/2007 of 29 May, the Order of April 29, 2009, Decree 92/2007 and Decree 86/2010 of 16 March (normative currently supplemented, as previously mentioned, by the Decree 203/2015, of October 27, which approved the Regulation of Law 5/2012, of February 23, on Entities of Voluntary Social Welfare, which partially repealed Decrees 87/1984 and 92/2007) On December 9 of 2015 it was published on Official bulletin of the Basque Country (“Boletín Oficial de País Vasco”) , the Decree 203/2015 of October 27, approving the regulation 5/2012 of February 23, about Voluntary Social Welfare Entities, which repeals expressly certain regulation in effect on the date, as the Decree 87/1984 or February 20 with the exception of

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the Articles 12, 16 and 31 (previously modified by the Decree 92/2007) and certain regulations of the Decree 92/2007 of May 29. The Regulation approved by the Decree 203/2015 of October 27, which come into force on January 1st of 2016 with the following exceptions mentioned in the Final Provision Ten of the Decree: • The final provision two, related to the maximum limit of administration costs, will come

into force in three months’ time. • The subject-matter provided on the Articles 43 and 44 related to the life-cycle investment

strategies, will be enforceable by law in 24 months’ time, taking into consideration the stated on the transitory provision 3 related to the plans approved before January 1st of 2016.

At its meeting on April 29, 2016, the Entity’s General Meeting approved the non-establishment of a life-cycle strategy, based on article 44, paragraph 2, of Decree 203/2015, after a report of advantages and inconveniences by the Governing Board.

• The subject-matter provided on the Chapter X of the Title II of the Regulation of the Good Governance and Key Functions, will be enforceable by law in 24 months’ time.

• Furthermore, the established on the article 51 of the Regulation related to the information to shareholders will be enforceable in 12 months’ time.

The prevailing Regulation and Decree governing Voluntary Social Welfare Entities establish, inter alia, the following compulsory stipulations: (a) Administration costs of Voluntary Social Welfare Entities are those stated in the articles

of association. In the case of entities that operate under the defined contribution system, administration costs are established based on equity relating to each social welfare plan or on these plans and their yield and may not exceed, on an annual basis, the following limits: • When they are calculated only on the basis of related equity, 1.6% of this equity

(until 31 of March 2016, the ceiling was 2%). • When both variables are used, 1% of related equity and 10% of the yield. The General Assembly, in its session of April 29, 2016, it passed to establish the administration expenses in a maximum of 0.37% (0.37% in 2015) on the equity, including the inherent expenses in the investment of Collective Investment Institute and entities of risk capital.

(b) Investments in assets must comply with certain requisites of diversification, dispersion and congruence: • At least 70% of the assets of each social welfare plan must be invested in the

following types of assets:

− Fixed and variable income securities and rights traded on regulated

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markets within the bounds of the OECD.

− Shares and investments in collective investment undertakings and stock investment funds that comply with certain conditions regulated by EU Directive 85/61 1/CEE and its successive modifications and the law 35/2003 and its successive modifications.

− Demand deposits or term deposits of less than or equal to 12 months.

Though, across the Order of May 21, 2013 of the Counsellor of Estate and Finance and the article 11.8 of the Decree 92/2007, of May 29, it will be considered suitable assets for the investment for Voluntary Social Welfare Entities deposits with less or equal 7 years in credit entities, when those have their headquarter in a Member state of the European Union, that the previous ones are nominated in a currency who are negotiated in the OECD, which are annotated in liabilities of the corresponding financial institutions and refer to the Supporting Financial Program of the SMEs, businessman and autonomous professional for the year 2013 regulated in the Decree 183/2013, of March 19.

− Derivative financial instruments traded on organized 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.

• Voluntary Social Welfare Entities 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 issued by promoters or protectors of social

welfare plans may not exceed 2% of total plan assets. • Investments in properties may not exceed 20% of total plan assets and a single

property may not exceed 10% of these assets. • Investments in securities issued on venture capital companies may not exceed

20%, on face value, of the total amount of shares issued. • Investments in a single collective investment undertaking, asset securitization fund

or stock investment fund can be up to 20% of the assets of each plan. (c) When a Voluntary Social Welfare Entity performs activities other than those that relate

to social welfare plans for retirement, death, permanent disability, long-term unemployment or serious illness, it should clearly define the assets and liabilities affected by these activities, without permitting, under any circumstance, the transfer of rights and obligations 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.

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The governing board of the Entity, in its 17 of December 2015 meeting has approved the entity’s investment policy, in force until April 29, 2016, updating the concentration limits and the requirement for the held-to-maturity portfolio. On the other hand, the Board of Governors held on December 15, 2016 approved the incorporation of the Socially Responsible Investment Policy implemented by the Entity, taking into account social, environmental, ethical and corporate governance considerations in their investments.

(e) In Voluntary Social Welfare Entities in which more than one Pension Plan has been established in order to cover the contingencies, they must implement an internal management, registration and accounting procedure that allows the attribution, separately and independently, of the rights and obligations assigned to each one of them. The Governing Board of the Entity held on June 1, 2016 has agreed to modify the current Regulations of the Performance Plan, renamed Geroa Pentsioak Social Security Employment Plan. On the other hand, it is agreed that the previously mentioned Plan, will be renamed GEROA I Social Employment Prevision Plan from January 1, 2017. In this plan will be integrated, the active partners, partners in suspense and passive partners that are being charging an annuity (Note 2). On the other hand, in the same Governing Board of June 1, 2016, has been agreed to integrate a new Social Security Prevision Plan which will be called GEROA II Employment Social Security Plan, which will integrate the passive partners that will collect a temporary rent or temporary rent with deferred annuity (Note 2). This regulation will come into force on January 1, 2017. At the date of preparation of these annual accounts no notification has been received from the Basque Government. Both amendments were approved by the Extraordinary Meeting of the Entity of June 16, 2016, although at the date of preparation of these annual accounts the Entity has not received any communication from the Basque Government, which it expects to receive throughout 2017.

(f) Voluntary Social Welfare Entities 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. The calculation of minimum technical provisions should be made 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 pensions accrued by ordinary members. Economic and actuarial assumptions used to evaluate liabilities should also be chosen with prudence.

(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 social welfare plan. This may not exceed the estimated rate of inflation used to determine technical provisions by more than three points, with a maximum limit of 5%.

(h) Entities must maintain sufficient and adequate assets to cover the technical provisions

specified in the corresponding actuarial studies. In the event that, for three consecutive years, the entity does not establish sufficient funds to cover the necessary technical provisions, or when existing funds in a specific period are less than 90% of the technical provisions, the entity must draw up a plan to redress the situation, which must be

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subsequently approved by the Basque Government’s Department of Justice, Employment and Social Security.

(i) Voluntary Social Welfare Entities that incorporate plans to cover biometric risks or the

result of an investment or a certain level of benefits must permanently hold assets, in the form of reserves, other than those in which their technical provisions are materialized. These assets must be free of all foreseeable obligations and will be used as an available capital adequacy margin to absorb deviations between actual and foreseeable expenses and benefits. The capital adequacy margin must be equal to at least 4% of technical provisions. At December 31 of 2016 and at the date of filing of these Annual Accounts, the entity fulfils this requirement (Note 21).

(j) For Voluntary Social Welfare Entities which include defined contribution social security plans, the margin of safety must have a minimum amount of 0.125% of the provisions allocated to defined contribution pension plans in which the partner assumes the risk of the investment. The safety margin must be constituted in its entirety, at least at the close of each year. The safety margin will be constituted in a maximum period of ten years, starting in 2016, with a minimum of one tenth of its annual amount. At December 31, 2016 and at the date of preparation of these annual accounts, the entity fulfils this requirement (Note 21).

(k) The Minimum Mutual Fund is set at 50,000 euros and must materialize in eligible assets

and be fully disbursed. Note 10 of the Report details the amount of the Mutual Fund disbursed by the Protecting Members. The entity fulfil the minimum required level at December 31, 2016.

Note 20 of the attached Report details the degree of compliance in relation to the rules applicable to the entity in terms of percentages of investment, diversification, negotiability and liquidity.

At the Extraordinary General Meeting held on June 16, 2016, certain modifications were approved regarding the adequacy of the Statutes to the requirements provided by Law 5/2012, of February 23, on Voluntary Social Security Entities and by Decree 203/2015, dated October 27, approving the regulations that develop it. Although, at the date of preparation of these annual accounts, the Bank has not received any communication from the Basque Government, which expects to receive on 2017. Company purpose On 27 November 1995 the Employment and Social Security Office of the Basque Government’s Department of Justice, Economy, Employment and Social Security approved the incorporation and articles of association of the Entity, as well as its inscription in the Basque Country Registry of Voluntary Social Welfare Entities under number 178-G. According to its articles of association, the Entity is governed by the general assembly (comprising the members of the governing board, 53 contributing member representatives and 53 ordinary member representatives) and by the governing board (composed of 26 members, 13 contributing member representatives and 13 ordinary member representatives). According to its articles of association, the scope of activity of the Entity, which is a non-profit-making organization, is the Basque Country. The Entity’s objective is twofold:

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• To protect ordinary members in the event of retirement, disability or death, the latter

insofar as widowhood, orphan hood or similar circumstances are concerned, paying them, once they have been recognized as passive members, or their beneficiaries the corresponding pension and benefit payments.

• To encourage its members to save by way of social welfare plans while protecting their rights.

The social welfare regime contemplated on the constitution of the Entity was created as a consequence of the collective agreements of the Iron and Steel Industries of Gipuzkoa, with a mandatory effect, under the Article 83 of the Worker’s Statute, and based on the Article 39.2 of the royal law Decree 1/1994, June 20 of 1994, currently repealed by the unique 1 derogatory provision of the royal Decree 8/2015, of October 30 (currently, Article 43 of the cited Royal Law Decree 8/2015). The Entity has three types of members: founding, contributing and ordinary members (the latter of which may be paying or non-paying), the main characteristics of which are as follows: • The founding 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.

• Contributing 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 as contributing members and those made on behalf of the corresponding employees who are incorporated into the Entity as ordinary members.

Contributing members are companies in the Gipuzkoa iron and steel sector which, as with their workers who are bound by the collective agreement of 1 December 1995 (Official Gipuzkoa Gazette of 03.01.96) 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 paying members are employees or workers from the Gipuzkoa iron and steel sector who were compulsorily incorporated into the present regime, without the need for subsequent individual ratification, as a result of the collective labour agreement reached for the iron and steel sector in Gipuzkoa, or superseding accords, those from other companies affected by similar agreements, and voluntary members admitted by the governing bodies.

• Ordinary non-paying members are those who have suspended their contributions as a result of having previously suspended their working relationship with the contributing member(s), but who retain their rights within the Entity.

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• Passive members are persons who, through their entitlement to receive benefits (retirement or disability), are recognized 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 persons 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. In order to adapt the payment system of the benefits, the government board of the entity held on December 9 of 2014 and the Extraordinary General Meeting of January 13 of 2015 approved certain modifications to the Benefits Regulation and the Entity’s Statutes, whose entry into force was conditioned by the correspondent approval of the Finance Director’s Office of the Economy and Treasury Department of the Basque Government. After taking into consideration certain recommendations of the cited authority, the Ordinary General Meeting held on April 15 of 2015 and the Extraordinary Government Board of the entity held on June 29 of 2015 confirmed the modifications of the Benefits Regulation. The Director’s Office of Political Finance and Institutional Resources of the Treasury and Finance Department of the Basque Government has approved the cited Regulation on June 30 of 2015, and the registration at the Registry of Voluntary Social Welfare Entities of the Basque Country, acquiring full effectiveness on the Entity from July 1st 2015 (Note 2) Likewise, the Government Board of October 8 and the Extraordinary General Meeting held on December 17, 2015 approved certain modifications regarding the adequacy of the Statute´s to the Entity's Benefits Regulation. On January 11, 2016, the Director’s Office of Financial Politics and Institutional Resources of the Treasury and Finance Department of the Basque Government has published the resolution 1/2016, of January 11, where it is approved the cited modification on the Entity’s Statutes, and its registry on the Voluntary Social Welfare Entity’s Registry of the Basque Country. During the 2016 financial year, the Entity´s Protecting Members amounted to 9,390 companies and Number Partners amounted to 105,235 people (9,824 companies and 103,362 Number Members during the financial year 2015). This is the breakdown among the different sectors integrated in the Entity:

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Contributing members Ordinary members 2016 2015 2016 2015 Ceramic 8 10 233 234 Fur/leather trade 98 105 492 508 Metal trade 868 935 6,032 5,936 Construction 872 928 6,167 6,475 Service stations 60 61 853 766 Timber industry 251 269 1,498 1,475 Furniture industry 47 48 428 409 Public sports facilities 22 20 383 344 Cleaning sector 301 342 8,087 7,924 Catering, entertainment and sports 175 183 2,334 2,156 Fruit wholesalers 21 24 157 179 Bakeries 179 189 2,093 2,096 Paper/cardboard 15 14 1,117 1,089 Iron and steel 2,732 2,819 48,746 48,086 Textile 478 517 3,070 2,869 Freight 54 56 716 684 Road haulage 547 590 4,039 3,997 Glass 28 27 202 226 Sundry 51 60 7,210 7,026 Offices 1,373 1,439 6,577 6,301 General trade 1,210 1,188 4,801 4,582 9,390 9,824 105,235 103,362

The Entity’s funds mainly comprise the initial one-off members’ fund contributions of its founding members and the regular fixed contributions from both its contributing members and individual associates (ordinary paying members), which are determined by the corresponding agreements. These 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 common workers’ contingencies. Contributions are paid monthly and comprise a percentage of each worker’s Social Security base, 50% of which is paid by the employee (ordinary member) and withheld from their salary, and 50% by the company (contributing member). In the event of temporary disability, maternity or paternity leave or temporary lay-off procedures, both the contributing and ordinary member will continue to honour their contributions. The evolution of the contribution percentages in the different sectors covered by the Entity is as follows:

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Sector Evolution Contribution percentage

Asedir Gestión, S.L. Since April 2005 3,5% Since January 2008 4,3% Since January 2009 4,6% Aspace Since June 2005 0,5% Since April 2006 1,0% Since March 2007 1,2% Since October 2008 1,4% Since January 2011 2,9% Aspace Viviendas y Residencias Since January 2004 0,5% Since September 2006 1,0% Since February 2007 1,5% 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 July 1998 1,0% Since January 1999 1,5% Since June 2000 2,5% Since June 2001 3,0% Since January 2002 3,5% Since January 2003 3,5% Since January 2006 4,0% Since January 2008 4,3% Cerámica de Gipuzkoa Since January 1997 1,5% Since May 1999 2,0% Since January 2000 2,5% Since January 2002 3,0% Since January 2003 3,5% Comercio de la Piel de Gipuzkoa Since October 1999 0,8% Since January 2000 1,6% Comercio del Metal de Gipuzkoa Since October 1999 1,0% Since January 2000 2,0% Construcción de Gipuzkoa Since June 1999 0,5% Since June 2000 1,5% Since January 2001 2,5% Since January 2005 2,9%

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Sector Evolution Contribution percentage

Since January 2006 3,3% Since July 2007 3,5% Since January 2008 3,7% Since January 2009 4,0% Clece, S.A. Since March 2004 1,0% Clece, S.A. – Donostiako Lamiak Since October 2004 1,5% Comercio General de Gipuzkoa Since January 2008 0,2% Since January 2009 0,4% Electroquímica de Servicio de Gipuzkoa

Since July 2000 0,5%

Since January 2001 1,0% Since January 2002 1,5% Since January 2003 2,0% Since J