The next Chile government’s plan to eliminate PFAs from the pension system

RIO DE JANEIRO, BRAZIL – In his victory speech on Sunday night, the President-elect, Gabriel Boric, confirmed the proposal of a collective pension system in which the AFPs (Administradoras de Fondos de Pensiones), the country’s Pension Funds Administrators, will not participate, at least in the mandatory section.

And even though the future president’s team knows that the road will be more than complex, considering that they do not have a majority in Congress, they have a plan to execute the campaign promise.

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The proposal, as explained by those close to the command, is to transfer the flow of contributions to the new public body that will be in charge of managing the pension savings, leaving aside the PFAs from this task, allowing, however, that the affiliates -who so prefer- can keep the stock of their resources in the private pension fund managers.

GRADUALNESS

Boric’s team points out that ending the transition period could take some 40 years, considering the following example. Suppose a person who had just entered working life and managed to contribute to an AFP before Boric’s system began and prefers to keep his savings in the AFP. In that case, the administrator will remain in place until that member retires.

This transition, they point out, took place within the framework of the programmatic agreement reached with the teams of Yasna Provoste and Marco Enríquez-Ominami after the first round of the presidential elections.

“What we have defined with the teams of Provoste and MEO was a transition where all the flow of new and old contributors will go to the system we propose. People who have resources in the system can choose whether or not to go with this scheme. This will be gradual in terms that the AFPs, in the best-case scenario for them, will last 40 years. That seems a more than fair transition,” says an expert on the next government’s proposal.

BALANCE-BASED CHARGING

In any case, in Boric’s proposal, the AFPs will change. One of them is in relation to administering the stock of affiliates who choose them over the new system.

Currently, the administrators have a fee when receiving the contributions, a cost that varies between 0.58% and 1.45% of the taxable remuneration.

This is why, for their subsistence during the transition period, one of the alternatives discussed within the President-elect’s pension team -although it has not been entirely resolved- is that the fund managers begin to charge for the balance administered.

“In the new system, we are going to charge per balance to cover administration expenses. Compared to what the AFPs charge today on the salary, this is cheaper, with a charge of between 0.3% and 0.4%. The reasonable thing to do, by market logic, is that the AFPs will charge the same as this new public entity so that there is no difference,” says a member of the team.

Although the AFPs have no place in the current pension reform, the private sector would remain in the voluntary pension savings business.

With information from Diario Financiero