Pension reform in Chile: these are the axes of President Boric’s proposal

Chilean President Gabriel Boric presented his pension reform project to increase pensions and end the Pension fund managers (AFP).

The bill will be submitted next week to Congress for discussion. These are the axes established by this reform:

INCREASE OF THE SINGLE GUARANTEED PENSION

It proposes the gradual increase of the Universal Guaranteed Pension (PGU) to CLP 250,000 (US$265) from the current CLP 194,000.

According to a press release from the Ministry of Finance, it incorporates pensioners who until now have been “excluded from the non-contributory pension system, such as those subject to reparation and grace laws (exonerated persons, Valech and Rettig)”.

NEW CONTRIBUTION AND A “SOCIAL SECURITY”

The reform establishes a new contribution, which employers will pay and implement gradually until 6% of taxable income is reached (one percentage point per year).

This contribution will be used to constitute the Integrated Pension Fund to be created by Social Security, which will provide the following benefits:

• Social Security Pension
  The 6% contribution paid by the employer will generate the right to a pension for the worker.
  It will be calculated according to the accumulated balance in the personal Social Security account and, according to the Executive, will recognize the “individual effort without differentiation by sex”.
• “Intergenerational Solidarity”
  This pension establishes a guarantee of 0.1 Unidad de Fomento (UF) per year contributed that applies to both current and future pensioners, with a maximum of 30 years.
• Caring tasks
  It grants contributions for severe or moderate dependency care for people registered in the Caregiver Module of the Social Household Registry (RSH), with a maximum of two years.
• Maternity
  Twenty-four contributions are recorded for 6%, which are added to the 10% child bonus.
• Redistributive mechanism from high to medium and low income
• Compensation for mortality tables for current and future retired women in the individual capitalization component.
  It is assumed that women will live as long as men (self-financed pension cap UF 15: CLP 519,000 at current value), which would compensate for the difference concerning the pension obtained.
• “Lagunas”
  Each time the Unemployment Insurance is used, individual or collective, it pays the 10% and 6% contributions charged to the Solidarity Unemployment Fund.
• Survivors’ pension
  In the event of the death of the pensioner, it is paid to their beneficiaries: spouses and children under 25 years of age who are studying.

END OF THE AFP AND CREATION OF OTHER FIGURES

The reform proposes the reorganization of the industry in the “Contributory Pillar” to improve its efficiency and increase pensions.

According to the Government, this reorganization “will reduce costs by lowering commissions for members, allow taking advantage of economies of scale for the benefit of members, and generate more competition in financial management”.

The proposal establishes the end of the Pension Fund Administrators (AFP) model, the creation of a Public and Autonomous Pension Investor (IPPA), and will also allow the creation of Private Pension Investors (IPP).

“The new public entity, the IPPA, will exclusively manage the Social Security, to which the 6% contributions made by the employer will be destined, and will compete with the private investors, the IPPs, for the administration of the 10.5% worker’s contribution.”

Meanwhile, the Instituto de Previsión Social (IPS) will be the Autonomous Pension Administrator (APA) and concentrate the support activities. “Its autonomy will be strengthened, enhancing its corporate governance.”

REPLACEMENT OF THE MULTIFUNDS AND OTHER CHANGES

Other changes are incorporated in the individual capitalization pillar, such as replacing the commission charge on the salary with a contribution to the managed balance.

The taxable ceiling, currently equivalent to CLP 2.8 million, will also be raised to equal that of the Unemployment Insurance (CLP 4.2 million), allowing higher savings amounts.

In addition, the current Multifunds will be replaced by “Generational Funds”.

This way, members will be assigned to a fund according to their age, following a long-term investment regime that will be “more conservative as members approach retirement age, thus enhancing individual profitability”.

Finally, the pension reform bill contemplates replacing “Programmed Retirement” with “Life Annuity”.

As explained in the statement of the Ministry of Finance, “the latter is a modality that guarantees a monthly pension until the death of the member, which is fixed in UF, so that it protects people from the risks of longevity, profitability, and inflation”.

It would also generate the right to survivors’ pensions for the legal beneficiaries.

With information from Bloomberg