In an address to the nation, last night President Boric announced details of the pension reform bill that will substantially improve the pensions of millions of Chilean men and women, who have suffered for years because of low pensions.
In Chile, for example, 72% of pensions are below the minimum wage and one in four retirees receives a pension that is below the poverty line.
We understand that questions remain regarding the implementation of this mixed-system bill, such as how the current system will change, whether pension funds can be inherited, what role the current private pension fund managers (AFPs) will play, or how the additional 6% contribution will operate. Below, we answer these and other questions about the reform.
- Why did the government decide to introduce this reform?
The main goal of the pension reform is to increase pensions for current and future retirees, with special emphasis on women, through three mechanisms:
- An increase in the Universal Guaranteed Pension (PGU), which will be financed with public funds obtained through tax reform.
- The provision of a new social security pension, financed by employers.
- A decrease in commissions and improvements in the returns obtained through the individual capitalization component.
- What does this pension reform propose?
Because we value people’s work, the pension reform bill will maintain individual savings and protect personal property. An employer contribution will also be created that will go toward a social security fund, which will improve pensions for everyone, especially women, who are those most disadvantaged by the current system. These components will form part of a mixed pension system, with a public investment manager and private players, where people will have the freedom to choose who manages their savings.
- What are the most important changes proposed by this reform?
The changes are summarized in the following points:
- The amount of the Universal Guaranteed Pension (PGU) will be increased.
- A new social security component of 6% will be created, financed by employers, where all contributions will be registered in personal accounts. This component will include significant compensation for women.
- The current private pension fund managers (AFPs) will be abolished. New private investment managers will be created, as well as a public alternative.
- The reform will maintain the ability to inherit pension funds, respecting the will of the people.
- Customer service for pension fund members, the receipt of contributions, account statements, pension payments, and collections will be centralized under a non-profit public institution. This will substantially reduce the commissions paid by members.
- Pension fund members will be able to choose between a public investment manager or private players to manage their savings.
- Under the reform, employee contributions will remain as individual property, respecting the will of the people.
- Can pension funds be inherited?
Yes, the individual capitalization component can be inherited, both during a pension fund member’s working life and when in retirement. With regard to the social security pension, a survivor’s pension will be granted to the spouse and children under 25 years of age who are studying.
- Why is systematic withdrawal being abolished and life annuity remaining?
The reform replaces systematic withdrawal with a new pension option called “life annuity with inheritance”, which combines the best attributes of systematic withdrawal with life annuity. As such, people will be able to choose between life annuity with and without inheritance.
Life annuity with the option of inheritance has the same attributes as systematic withdrawal with regard to the ability to inherit funds, but it guarantees a pension for life in UF (Unidad de Fomento: An indicator whose value in pesos is adjusted daily in accordance with the Consumer Price Index). The proposed life annuity pension with inheritance will allow people to receive a stable pension, as well as enabling them to leave funds to their heirs should they die before they are exhausted.
People will therefore be able to choose between a simple life annuity (which grants a survivor’s pension to their spouse and children under 25 years of age who are studying) or a life annuity with the option of inheritance that will pay a lower pension, but will allow an inheritance to be left under the same terms as systematic withdrawal.
- What role will the AFPs play?
The current AFPs will be abolished. However, there will be a role for private-sector players to participate as investment managers, and a public alternative will be added to increase competition. The role of these investment managers will focus on where they can add the most value for pension fund members: investing the funds well and generating strong returns.
- What role will the new public institution play?
There will be two public-sector institutions. An Autonomous Pension Manager will be responsible for support activities and account management: customer service for pension fund members, the receipt of contributions, account statements, pension payments, and collections. A Public and Autonomous Pension Investment Manager will also be created, which will enable pension fund members to choose between private investment managers and the public investment manager, strengthening freedom of choice. This public investment manager will also be responsible for administering the Integrated Pension Fund that will be created using employer contributions.
- How will the 6% employer contribution work to improve pensions?
It is necessary to differentiate between current and future retirees:
- In the case of current retirees, the 6% will provide a pension equivalent to 0.1 UF (currently US$3.81) per year of contributions paid, and compensate women through payment calculation tables differentiated by gender. These increases will be implemented immediately for current retirees.
- For future retirees, the 6% will operate according to a social security logic. The benefits will depend on what each person has contributed. In addition, the Integrated Pension Fund that will be created will complement the pensions of low-income individuals. This will enable all pensions to be increased, especially for those with low incomes, compensating for gender gaps that arise due to unpaid care work, maternity, or unemployment.
- Why will the additional 6% contribution be allocated to a solidarity fund and not to individual capitalization?
Because allocating it to a solidarity fund allows for a significant increase in pensions today, improves future pensions for those segments that are most disadvantaged by the current system, such as women, and provides protection to pension fund members from the different contingencies they may face in the labor market.
The creation of a solidarity fund will allow Chile to leave behind a system that is considered extreme, because it only offers individual capitalization and is managed exclusively by private-sector players. 83% of OECD countries have a public-solidarity component in their pension systems, similar to the one we will create with this reform. That is why the reform proposes the establishment of a mixed system that creates a collective savings pillar using employer contributions, thus complementing the pension system by increasing the pensions of retirees both now and in the future, and providing greater security in old age.
The reform will maintain employee contributions as individual property and the ability to inherit pension funds, respecting the will of the people.
For more information, as well as concrete examples with figures, you can visit www.sistemamixto.cl.