The current project release about the pension reform ideas in Chile plans the change to a “mixed system approach”, but the implementation leaves questions undiscussed, such as, how the current pension system will transition in detail and the heritability of the actual funds.
What are the most important changes proposed by this reform?
- The amount of the Universal Guaranteed Pension (PGU/Pension General Universal in Spanish) is increased gradually to CL$ 250.000 monthly.
- A new component of social security is created, financed by an additional 6% by employers, in which contributions will be registered in personal accounts by a certain part and contemplates significant compensation for women and current retired.
- The AFPs are finished in their role established in 1981, however, they can convert into private investment managers, while adding a public alternative. The AFP companies will have to compete and need to focus on creating added value for the affiliates, investing the funds accordingly and generating attractive returns.
- The reform will maintain the inheritance of the funds, respecting the will of the people.
- The entire customer service for affiliates, the collection of contributions, statements, pension payments will be centralized in a non-profit public entity (actual IPS), which will allow a substantial reduction in commissions paid by affiliates.
- To make individual savings profitable, you can choose between a public investor (new public entity) or private actors (former AFPs).
According to the new approach, there will be two public entities. The Autonomous Pension Administrator in charge of client support, customer service management and collection of monthly contributions (which will be the current IPS – Instituto de Previsión Social).
In addition, the Public and Autonomous Pension Investor (IPPA – Inversor de Pensiones público y Autónomo) is created, which gives everyone the possibility of choosing between private managers (e.g. former AFPs) and this public manager, strengthening freedom of choice and reducing administration commissions charged by current AFPs. The transition period for AFP companies and IPS considers a term of 24 months.
The proposed 6% increase in social security contributions for employers should happen gradually through a 6-year progression (1% annually).
The actual 10% pension contribution discounted monthly at employees payroll will remain in the individual pension account (with the option to decide who should manage those funds in the future).
What remains open and is not commented so far, if the current pension law published and set in place in 1980 (DL 3.500) will be modified or will completely disappear/repeal (and therefore all following published laws like the 18.156 for foreign professional workers) which might completely remove the possibility to withdraw your pension funds.
The private AFP pension system was created during the dictatorship of Augusto Pinochet (1973-1990). Since then, there have been several attempts to reform it, but they have yet to reach an agreement.
Source of updates in Spanish (Superintendencia de Pensiones)