Pension and retirement funds in Latin America: new and existing rules
Pension and retirement funds in Latin America: new and existing rules
Pension fund regulations may be an incentive or deterrent when considering establishing operations in a country. This is why it is important to understand the new rules and situation of current legislation on the subject in various jurisdictions. Below we examine the current situation in Mexico, Uruguay, Peru, Colombia, Brazil and Chile.
By reason of the health emergency caused by COVID-19, and using the exceptional powers granted to him, the president issued two decrees allowing among other things the option of transferring pension schemes and withdrawing sums in advance from pension funds; the aim being to mitigate the adverse economic effects of the pandemic.
This was stated in legislative decrees 558 and 802 of 2020 (the second decree amended the first).
It also needs to be mentioned that, in overseeing compliance with the Constitution, the Colombian Constitutional Court (judgment C-258 of 2020) held those decrees unconstitutional with retroactive effect due to a failure to comply with the formal requirements for issuing them.
Moreover, two bills were recently laid before the Colombian parliament with which it is sought to create a program allowing partial withdrawal of pensions as a mechanism providing financial support to counteract the economic effects of the pandemic, by authorizing non-active contributors to the individual savings system supplemented by public funds (Régimen de Ahorro Individual con Solidaridad) to make a single withdrawal of an amount equal to four times the minimum wage, or up to 10% of the individual capitalization accounts.
The Chilean pension system is built around three pillars: public funds (public basic pension for the poorer members of society), mandatory contributions (mandatory personal savings) and voluntary payments (voluntary savings). For a few years now the government has been studying potential changes to the system's public funds and mandatory contributions pillars.
- In December 2019 changes to the system's public funds pillar were approved, which increased the basic public pensions of pensioners over 80 by 50%, of pensioners between 75 and 79 by 30%, and of pensioners under 75 by 25%.
- An important reform of the system's contribution pillar is currently before parliament. That reform includes changes to several components, including:
- Increase in individual contributions. It retains the individual account consisting of 10% of workers’ contributions managed by the pension fund managers and increases contributions by 3% which will be managed by a new public entity, CASS, who will put the management of that fund out to tender among specialized private funds.
- Creation of a new public pooled savings fund. Contributions will be increased by a further 2.8%, payable also by the employer. These amounts will go into a new pooled savings fund managed by CASS. This program will provide an additional amount for personal pensions.
- Minimum pension guarantee. All pensioners who have paid contributions for at least 30 complete years are entitled to a guaranteed minimum pension, and it is stated that the sum of all pensions funded out of individual savings, pooled savings, and the public fund, cannot go below a similar amount to the minimum salary.
- Greater powers for pension fund managers (AFPs). The creation of not-for-profit pension fund managers is authorized, which may be organized as members’ cooperatives.
- Fee regulations. It is stated that, if the funds obtain a negative return, the pension fund managers must refund a portion of the fees paid by their members.
- Independent directors at pension fund managers. The pension fund managers’ bylaws must include provisions on independent directors. The individuals in this role must have been members of the system for at least 10 years and have paid contributions for five to the funds managed by the respective pension fund manager. Candidates for independent director must be chosen by the other members in a formal selection process.
- Selection of candidates for director of an S.A. corporation. Pension fund managers are the only ones allowed to vote for director candidates at the S.A. corporations in which the pension funds invest, from a shortlist of three or five proposed by the committee of pension system users, which will choose them in a formal selection process.
As part of a complete reform designed to strengthen the pension system in Mexico, on July 22, 2020 the federal government announced through its Department of Finance and Public Credit (SHCP) that it will send to parliament an initiative worked on by Department of Finance and Public Credit, the Business Coordination Board, and various worker representative organizations, to reform the Law on the Mexican Social Security Institute.
The bill on strengthening the pension system was initiated with the reform of article 4 of the United Mexican States, to include the government’s obligation to grant pensions to support basic living expenses in old age.
The substantive changes that were published by the Department of Finance and Public Credit in statement no 61 dated July 22 had the following components:
- Increase in the three parties’ contributions, from the existing 6.5% of salary to 15% of salary, gradually over an eight year period.
- Strengthening of the guaranteed pension, from a current average of MXP$3,289 (approximately 80% of the current minimum wage) to an average value of MXP$4,345, which will be granted by reference to age, number of contribution weeks, and the wage base on which contributions are calculated, an amount that may be up to 220% of the current minimum wage.
- Decrease in contribution weeks, from 1,250 to 750 weeks.
- Pension fund managers would reduce their fees, and their investment system would be reformed to diversify risks and allow investment in investment projects.
Due to the negative effects that COVID-19 has had on the Peruvian economy, the Peruvian parliament has approved a few legislative initiatives seeking to put money in citizens’ pockets. A few initiatives are related to contributors withdrawing funds held by pension fund managers (AFPs) and by the country’s Social Security Office (ONP).
It first needs to be clarified that the welfare system is made up of the Social Security Office and pension fund managers responsible for managing the pension funds of their members. Besides the fact that the pension fund managers are private financial institutions and that the Social Security Office is a public body, the main difference between them is that at a pension fund manager, the size of the pension depends on how much each member has paid in plus the return obtained on that amount; whereas at the Social Security Office contributions go into a communal fund which is used to pay all members. A few of the most recent legislative initiatives are summarized below.
- Withdrawal of 25% of funds held by pension fund managers: On April 30, 2020 the Peruvian parliament approved Law no 31017, defining measures to ease household finances and boost the national economy in 2020. This law allows people to withdraw up to 25% of their private funds with a cap of S/12,900 (approximately, US$ 3,690).
- Proposal to be able to withdraw 100% of funds held by pension fund managers: With the same aim, on August 16, the parliamentary Consumer Defense Committee approved a bill allowing owners of funds held by pension fund managers to withdraw the whole amounts of their funds. The bill applies specifically to anyone who does not record any contributions for longer than 12 months running from when the law is published. Experts on this subject agree that this bill proposing the withdrawal of 100% of pension funds could have an impact on the assets of welfare funds, such as sales of assets and instruments acquired by each pension fund manager. It has been pointed out that when the first partial withdrawal of 25% was approved (last April) there were different circumstances (i.e. the percentage withdrawal was partial, policies had been adopted by Peru’s Central Reserve Bank involving repurchase transactions and pension fund managers holding higher amounts of liquid assets abroad).
- Withdrawal of funds from the Social Security Office: On August 28, the parliament sent the Presidential Office a law that would allow the withdrawal of up to S/4,300 (approximately US$1,230) from contributions to the Social Security Office, for active and non-active contributors. The instrument also states that individuals who have paid contributions to the Social Security Office and who at the age of 65 or over have not managed to satisfy the requirements to be eligible for a pension are entitled to a refund of all their contributions.
So, on September 18, 2020, the government’s executive branch examined the bill and stated among other reasons that the legislative initiative was not technically viable and that if a bill of this type were implemented, the first to see a change to their rights would be existing pensioners. Similarly, it was argued that it was unconstitutional for the author to seek to equate the Social Security Office with the private pension system to justify refunding paid contributions, for example.
Lastly, on September 29, 2020, the parliament approved (through its insistence) the bill examined by the executive branch.
*contents created by Brazilian law firm NBF|A
Following the reform of the Brazilian pension system, approved at the end of 2019, which changed the pension calculation method, in addition to increasing the minimum retirement age and the minimum contribution time for employees, the health and economic crisis caused by COVID-19 has posed new challenges for the current government.
To give support to companies hit by the crisis, the federal government decreed a set of rules to defer certain social security obligations and obligations to pay into the Length of Service Guarantee Fund (FGTS) for employers, with the goal of protecting their cash flows already hit by the consequences of the pandemic. These rules notably include:
- deferral of payment into the FGTS for the period between March and May 2020, which may be made in 6 installments between July and December of that same year;
- deferral of employer social security contributions for the period between March and May 2020 to August, October and November of that same year respectively; and
- a 50% reduction to employer contributions to the so-called “S System”, composed of professional organizations and entities supporting industry and workers and funded out of employers’ mandatory contributions.
Additionally, in its employment and income support benefit program, the Brazilian government has granted to workers who have entered into an agreement with their employers to suspend their employment contracts or reduce their hours and wages for a period of up to 240 days, a monthly benefit ranging between R$ 661.25 and R$ 1,813.03 (according to the type of agreement and the reduction negotiated with the employer) paid in full out of the Brazilian ministry of economy’s funds.
*Garrigues does not have an office in Uruguay
Uruguay has a solid social security system covering more than 95% of people over 65, the highest figure in the region and one of the highest worldwide. Its benefits are equal to around 12.5% of GDP, and organized in a six-part mixed system: a global part, covering trade, industry, rural sectors, schools, state sectors and services, which is paid out by the Welfare Bank (Banco de Previsión Social); another for bank employees, by the Banking Pension and Retirement Fund (Caja Bancaria); another for university graduate professionals, by the Pension and Retirement Fund for Professionals (Caja Profesional); another for notaries, by the Notarial Pension and Retirement Fund (Caja Notarial); and two special parts for military personnel and police, by the Military and Police Pension and Retirement Fund (Caja Militar y Policial).
The global system is mixed, with a mandatory public component and another individual savings component, managed by welfare savings fund managers (AFAPs - Administradoras de Ahorro Previsional), which at the end of the working cycle transfer the funds to the Government Insurance Bank (Banco de Seguros del Estado). There is also a voluntary savings component paid to the same welfare savings fund managers (AFAPs).
One of the first goals of the new government of president Luis Lacalle Pou in 2020 was to set up a committee of experts to consider a reform of the Uruguayan welfare system, made particularly necessary by the country’s aging population and workers’ greater life expectancy. The committee's structure was approved recently in a Law for Urgent Consideration approved by parliament with the main contents of the government’s program.