AFPs, govt square off over pension reform impasse
The future of El Salvador's pension system is in doubt amid a political standoff between President Salvador Sánchez Cerén and pro-industry factions, as both seek a solution to avoid a second "selective default" on its October payment to pension fund managers (AFPs) and find additional funds to pay current retirees.
The Central American nation is facing a dilemma emerging in countries across the region, as retirement systems shift to contribution-based pensions using individual accounts managed by private firms and away from traditional guaranteed-benefit pensions drawing on public funds.
For years, pension fund managers (AFPs) operating in El Salvador have been required to invest 45% of individual contributions in a fund managed at a state bank, which typically offers only a low rate of return (often 2%).
In April, the government defaulted on its payment on that debt and, on July 18, the legislature passed a measure to increase the required investment from 45% to 50% to generate additional funds to cover immediate costs for pension benefits, as funding looks set to run out by September.
Nevertheless, the nation's supreme court issued a ruling July 26 that nullified the measure, leading to the current impasse, as some 175,000 retirees are now unsure of whether they will receive pension benefits starting in September.
The president met August 7 with representatives of Honduran and Colombian AFPs in an effort to find a path forward, according to media reports from Colombia's W Radio and local outlet ElSalvador.com.
"What's in play here is the payment of pensions, the stability of the system and the very existence of the AFP," the president's technical secretary Roberto Lorenzana was quoted as saying by ElSalvador.com hours before the meeting.
In the same report, representatives of the AFPs countered the government's position, saying that the system needs to focus on long-term sustainability rather than a quick fix to immediate funding problems.
The AFPs support a plan introduced in February, termed the Citizens Pensions Initiative (ICP), which they say is the only one on the table with a statistical basis for financial stability.
They also demanded that the government respect the workers' contributions they manage as private property, not a means to paying off pension benefits to retirees under the previous system.
René Novellino, a representative of the two AFPs at the meeting, told ElSalvador.com, "No one can say they have the absolute truth, but we do posit that there has been one initiative that has garnered approval and has passed rigorous revision."
After the meeting Lorenzana conceded that the government has given up its attempt at a "mixed system", but asked that the AFPs concede some points as well to come up with a solution to the immediate fiscal problems the government faces.
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