Chile pension reform proposals delivered by Bravo commission

The much awaited report by the Bravo commission, including proposals for a reform of the Chilean pension system, was finally delivered on Monday without any big surprises.

The 24 members of the commission - named after chairman, economist David Bravo - voted on three alternative sets of proposals, with set A, involving keeping the current system of pension fund administrators (AFPs) and individual contributions mostly unchanged, winning by one vote over alternative B, which proposed transforming the current solidarity pensions into social security to be funded by employees, employers and the state. Alternative C, which received just one vote, outlined fully transforming the pension system into a pay-as-you-go scheme.

The commission presented finally a set of 58 reforms, with some of the most significant being: i) raising the retirement age of women to 65 years (the same as for men); ii) increasing contributions to 14% from 10% of income, but with the additional 4% to be contributed by the employer, and a portion of that 4% must be contributed to a solidarity fund; iii) extending the current solidarity pension to at least 80% of the population; and iv) raising the basic solidarity pension by 20%.

It was estimated that the cost of implementing the reforms could reach US$1bn.

The proposal was well received by the markets, according to Bice Inversiones - the investment unit of Banco Bice - with the exception of "some initiatives that could negatively affect the sector, like: (i) the extension of the affiliate's tender to include not only labor market entrants, but also a share of previous contributors; (ii) the intermediation costs to be assumed by pension managers; (iii) the creation of a public AFP; and (iv) it vaguely mentions the need to boost AFP's investment in real assets or support domestic production, reducing exposure to riskier financial assets."

The pay-as-you-go system was not considered because "it's a proposal that affects savings substantially... and secondly, it's a proposal that doesn't' seem to us to be fiscally sustainable over time," David Bravo was quoted as saying by local daily El Mercurio.

The next step will be the creation a committee of ministers to study the proposals, with no deadline to implement them.