IMF urges Peru to undo 2016 pension reform
The IMF has urged Peru to reform its pension system.
The multilateral said controversial pension freedom legislation passed in 2016 should be repealed and further changes introduced.
"It is imperative to implement incentives to retain workers in the private pension system, while also designing reforms to reduce inequities and enhance social protection," the IMF said in an assessment of the stability of the country's financial system.
Under the law, private pension system contributors who reach the minimum retirement age can withdraw up to 95.5% of their pension pots. This has led to billions of dollars pouring out of the system and a major drop in total premiums for annuities.
The IMF said reforms should be aimed at increasing replacement rates and increase overall contributions rates.
"Decreasing the overall cost of the system, for example, by lowering pension management fees through introducing caps on commissions would also be desirable," the IMF said,
Action should also be taken in the short-term, it said: "In the meantime, to design incentives for participants to remain in the current system, policy options include requiring employers to participate at the current contribution rates, making the employer-contributed share ineligible for withdrawal; and, providing incentives to purchase fixed-term annuities."
Since the pension freedom scheme entered force and June, 188,665 members opted to withdraw 95.5% of their savings, accounting for 94.03% of the total, sector watchdog SBS said. Those who chose to take out a pension and obtain a lump sum accounted for 9,709, or 4.84%, while those who opted for a full pension accounted for 2,277, or 1.13% of the total.
Around this time last year, 100,000 members had withdrawn the maximum amount allowed by law.
The replacement rate, local paper Gestión said, citing IMF data, is currently 25% but could fall to 22% by 2047 if no reforms are made.
Last year, a series of pension reform proposals were submitted by the finance ministry. The committee described the current model as "highly fragmented and lacking overall vision."
In related news, local private pension fund manager AFP Integra told Gestión that employee contributions should rise to 11-12% from 10% currently, and that authorities should look into whether employers should contribute and whether the retirement age should rise to 70 from 65 currently.
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