Peru pension overhaul: What's being proposed

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Tuesday, November 14, 2017

Peru's pension system has a series of shortcomings that prevent it from operating properly.

That's according to a report produced by the finance ministry's so-called social protection commission, established this year to propose ways of improving the pension and health systems.

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The current pension model is "highly fragmented and lacking overall vision," said the report authors, who include economists and public officials.

Pension cover provided under the current system – in which a public scheme and a private scheme compete to sign up formal sector workers – is "low and falling."

Today, 16.8% of the population classed as economically active pays into the system - compared with 64.8% in Chile and 18.9% in Colombia – and just 35% of citizens aged 65 or above are part of a pension scheme.

Plus, according to the report, just 13.7% of today's economically active population is likely to receive either a public or private pension when they reach retirement age. And, the size of the average pension is small compared to that of the likes of Chile, Colombia and Mexico – the other members of the Pacific Alliance trade group.

The committee highlighted that under the public system, affiliates with fewer than 20 years of contributions do not receive a pension on retirement and cannot withdraw funds they have paid in.

The report said if the proposed reforms were implemented the replacement rate would rise to 74% from 34% and, eventually, every person older than 65 would have a pension.

It is now up to lawmakers to decide whether to adopt the proposals and draw up associated draft legislation.

KEY PROPOSALS

The committee has put forward a system based on three pillars.

Pillar 1

A universal basic pension. Initially, because of fiscal constraints, the government would boost, via subsidies, pensions of low-income workers. Contributions would cease when a pension reaches the 328-sol (US$100) a month threshold.

Pillar 2

Establishing pension savings accounts for every citizen of working age. Contributions would be administered by a centralized body and the average commission would be less than 0.6%. AFPs would bid for contracts to manage the resources which today total about US$40bn, state news agency Andina reported, citing commission member and economist Augusto de la Torre

Four AFPs operate in Peru: Habitat, Integra, Prima and ProFuturo.

- The government would help young people on low incomes contribute to their funds, in this way reducing the financial burden on them in the early years of their working lives. A similar scheme would be established for other low-income workers.

- Making it easier for workers to pay into their funds, via the likes of mobile telephone bills.

- Reform the law that, today, allows workers to withdraw up to 95.5% of their pension savings on retirement.

PILLAR 3

- Helping ensure retirees receive a stable and decent income through the development of an annuities market with programs for the withdrawal of worker savings. The state would play a more active role in this area.

WHAT THE AFPs SAY

Peru's association of private pension fund managers AAFP has criticized the proposal to create a central body.

"They're talking about creating a state monopoly. It's going to be a step backwards," AAFP head Giovanna Prialé was quoted as saying by newspaper El Comercio.

She added: "Giving a single public entity control constitutes an enormous risk. We're talking about a large black box into which all the money is poured and a group of officials is the party that makes all the decisions. What happens if this committee has political interests?"

Prialé said the focus must be placed on improving the rates of tax collection and continuing to reduce AFP commissions through tenders and bringing more people into the formal labor market.

Read the full report (in Spanish).