Boric proposes a new mixed pension system and the end of the AFPs

The AFPs, in this reform, are finished. There will be new private investment managers with the exclusive purpose of investing pension funds and, in addition, there will be a public alternative, which will allow competition to be promoted with the entry of new actors”.

Gabriel Boric, President of Chile

After several months of waiting, the President of Chile Gabriel Boric presented his government’s pension reform on national television, whose emphasis is based on a mixed system, increased solidarity, a greater role for the State and the transformation of the AFPs in Private Pension Investors (IPP).

Likewise, he assured that the funds will not be expropriated, guaranteed their heritability and freedom of choice. The reform seeks a reorganization of the industry and where much of the parliamentary debate will focus.

Among the points contemplated by the project, a new Integrated Pension Fund stands out with an additional 6% of contributions charged by the employer. It is the central axis of the pension proposal, as it constitutes the creation of a new pillar in the system made up of mandatory contributions.

In addition to functioning as “Social Security”, by compensating for the deficiencies that each worker may have during their work history (gaps, gender gaps, care work, among others), the proposal brought a novelty: the distribution of the contribution by 70%. (4.2 points of the additional contribution) will go to the register of individual savings in the collective fund, and 30% (1.8 points) for the equitable distribution of benefits to current pensioners. The reform also contemplates systems of parametric adjustments and actuarial analyzes every three years, which could affect the promises of future benefits.

The proposal contemplates a compensatory bonus equalizing the pension amounts for men and women, regardless of their different life expectancy; a new bonus for biological or adoptive mothers for each child born alive, which is added to the existing bonus per child, and a supplement for third-party care with severe or moderate functional dependency.

Under the slogan “the AFPs are finished”, the reform creates a scheme that removes the managers from the administration of affiliate accounts and forces them to become IPP, public limited companies with the exclusive purpose of managing the investments of the savings of individual capitalization accounts. The AFPs that agree to this role will have a period of 24 months to transform into IPPs.

Choice of people. In his speech, Boric stressed that the proposal “will strengthen the freedom of choice of members”, and that “it will be you who will choose between private or public investment managers.” People who do not choose a manager will see their savings allocated to the public manager. According to those familiar with the proposal, the Government estimates that at least 70% of the people will be assigned by default to the state entity, given the inertia shown, in general, by affiliates, in the face of this type of decision.

A new commission collection system will be created, as well as a new generational fund. After 20 years, the multi-funds will be replaced by the new generational funds, a modality recommended by the OECD. They also seek to strengthen the PGU, with a gradual increase that will have a total increase of 28.9%, prioritizing in this increase the beneficiaries of the lowest pensions.

The proposal contemplates the replacement of programmed withdrawal, the star product of the AFPs, with a life annuity, a pension modality from insurers that “guarantees a stable monthly pension in real terms (fixed in UF), in such a way that it protects people of the risks of longevity, profitability and inflation”, as indicated in the government.

Main axes of the pension reform project in Chile:

• Establishes a mixed tax system where the State, workers and employers contribute.

• An Autonomous Pension Administrator (APA) will be created. It will be a council of seven members, it will enroll people, collect, and pay benefits.

• The current pension administrations, known as AFPs, will cease to exist.

• New private entities will be created, focused on their role of investing pension funds.

• Creation of an Integrated Pension Fund, or a new social security. This will be financed by contributions from the employer.

• The option to inherit the savings is given under certain conditions.