Pensions: what are the differences between the AFPs and the ONP?

Many workers wonder about the best option to save their money and be able to receive a decent pension in the future. In Peru, there are two ways: join the Private Pension System through a AFP or to the National Pension System through the ONP.

In that line, the differences are several. Below we tell you what you should take into account and what is expected from a future pension reform in Peru, which would seek to improve these systems.

Comparative table between AFP and ONP

Check the comparative table between the Pension Fund Administrators (AFP) and the Pension Normalization Office (ONP), according to detailed information on the website of the Superintendence of Banking, Insurance and AFP (SBS).

Main differences between AFP and ONP

“The ONP it is a pay-as-you-go system, where you will contribute 20 years and you will receive a minimum pension of S/ 500,” Noelia Bernal, professor of Economics at the Universidad del Pacífico, told this newspaper. “Instead, in the AFP the worker will save in an individual account —as if it were a savings account—, there are no distributions with other workers and the pension will depend on savings and profitability”.

Along these lines, the specialist comments that one of the main differences lies in the fact that one (ONP) will provide you with a secure pension because it is a pay-as-you-go system where the financial risk is shared, while in the other (AFP) this contribution is individual and the risk must be assumed by each worker.

“The ONP has what is called ‘a defined benefit or a secure pension’. In the AFP there is no such guarantee, you don’t know what pension you are going to receive. This is what is called the undefined benefit systemwhat is known is the contribution that is made to the AFP, but the pension that you are going to receive will depend on the profitability, the financial risk is assumed by the worker”, stressed Bernal.

For his part, Juan José Marthans, former superintendent of the SBS, pointed out that although the Private Pension System (SPP) has shown virtues in terms of manage intangible accounts, foster and promote investment processes through funds properly managed by the AFP, also presented some drawbacks.

“This system has suffered from restrictions, such as the commissions they charge, the lack of competition that exists within the market, the need to improve user service and provide information. This unfortunately has led to the need to review the possibility of a reform in the system, ”he indicated to the Republic. He added that in relation to the ONP what is required is to drive the concept of individual accounts: “Under the current concept it is impossible to identify the individual contribution accounts of each one of the members of the national pension system”.

Similarly, Noelia Bernal commented that among the positive aspects of the AFP would be the capitalization: “If you start saving from a very young age, when you reach adulthood, you will have good savings, if, let’s say, there have not been many financial crises,” he said.

While in relation to the ONP, the period that must be contributed could be a negative aspect. “This time is too much in a world of work like the one we currently have, in a lot of dynamism it is difficult to quote for 20 years. Although this is already becoming more flexible and now there are regulations that offer pensions from 10 years later,” said the economist.

New changes in the pension reform

In his last message to the nation, the President of the Republic, Pedro Castillo, indicated that in six months a diagnosis and new regulatory proposals will be issued to make modifications and improvements to the public and private pension system. This suggests the discontent of the population with respect to the systems that currently operate in the country.

Specialists agree that a future pension reform should be thought of in a context of comprehensive change that incorporates both the national and private systems.

“These two systems must generate alternatives for healthy competition within the market; for this it is recommended that new entities enter to offer pensions in the private system”, indicated Juan José Marthans. “We need a new semi-contributory contribution scheme where it is necessary to integrate the informal front within the contribution dynamics,” he added.

Meanwhile, Noelia Bernal stressed the need to create a contributory system in which there is a balance between the two pensions (AFP and ONP) and that comes from a distribution system; In addition to including independent workers who are in informal or low-productivity jobs, because “they represent more than 70% of the workforce.”