The State would finance the minimum pensions of AFP members

One of the main pieces of the debate moved for the inexorable reform of the pension system. The bill of Executive power —created by the Ministry of Economy and Finance (MEF)— maintains some criteria of the current model such as contribution rates of up to 13% for a worker —and does not involve the employer, as the Labor Commission of the last legislature sought—, but it also opens the doors for independents in the interest of economic formalization. Based on a “pension identity” and greater competition for the AFPs, the MEF letter begins its journey through Congress.

1. Pillars to universalize the pension

There are four pillars that articulate the private and public model. The aim is to mitigate the main problem that affects the Peruvian pension model: the lack of coverage, according to the former director of the BCRP Elmer Cuba.

In the non-contributory pillar, vulnerable groups and those in poverty will be financially helped; in the contributory to workers, both for their retirement and in case of disability, and in the semi-contributory, a pension is set proportional to the contributions of the independent or with a minimum guarantee from the State. In the three axes, the ONP will take sides and only in the contributory area will users be able to choose between the national administrator or an AFP or financial entity. In the voluntary pillar, complementary contributions will be deposited to fund the retirement amount via AFP or bank.

2. Mandatory membership from the age of 18

In order to guarantee an old age in better conditions, “a pension identity will be created from the age of 18,” according to Andrés Zacarías, general director of Financial Markets and Private Pension of the MEFIn addition, current regulations are changed and barriers are eliminated so that citizens can choose between a private administrator or the ONP to manage their contributions. It is worth mentioning that currently a member could not migrate from an AFP to ONP; and if he wanted to leave the ONP, he ran the risk of not receiving anything by not qualifying for the recognition bonus.

Finally, those undecided compatriots will be referred by default to the ONP and no longer to the AFP, this being another substantial change to the pension model.

3 Pensions will rise in January 2024

The proposal contemplates raising the minimum pension in the ONP: from S/500 to S/600. The maximum would reach S/1,000. In both cases, the citizen must reach 20 years of contributions.

Proportional pensions would also be raised for those who do not complete the two decades of contributions. Those who have contributed between 10 and less than 15 years will have S/300. Currently, they receive S/250. Meanwhile, those who contributed for more than 15 and less than 20 years would no longer have a remuneration of S/350, but rather S/400. The new amounts would apply from 2024.

In addition, AFP members who do not have sufficient funds to finance a minimum pension may transfer to the ONP, where they will be granted the benefit of the state guarantee so that they can access a proportional or minimum pension. The State’s expenditure to provide pensions to current AFP members would be S/123,000 million throughout its implementation, according to the MEF.

4. Padlocks on the withdrawal of 95.5% of the AFP

The reform carried out by the Executive puts an end to the withdrawal of 95.5% of the funds, currently applied for early retirement for people between 50 and 55 years old.

However, the prohibition will apply only to new members of the inexorable pension model – to be debated in Congress – and also to current contributors under 40 years of age.

Those members over 40 years of age who want an early withdrawal – REJA, popularly known – will be evaluated by the Superintendence of Banking, Insurance and AFP (SBS).

On the other hand, the age for early retirement would be raised to 55 years and the legal age will continue to be 65 years.

5. Insurers and savings banks enter the competition

In a market concentrated by the AFPs, the doors are opened for more entities to compete and “give greater plurality to the market”, thus improving its efficiency and operation, according to the MEF.

Thus, banks, municipal savings banks, rural savings banks, investment banks and insurance companies will be able to manage pensions “with the aim of reducing commissions” that are charged to the member and are usually harmful when profitability falls.

6. You must replace withdrawn funds for your pension

The Executive points out that AFP members who used their resources in the six withdrawals authorized by the pandemic would generate “a situation of inequality if they do not revert this money to the system” and would break the premise of “equal effort, equal benefit.”

The MEF warns that the goal is to protect the member, but also to keep the system afloat, which is why, despite using the public treasury to cover what is missing in a pension, members who “in their active stage” withdrew resources have to restore the funds “in some gradual way.”

7. Inclusion of independent workers

Regarding independents within the public sector – such as landlords or consultants -, those in the ONP will be charged a rate of no less than 13% on each amount received, with a maximum base of 50% of the UIT in force at the time of payment; and if they are in the private sector, a rate of 10% plus an insurance premium and commission. In general terms, the rates currently set for dependents are being maintained.

“Independents, progressively, are going to have to start contributing with a greater objective: to formalize our economy. At first they will begin to contribute only through the UIT. If an independent earns more than that, it is not that he will contribute in full, but up to half of the UIT with the rate of 10% or 13%, depending on the regime,” added Andrés Zacarías of the MEF.

8. In what cases can I use my funds?

Despite the filters for the withdrawal of 95.5% in early retirement, the exceptional withdrawal of 25% of the fund from an individual AFP account is authorized to pay the initial payment or amortize a mortgage loan for a first property, always that is a credit of this category given by a financial institution or savings and credit cooperative that only operates with its members, does not collect resources from the public or operates with third parties.

In addition to those members who, in the event of a terminal illness or cancer diagnosis that reduces their life expectancy, could release up to 50% of their contributions.

9. Tax incentives

As mentioned previously, resources from the public treasury will be available to complement a pension, although anyone in the system will also be incentivized through tax instruments and direct contributions that will be specified in the regulations and the criteria will be defined.

Automatic membership is insufficient

Approach. Noelia Bernal, economist

In general terms, I think the initiative and proactivity of the Executive in having achieved a proposal to reform the pension system is good. However, I believe that there is an error in the composition of the commission that prepared this document and that is reflected in the result, since each of them (MEF, S.B.S.MTPE, BCRP) are defending their jurisdictions, the status quo.

There is talk of opening the market to new competitors, but I don’t know how much it will help if the workforce of formal workers is very limited. Let us remember that the system began in the nineties with six or eight AFPs and we have ended up with only four. Then we will have more private and ONP, and on top of that you can move from one place to another. There I think they have made a bad copy of the Colombian system, which has many problems due to these transfers.

On the other hand, subsidizing minimum pensions for AFP members, as proposed, is very expensive. It strikes me that the MEF approves such an expensive measure –which in present value is between 11 and 13 points of GDP– and that it is very austere to expand Pension 65 coverage. It is contradictory.

Affiliating Peruvians from the age of 18 seems to me to be a very good measure, but it is insufficient if you do not ensure that the contributions are made. It is also not known what will happen to the workers of the mypes.

So, what we see is that the fiscal effort of the proposal is to focus on those who are already part of the system when it should be the opposite.