Chile pension reform: It's urgent but differences remain

Government officials, private pension fund managers (AFPs) and lawmakers agree that Chile needs to pass a pension reform now more than ever as the current model is not providing adequate payouts, but disagree on both the effectiveness of the bill in congress and the issues that must be addressed in a scenario of an aging population and increasing public sentiment against the current system.

During a seminar held by the country’s construction chamber (CChC) the government’s pension bill coordinator Augusto Iglesias defended the proposed legislation, saying “there hasn’t been a more ambitious reform since 1980, and that’s including the 2008 reform that created the solidarity pillar.”

The government bill will increase the contribution rate by 40%, something Iglesias claimed has never been done in any pension reform through the legislative road. The Chilean system was introduced in 1980 under the military dictatorship.

The reform was passed by the labor committee of the lower house, and the finance committee will begin discussing it in the next few weeks.

The government expects the bill to be passed this year in order to begin its implementation in 2020.

However, the labor committee made some modifications. Iglesias criticized the decision to add an article to block AFPs from charging affiliates commissions for intermediation.

“This means, in practice, to ban or limit pension fund investments in a large variety of instruments abroad,” he said, adding that the government will discuss this amendment further with the opposition as the bill moves through congress.

Iglesias said the government has three “red lines” in the talks with the opposition: individual capitalization (defined contribution), the private sector’s dominant role in pension fund management, and the existence of a public component to support more vulnerable retirees.

AFP POINT OF VIEW

During the same event, the chairman of AFP Habitat, Cristián Rodríguez, said he shared the government’s sense of urgency, but criticized the proposed reform for not addressing the main issues plaguing the local pension system.

“AFPs are not the problem. Low pensions are the result of low salary levels, the retirement period is too long in relation to the working period, and it’s necessary to focus the discussion on the real problems, not the most popular ones,” he said.

He said that of the 11mn Chileans affiliated to the AFP system, only half of them made contributions last month, and that raising the contribution rate by 40%, to 14% of salaries from 10%, was not enough.

Rodríguez said if the government aimed to solve the issue of low pensions by only increasing the contribution rate, then it would have to increase it by 100% as the rise in life expectancy has created a scenario where the retirement period could, in some cases, be as long as the working life of an affiliate.

He said that addressing these issues could increase women’s pensions by 100%, and men’s pensions by 60%.

AFPs have also criticized the fact that under the government's bill the additional 40% in contributions – to be paid by employers – would be managed by a state entity.   

LAWMAKERS WEIGH IN

Lastly, senators Andrés Allamand, from the pro-government Renovación Nacional party, and Ricardo Lagos Weber from the opposition Partido por la Democracia warned that failing to pass a pension reform during this government, either the current bill or another one, would have negative consequences for the entire political system.

“The reform is indispensable, but I would also say that it’s urgent,” Allamand said. “Objectively, pensions are low.”

Meanwhile, Lagos Weber said if congress fails to pass a pensions reform, “it would feed left-wing and right-wing extremism, and populism.”

A movement known as No More AFPs has staged several large demonstrations against the current private system in recent years.