Chile pension reform draws mixed reaction from AFPs

The trade group representing Chile's pension fund managers, AAFP, said it views the government's pension reform proposal as positive overall but had wanted to see the proposed new contribution rate more in line with the OECD average.

President Sebastián Piñera addressed the nation on Sunday in a televised speech to unveil the details of a major reform to the pension system.

Piñera said that reform is urgent due to the low pensions that many retirees receive and the large number of people who are now in retirement. Given the impact of longevity, the current problem will only increase in the coming years without changes to the current system, he added.

The speech and the reform proposal can be read in full here.

Where AAFP sees the biggest reform flaw

The reform proposal will increase the monthly contribution workers in the formal sector make to the country's six pension fund managers from 10% to 14%. The increase will be gradual and 100% financed by employers.

The low contribution rate is widely seen as one of the main reasons for the low pensions and AAFP said it must be raised much higher than 14% in order to really address this problem. The trade group called for a contribution rate closer to the 19% average of OECD countries, of which Chile is a member.

The reform contains pension-related incentives for people who decide to postpone their retirement and although AAFP views this as a step in the right direction, it called on the authorities to follow the global trend of rising the retirement age in the face of increasing longevity.

In Chile, men retire at age 65 and women at 60. There is widespread consensus that some kind of increase will have to come at some point, but several administrations have refrained from making an actual reform proposal over fears of strong resistance from voters.

AAFP said it would comment fully on the reform once it has been sent to congress and all technical aspects are known.

New competition

AAFP's members, the AFPs, will face competition in terms of the management of funds that would be generated if the 14% contribution rate is approved.

AFPs are the only entities that are allowed to manage mandatory pension savings currently, while a host of other financial institutions are authorized to participate in the voluntary pension industry.

The reform gives AFP members the right to choose the financial institution that will manage the contribution from employers, opening the door for asset management firms, banks (through asset management units), life insurance companies, savings & loan cooperatives and social security entities known as Cajas, to enter the pension fund management business.