Spotlight: Chile pension reform off the starting blocks

Chilean President Michelle Bachelet has presented her government's pension reform proposal.

Officials have drafted three initiatives which lawmakers are due to debate over the coming months.

Finance minister Rodrigo Valdés (pictured) said the reform is "great news for everyone," adding that the main beneficiaries of the changes to the system will be women and the middle class.

In 2008 Bachelet, during her first term in office, implemented a reform that created the so-called solidarity pillar. More than 1.8mn Chileans have benefited from the pillar, which has increased pensions and benefit coverage among vulnerable segments of the population.

The first bill as part of the current reform establishes a new scheme under which employers will contribute 5% of an employee's monthly salary. Of this, three percentage points would go into an individual savings account set up for each worker. This account would be managed by a public entity set up by the state. The remainder would go into a group scheme managed by the same entity. This group scheme would be used to boost the size of women's pensions, among other purposes.

The second bill establishes the government entity.

The third bill modifies the rules governing the country's private pension fund managers, or AFPs as they are known.

The changes will cost the state US$1.5bn, Valdes said, citing higher wage bills on the part of public sector employers and the impact of companies using pension-related tax benefits.

AN INDUSTRY VOICE

Roberto Fuentes, head of studies at Chile's association of private pension fund managers AAFP, told BNamericas that the reforms have positive and negative aspects.

"This draft legislation, based on the preliminary information available, has a positive element, which is the significant increase of 5% in savings. Without doubt this higher contribution will permit the financing of bigger pensions."

He said a key negative issue surrounds the question of who eventually will shoulder the cost.

"In reality, today's workers will finance it," he said. "In the medium and long-term, employers tend to transfer this higher tax to salaries, to future wage growth. This will be especially true in the case of those with limited leverage and education, he said.

The bulk of AFP contributors are salaried workers who earn between 300,000 and 500,000 pesos (US$464 and US$773) a month.

Fuentes also cited as negative aspects the fact that, under the proposed group savings scheme, those earning less will receive the same proportional boost as those earning more. He also cited the issue of duplicate fund management costs - as affiliates would have an AFP account and an account with the government.