Reform of the pension system: what we know about the project to improve the retirement pension

The AFP Association, which brings together four Pension fund administrators in Peru, presented a proposal for reform of the pension system which guarantees a minimum pension for the benefit of affiliates, as well as increased competition between fund managers and incentives for state contributions.

The union proposes to include self-employed and informal workers and improve pensionssince currently only 3 out of 10 workers will have access to a pension.

“This approach, which rewards the savings effort, the fundamental basis for building up an old-age pension, aims to guarantee a minimum monthly pension to people with at least 20 years of contributions and a staggered retirement to those who have contributed between 10 and 20 years,” he said. Giovanna Prialé, President of the AFP Association.

In addition, the proposal incorporates a Seed capitalwhich implies a state contribution to each newborn, thus financing Pension 65 for all Peruvians and allowing a more efficient use of State resources.

“It’s time to focus on a real long-term reform and think of those Peruvians who will have nothing to live on when they reach retirement age. The idea is that in this new system guarantee a minimum pension for everyone. It would be a mistake for the control of pensions to pass into the hands of the state, that is, into the hands of a government that can be subject to the vagaries of Peruvian politics, as some sectors are proposing,” Prialé commented.

The sector proposal is based on the following points:

– Minimum pension for all. Set up a minimum pension scheme that recognizes and rewards individual effort through solidarity mechanisms.

– Matching contribution. It proposes that, for each soil contributed by the member, the State contributes an equivalent amount until a minimum pension is reached. This contribution aims to integrate informal and self-employed workers who do not have a constant savings capacity.

– Reimbursement of 1% of the IGV. It proposes that each citizen restores 1% of the VAT paid in the year, thus increasing pensions and profitability, promoting savings and encouraging formalization.

– Seed capital. This implies that the State creates a fund for each Peruvian born, as a basic fund that is capitalized until the person reaches the age of 65.

– Increase the number of fund managers. Affiliates will have more options to choose from, opening up the pension system to new players with the same rules: separate assets and intangible funds in order to protect savings.

– Finally, the creation of a performance commission was proposed.with a component associated with profitability to create a new alternative for affiliates.

“With this proposal, the AFP Association seeks to promote debate, in order to work for a comprehensive reform that grants decent pensions to all Peruvians,” said the AFP representative in Peru.

For his part, he former Minister of Economy and President of the Privy Council for Competitiveness, David Tuestaexplained that the proposal presented by the four AFP A guaranteed pension plan is offered through the contribution plus profitability and seed capital.

” Guarantee Pension to affiliates with 10 years or more of contributions who have demonstrated a saving effortto equalize the retirement conditions between the public and private system,” said the economist.

He illustrated that a minimum pension of S/583 soles in the Private pension plan (SPP) would cost S/19,619 and in the National Pension System (SNP) around S/126,863, for a retirement period of 20 years.

For low income people which does not contribute to any system, this initiative is more effective, because with Pension 65 there will be 580,000 beneficiaries over a 10-year period and with seed capital 5.8 million beneficiaries. Also Seed capital for each child born would replace the pension 65.

On another point, Tuesta said that more competition is generated and the possibility of choosing affiliates, because there will be more managers and an performance fee.

“Se propone que los trabajadores tengan más opciones para elegir, para ello se aumentará el número de gestoras de fondo, por lo que habrá más actorses en el mercado con las mismas reglas de juego, con patrimonio separados y fondos intangibles”, remarked el presidente of Private Competitiveness Council.

There the performance fee promotes competitionIt must therefore be an additional, voluntary and informed option. This will have two components, a fixed one to cover operating costs and another variable according to the profitability obtained over a given period.

Similarly, the proposal generates support for the saving effort. For all the informal and independent workers, they will have more funds in the Individual Capitalization Account (CIC) and better profitability.

“To improve your savings, for each sun you contribute, the state also contributes a sun. With this, the more profitability generated, you get a higher pensionTuesta remarked.

Plus, the Economist said a portion of the taxes they pay help build your pension. “For all informal, self-employed and dependent contributors, increases pensions and encourages retirement savings. Each contributor is referred to his CIC 1% of the IGV paid in the year”.

Everyone can do better pensions and in a sustainable way, like the case of Carmen who works as a saleswoman in the central market, mainly for campaigns. With an approximate income of $1,025/month and 20 years of contributions, applying the reform proposals, he would have the following pension plan: