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Pension funds welcome more flexibility
Pension fund managers (known as AFPs) administer these mandatory savings, consisting of a 10 percent monthly contribution from the employee's salary, plus an additional contribution to the AFP that serves as a fee for service and to cover an invalidity and life insurance in case of any eventuality. These funds are deposited on the worker's individual account, which then is capitalized.
"There are three major characteristics to the pension funds system. The first is that it offers uniformity of opportunities and non-discrimination. Workers choose what they want to contribute, although fiscal advantages are provided to those who contribute more than the required 10 percent. They can also decide at what age they want to retire. A person who has saved more during active life may retire before the established 60 years for women and 65 for men. Secondly, there are two modes to pension: the programmed retirement in which the worker maintains his funds and assumes longevity and rentability risks of the account and, the other, lifelong rent, where a worker's resources are destined to pay of a lifelong rent, which is paid by an insurance company. The third component is that AFPs, which are companies with the purpose of administering pension funds, are subject to rules. The state not only regulates the system, but also holds a subsidizing position which guarantees minimum pensions," said Guillermo Arthur, president of the AFP Association.
AFPs are allowed to invest up to half their capital in government bonds, or fixed income instruments, and up to 37 percent of their total fund in stocks on the Chilean exchange. "When AFPs were created, first we were able to invest only in government bonds and Central Bank documents. As the industry began to open up, we were able to enter the financial sector and invest in mortgages, the Chilean stock exchange and other instruments. Then came the possibility to invest abroad, which was something government authorities did not want to do because they wanted funds to remain in the Chilean economy and because the authorities are very careful with the currency's value. By law, we cannot invest more than 20 percent in foreign markets; however, the Central Bank states when you can arrive at that 20 percent. In other words, today we can only invest 16 percent, but I believe that some time soon we will be able to increase it to 18 percent," explained Alfredo Schmidt, president of AFP Habitat, which is the second AFP in Chile. AFP Habitat's principal owner -Sociedad de Inversiones Previsonales, S.A. - is composed of an equal partnership between the Chilean Chamber of Construction and Citicorp.
In terms of expectations, "For this year, we are hopeful to see some legal changes in the industry. We are observing positive responses from the new government with respect to these improvements. There is consensus in the industry," according to Manuel Antonio Tocornal, general manager of AFP Cuprum. In order of importance, he mentions that "it is fundamental to change the way we charge our affiliates -2.5 percent of the employee's salary - and this way of charging has not generated the elasticity necessary for more competition. Consequently, it ends up punishing people with lower incomes. We need to liberalize restrictions over investment to be able to design more efficient portfolios in order to have the best possible rentability as well as more flexibility to invest abroad." AFP Cuprum is the third largest in the system with assets of more than $5 billion, which translate to 16 percent of the market.
Chile's pension fund system has become an important element of economic strength and stability for the country as well as a model for domestic savings. "The AFP system is an example of private-sector solutions for public problems, such as poverty and low worker pensions," concluded Arthur.
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Table of Contents New president focuses on future while reconciling the past |
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The Chilean pension fund system, based on individual capitalization, was instituted in 1981 to replace the government's retirement plan, which was lagging the economy and not meeting the needs of the population. As established by the Decree of Law 3500 of 1980, the purpose of this system is to provide a stable income for retiring workers, in proportion to the income earned while working. All employed Chileans are obligated to form part of a pension fund, except those who were self-employed during the system's transformation or who were employed under the previous system and are receiving their pensions.
Since its implementation, the Chilean pension funds system has experienced significant growth, which is equivalent to approximately 42 percent of the national gross domestic product. For instance, during 1981 the total amount of funds was $2.98 billion, which reached $31.15 billion by 1999. Between 1981 and 1998, the number of members went from 1.4 million to 5.9 million.