Chile: Employers Must Contribute to Employee Pensions

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By Tom Azzopardi

Chilean companies will be required to make contributions to employee pension accounts under legislation sent to Congress this week. Accounts are currently funded solely by employee contributions of 10 percent of gross salary. The new law will add a 5 percent employer contribution.

The monthly employer contribution will be introduced gradually, beginning at 1 percent in the first year and rising to the full amount within six years. Sixty percent of employer contributions will be paid directly into workers' individual pension accounts, the remainder into a new collective savings fund to boost the pensions of those who have not saved enough for their old age.

Three Bills

The bill is one of three pieces of legislation signed by President Michelle Bachelet on Aug. 10 that aim to increase pensions for Chilean workers, especially the lowest paid.

“We know that individual effort is key and must be recognized, but in many, many cases it is not sufficient,” Bachelet said in a national broadcast to explain the reform on Aug. 12.

In 2015, a commission appointed by Bachelet found that approximately half of retirees would receive pensions of under 90,000 pesos ($139) a month, less than half the minimum wage. The government initially shelved the commission's proposals to improve the situation, but a wave of mass protests last year calling for higher pensions and the elimination of the private pension fund administrators (AFPs) forced the president's hand.

Bachelet explained that the new collective savings fund will increase the income of most pensioners by at least 20 percent while future retirees will obtain a pension that is 50 percent higher as a result of higher contributions.

Rather than the unpopular AFPs, which are seen as profiting from workers' savings, the additional contribution to individual accounts will be administrated by a new public body led by a committee appointed using the same method as Chile's well-respected and autonomous Central Bank. This will be the subject of the second bill.

The third will introduce stricter regulation of the AFPs.

Time Running Out

The government proposal has not pleased business leaders, who see the employers' contribution as a tax on jobs as Chile's economy suffers its worst slowdown since the 2008-2009 global financial crisis. In addition, the AFPs, which include subsidiaries of Metlife Inc. and Principal Financial Group, have pointed out that the new public entity will increase, not reduce, the cost of administrating workers' savings.

The bill also does not address the issue of retirement ages, currently 65 for men and 60 for women, which are a contributing factor to low pensions, especially for female retirees, critics have pointed out.

Still, legislators have promised to give their full attention to the bill in order to complete the approval process before the Bachelet government steps down in March. Failing this, the completion of the legislative process may be left to Bachelet's successor.

Former president Sebastian Piñera, who is the leading candidate for next November's presidential elections, has said he would require a 4 percent contribution from employers, all of which would go into the individual account, while an increased basic pension would be financed out of general taxation.

The government's principal candidate Senator Alejandro Guillier said that he broadly supports Bachelet's proposal, while Beatriz Sanchez of the left-wing Frente Amplio coalition has called for the abolition of the AFPs.

To contact the reporter on this story: Tom Azzopardi in Santiago at correspondents@bna.com

To contact the editor responsible for this story: Rick Vollmar at rvollmar@bna.com

For More Information

For more information on Chilean HR law and regulation, see the Chile primer.

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