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We expect further adjustments in the Senate.
2024/01/29 | Andrés Pérez M., Vittorio Peretti & Ignacio Martinez Labra

The Government’s pension reform, originally presented to Congress in November 2022, was recently approved by the Lower House of Congress, albeit after significant changes and with the rejection of several key measures.


The administration’s original pension reform proposed a major structural overhaul of the pension system, even though they had a minority representation in Congress. The reform presented in November 2022 proposed the creation of a new “social security pillar” financed by new contributions of 6% of the workers’ salary – to be paid entirely by the employer – with contributions to increase gradually at a rate of 1% per year. Of this 6% increase, 1.8% (30%) would finance greater pensions for the most vulnerable, and the remaining 4.2% (70%) to an individual “notional account.” As presented, the notional accounts differed from the individual capitalization account, in the sense that their returns would depend on the overall returns of the collective fund, whereas the individual capitalization account’s return would be a function of the targeted date of the retirement fund. Contributions to the social security pillar would be administered by a new public entity, that would also, by default, receive the future flows of the mandatory 10% contributions to individual capitalization accounts. The bill also proposed replacing the private pension fund managers (AFPs) with private investment managers that would only invest, leaving other roles currently performed by the AFPs such as the collection of contributions, pension payouts, and back-office functions to a new agency.


In the aftermath of the rejection of the administration’s tax reform in March 2023, and the second constitutional process, pension reform discussions were essentially on hold throughout most of 2023. Facing difficulties in the reform’s discussions from a minority position in Congress, and a united opposition, the administration gradually amended key elements of the reform. Earlier in January 2024, the government presented an amendment that ensured the support from independent congressmen from the center by changing the distribution of the additional 6% contribution to 2.1% to the individual capitalization account, 0.9% to an intragenerational savings account, and the remaining 3% to a social security fund. The amendment cleared the path for the reform’s general approval in the Lower House. 


A bittersweet approval… While the reform was approved by a simple majority in the Lower House’s floor on January 24, several key measures were rejected. The most relevant articles that were approved include:


  • Separation of the Pension Fund Industry: A new pension administrator will be responsible for the collection of contributions, pension payouts, and back-office functions; the AFPs currently perform these duties, as mentioned earlier. In addition, Private Pension Investors were approved, replacing the current AFPs. In doing so, pension fund managers will have to adjust their fee structure, currently based on a percentage of the monthly wage, to a fee based on AUM.


  • Competitive auctions of affiliates: to foster greater fee competition, 10% of the outstanding stock of affiliates will be randomly bid on an annual basis. Savers would have to provide their consent if selected to shift to a manager with lower fees.


  • Shift to targeted date funds: the current structure of five types of funds stretching from riskiest to most conservative is replaced with targeted date funds, reducing the financial risks associated to the massive fund switching in previous years, among other effects.


  • Higher publicly financed pensions with a greater coverage, over time: Congress approved an increase of publicly financed pensions (PGU) to CLP250,000 from CLP214,296. This program currently covers 90% of the population aged above 64 at an annual cost of slightly under 2% of GDP in 2023 and is projected to rise to 100% coverage after six years at an annual cost of 2.3% of GDP, according to estimates by the Ministry of Finance.  However, additional financing was not approved.


  • Loans from individual capitalization accounts (so called “self-loans” or “autoprestamos” in Spanish): Loans from one’s individual capitalization accounts were approved, with withdrawals equivalent to 5% of accumulated savings up to 30 UF (approx. CLP1,100,000, roughly USD1,200). This measure had been proposed previously by the administration to reduce congressional support for further withdrawals.


… as several key measures were rejected.  The additional 6% contribution paid by the employer, arguably the most important measure of the bill, was rejected. Another key measure that was rejected was the creation of a state pension fund manager.


Expect adjustments in the Senate. Discussions will continue in the Senate in March, where the opposition has half of the seats. In fact, the opposition has the presidencies and majorities of the two commissions in which the reform will be discussed – the Labor committee and the Finance committee. Changes eventually approved by the Senate floor would have to then be approved by the Lower House floor, suggesting the reform is likely to end up in a Mixed Committee, towards the end of its legislative discussion. In any case, polls favor additional contributions be paid out entirely to the individual capitalization account rather than a social security fund, suggesting the reform is likely to shift contributions in that direction. Polls also show that the administration’s approval has been roughly steady at 30%.


Several setbacks over time. For context, several administrations have unsuccessfully attempted to reform the structure of Chile’s pension system over the past few years. The most recent reform to the solidarity pillar of the pension system was approved in February 2022, with the creation of the universal guaranteed pension program (PGU in Spanish) that broadened the coverage and raised publicly financed pensions (with respect to the Pensión Básica Solidaria program, implemented originally in March 2008).


A pension reform approval with broad political support, that raises pension payouts, increases domestic savings, safeguards formal employment, and ensures fiscal sustainability would be positive for Chilean risk assets. Discussions in the Senate are likely to stretch throughout 2024. We expect renewed withdrawal efforts to begin in April 2024, once the year hiatus of last year’s rejection is completed. Elections scheduled for this year (municipal elections on October 27, 2024) and 2025 (legislative and presidential elections on November 23, 2025) may pose challenges to reach consensus on structural reforms, as has been the case in previous years.