RIO DE JANEIRO - Brazil's government has just approved legislation creating that nation's first tax-advantaged retirement plan for individuals.
The individual programmed retirement fund, or FAPI, is designed to stimulate long-term national savings as well as to help, over time, lighten the government's burden of providing social security benefits. At present, Brazil's social security program has a deficit.
The new retirement program is a defined contribution arrangement. It can be sponsored by an employer - similar to 401(k) plans in the United States - or it can be created by individuals, like the U.S.' individual retirement accounts.
Users of the FAPI program - whether individuals or companies acting on behalf of their employees - invest in a retirement plan by buying shares in an investment fund.
FAPI investment funds will have to be registered with the government. Their investment horizons will be limited; while they will be able to invest up to 100% in government bonds, they will only be allowed to have up to 80% in non-government fixed-income instruments and up to 49% in variable-income instruments, such as equities. Unlike Brazilian pension funds that provide a 6% annual guaranteed return, the FAPI funds have no guaranteed return on investment.
According to the newly passed legislation, participating individuals would be penalized for making any withdrawals from their accounts for the first 10 years after they are established. While the size of these penalties has yet to be determined, the ceiling on them will be 25% of the amount of the individual's FAPI account.
Individuals with FAPI investments will be able to deduct up to 2,400 Brazilian reals ($2,200) from their income tax, and companies making FAPI investments for their employees will be able to deduct up to 10% of their payroll cost.
Experts believe the most common users of the FAPI plan will be professionals who now have no individual retirement plan, either provided by their companies or by insurance companies. Small firms, unable to afford setting up retirement plans for their workers, will also be attracted to the FAPI plan. But the program is not expected to attract either individuals who already have corporate retirement plans or companies that now offer their own retirement packages.
According to some close observers, individuals are likely to prefer corporate retirement plans because, unlike the FAPI program, company plans provide death and disability coverage.
For tax and personnel reasons, companies still are likely to prefer their own plans. On the tax front, companies can deduct 100% of contributions made to their own retirement plan. Under FAPI, they can deduct 10% of the gross salary of individuals participating in that program.
In addition, FAPI holdings will be portable - unlike corporate plans. That means employees with corporate plans will have more incentive to stay with a company that is offering them participation in a corporate plan.
Marlene Reiner, a senior consultant with the Sao Paulo subsidiary of Towers, Perrin, said the government's main aim with the FAPI program is to teach people to begin a long-term saving program for when they retire, which will in turn, take social security payout pressures off a government whose social security program is in the red.
According to Ms. Reiner, the government hopes the FAPI program will bring in U.S.$50 billion in the next 10 years. She added big banks and insurance companies should soon begin making FAPI plans available.
