Chile’s Congress gave its final approval to a reform that will boost pensions for current and future retirees, handing President Gabriel Boric only a partial win following major concessions from his government.
The lower house of Congress backed the legislation on Jan. 29 after the Senate gave its approval through both general and item-by-item votes early on Jan. 28. The go-head followed a marathon of talks between lawmakers and the government over both the bill’s contents and its financing.
The reform represents the best attempt at reaching middle ground on arguably the most contentious problem gripping Chile. There’s no question that the current system is detrimental to women and often leaves retirees in general living in poverty or having to find other sources of income in old age. Meanwhile, the private pension funds, known as AFPs, are the bedrock of the local capital markets, meaning any legal overhauls risk irking investors.
Chilean lawmakers kept the AFPs in place, elating many on the center-right and in the business community while leaving Boric and his allies deeply frustrated. On top of that, the AFPs will be in charge of managing new employer pay-ins to workers’ individual pension accounts that are equivalent to 4.5% of salaries.
“Consolidating a system that you promised to eliminate is not a good legacy,” lower house Deputy Marcos Ilabaca from the center-left Socialist Party said in reference to Boric during a local radio interview early on Jan. 29. “It’s lacking truth.”
Some of Chile’s AFPs are owned by U.S. companies. They include AFP Habitat, by Prudential; AFP Cuprum, by Principal; and AFP Provida, by Metlife.
Another employer contribution worth 1.5% of salaries will go temporarily toward increasing payouts for retirees who need extra money now, with those funds later being returned to current workers when they end their careers. A further 1% will go toward women’s pensions and also funding disability insurance.
Right-wing lawmakers had insisted for months that the entire amount from the new employer contribution go directly to workers’ individual accounts.
Total employer contributions will rise to 8.5% of workers’ salaries over nine years, and that period can be extended if tax collections miss expectations.
The proposal will lift the state-backed universal minimum pension to 250,000 pesos ($252) per month. It also aims to lower commissions and encourage greater competition among fund managers.
