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5 November, 2021

What is the purpose of the new pension fund reforms in Latin America?

The COVID-19 pandemic increased the challenges facing the region in pension matters. Due to the loss of income resulting from the prolonged quarantines, two countries in the region allowed the early withdrawal of pension funds. They have not been authorized in the remaining countries, to date. Massive fund withdrawals have exacerbated existing problems and accelerated the need for reforms.

“Pension reforms must be adjusted to the labor market and trends in each country, for the purpose of increasing coverage. Likewise, it is important to bear in mind the expectations of the population, focusing on the protection of members as a central objective,” said the Executive President of the Dominican Association of Pension Fund Administrators (ADAFP), Kirsis Jáquez.

In her presentation, Jáquez described the trends in the reform processes of the Latin American pension systems (approved or under discussion). In Peru, on the one hand, early pension fund withdrawals are gradually being authorized, via legislation. A fourth withdrawal of funds is currently being debated in Chile. Different percentages of early fund withdrawals have also been proposed in the rest of the region (Colombia, Costa Rica, El Salvador, the Dominican Republic and Mexico), although they have not been authorized to date.

According to the expert, the early withdrawal measures approved in Chile and Peru constitute a “pension counter-reform,” since she believes that the reduction of individual savings as the basis of the mandatory contributory pillar is a step back in the improvement of pension systems in Latin America, since in addition to other damages, they reduce the value of pensions.

ADAFP has drawn up 25 proposals for improving the pension system in the Dominican Republic. They include a non-contributory minimum solidarity pension (60% of the minimum wage), a lifetime disability pension, balancing replacement rates between men and women, adjusting the retirement age to life expectancies and integrating independent workers, in addition to establishing a gradual contribution for defeating informality and encouraging voluntary pension savings with tax incentives and automatic enrollment.

According to Jáquez, it is important to strengthen individually funded systems, because they have a high impact on savings in countries, and enable the means-testing of more sustainable non-contributory assistance programs for those who really need them.

The Vice President of Enrollment of the Mexican Association of Pension Fund Managers (AMAFORE), María de las Nieves Lanzagorta, on the other hand, spoke on the situation in Mexico, which switched to an individual accounts system through a reform in 1997, and the latest reform to the Retirement Savings System (SAR) that came into effect in January of this year.

This reform reduced the number of weeks required for accessing an unemployment pension in advanced old age. Mandatory employer contributions were also increased; the Social Security contribution was redistributed to finance the savings of workers with less income, and the guaranteed minimum pension and replacement rates were increased, among other adjustments.

The presentation can be viewed on the seminar’s website (https://seminariofiap.strim.cl/).



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