Check the NOTE here

Latin American pension systems face significant challenges due to demographic changes, high informality rates and the need to provide sufficient and sustainable pensions over time. In Peru, the pension system has evolved from a solely PAYGO scheme to a competing mixed model that includes an individual savings system.

However, design, coverage, and sufficiency challenges have persisted over time, exacerbated by the recent pandemic and the extraordinary withdrawals of funds.

The three main problems facing the Peruvian pension system are:

1. Design: contributory systems coexist without being subject to the same rules.
2. Low coverage: the high labor informality rate makes it difficult to participate in the system.
3. Pension shortfalls: Demographic trends and the lack of minimum guarantees affect pension amounts.

The Law on the Modernization of the Pension System, approved in September 2024, includes among other measures:

• Mandatory membership at the age of 18.
• Minimum pension for members of the private pension system (SPP1), so that now both contributory
systems [PAYGO (SNP2) and the SPP] will have minimum pensions.
• Savings by contributions via consumption.
• Productivity based fees.
• Admission of new actors to the SPP.
• Gradual mandatory contribution of independent workers.
• Free transfers between SNP and SPP.
• Restrictions on early withdrawal of funds.

These measures account for several improvements in the three aforementioned problems. In terms of design, free transfers between the SNP and the SPP are complemented by greater transparency since a guaranteed minimum pension can be accessed in both systems. Regarding coverage, automatic enrollment and contribution via consumption will allow everyone to save and participate in the system, even those who work in the informal sector. The mandatory progressive inclusion of independent workers will also have a positive impact on coverage. Regarding sufficiency, the introduction of a minimum pension in the SPP will contribute to ensuring certain minimum income levels. Restrictions on withdrawals will allow pension savings to grow and provide better pensions for individuals.

Despite these improvements some challenges remain. Contribution rates to the SNP and SPP remain below the OECD average, while demographic trends will continue to bring pressure to bear on the sufficiency and sustainability of the system. A technical institutional framework must be established to adjust the parameters of the system independently and professionally. Increases in coverage and non-contributory pension amounts are also pending.

Check the NOTE here