“This Law strikes at the heart of the system. If I can withdraw 95.5% of all my funds at age 65, then what am I saving for? ” This is how the Vice Chairman of the Association of AFPs of Peru, Rafael Picasso, summarizes the impact of the law that enables members over 65 years of age to withdraw almost the total amount of their pension savings, signing a document renouncing State assistance in case they run out of resources in their old age.

By June 28, 13,692 members of the Peruvian private pension system had already exercised this new option, withdrawing a total amount of US$ 365 million, according to Picasso.

“90% of these funds have been destined to consumption, only 3% to programmed withdrawal or life annuities, and 7% to a pension product developed by the banking system; with this scenario, the money will quickly vanish.

From now to the end of the year, it is estimated that some US$ 1,200 million will be withdrawn,” he warned.

Due to the above, he said “Even though the law stipulates that members who withdraw their resources will be unable to access any kind of state protection or coverage, the law can be changed in less than a day, because you can’t just abandon people in poverty. They could apply for a ‘65’ pension (which provides a an amount of approximately US$ 85 every two months to the most vulnerable elderly people over 65 in Peru).

Today, 500 thousand Peruvians benefit from this program, but it is estimated that in six or seven years time, there will be 7 million candidates. “Where will the money come from?” he asked. To this scenario, the official added the structural deficit of the National Pension System (SNP) – PAYGO – of US$40 billion, which also entails an expenditure of some US$1,300 million per year for the Treasury.

Nonetheless, another law was recently passed that enables withdrawing 25% of the saved fund to buy a house or pay off a mortgage loan. “In this case, we cannot say how much has been withdrawn, because the regulations should be published in the next few days. The Central Bank has estimated that it could be US$ 4.700 million. And that amount can be withdrawn at any time, without any age restriction,” said Picasso.

Multiple effects

The new rules and regulations will have an overall impact on the financial system in Peru. Picasso said that “activities linked to life annuity insurance have suffered a sudden-death; long-term funding will diminish; it is estimated that the long-term rate could increase by 2% or 3%; and we have had to halt virtually all of our investments because we have to have cash available to hand over those funds.” It is estimated that this will entail about US$16 billion less funds in the capital markets over the next 10 years.

This is a daunting challenge when it comes to liquidating positions, especially in the case of the Fund with the most equity. Solutions have been proposed, such as requiring six months advance notice of withdrawal from members, so as to avoid having to go on the market and selling abruptly, or being able to obtain liquidity against the portfolio.

Furthermore, in Peru the AFPs charge commissions on the managed balance, due to which this measure would entail less income on commissions, and this could cause an adjustment of the commission, or a reduction in expenditure.

On the other hand, withdrawing 25% of the fund, depending on the age at which it is done, could entail between 6% and 30% less pension for the member.

Withdrawal of funds violates regional agreement

Rafael Picasso warned that the rules and regulations that enable withdrawing the pension funds, prevent the proper functioning of the Paracas Agreement of the Pacific Alliance, which agreed to advance in the integration of these savings into the capital markets, and the portability of funds: “How can there be free portability if withdrawal is allowed in one of the countries?” From the legal standpoint, it is a breach of the Treaty with the Pacific Alliance.” Hence, he argued that one of the challenges of the President-elect of Peru, Pedro Pablo Kuczynski, and the new Congress, is to rebuild credibility and legal stability. “Regulatory risk exists all over the world, but the rules cannot be changed constantly,” he said. However, he is hopeful that a Commission for the comprehensive reform of the pension system will be created, as announced by Kuczynski. He hopes that the commission will acknowledge “that this law is an outrage” and must be repealed. Otherwise, he believes that limits could be put on withdrawals, and that instead of withdrawing 95.5%, members could withdraw up to 20%, leaving the remaining 80% for securing a pension.”

“What is most serious, is that in some cases of 95.5% withdrawal, individuals will be left with nothing; they will spend it. And if they withdraw 25%, their pensions will diminish.”

Source: El Mercurio newspaper
Date: July 5, 2016

“This Law strikes at the heart of the system. If I can withdraw 95.5% of all my funds at age 65, then what am I saving for? ” This is how the Vice Chairman of the Association of AFPs of Peru, Rafael Picasso, summarizes the impact of the law that enables members over 65 years of age to withdraw almost the total amount of their pension savings, signing a document renouncing State assistance in case they run out of resources in their old age.

By June 28, 13,692 members of the Peruvian private pension system had already exercised this new option, withdrawing a total amount of US$ 365 million, according to Picasso.

“90% of these funds have been destined to consumption, only 3% to programmed withdrawal or life annuities, and 7% to a pension product developed by the banking system; with this scenario, the money will quickly vanish.

From now to the end of the year, it is estimated that some US$ 1,200 million will be withdrawn,” he warned.

Due to the above, he said “Even though the law stipulates that members who withdraw their resources will be unable to access any kind of state protection or coverage, the law can be changed in less than a day, because you can’t just abandon people in poverty. They could apply for a ‘65’ pension (which provides a an amount of approximately US$ 85 every two months to the most vulnerable elderly people over 65 in Peru).

Today, 500 thousand Peruvians benefit from this program, but it is estimated that in six or seven years time, there will be 7 million candidates. “Where will the money come from?” he asked. To this scenario, the official added the structural deficit of the National Pension System (SNP) – PAYGO – of US$40 billion, which also entails an expenditure of some US$1,300 million per year for the Treasury.

Nonetheless, another law was recently passed that enables withdrawing 25% of the saved fund to buy a house or pay off a mortgage loan. “In this case, we cannot say how much has been withdrawn, because the regulations should be published in the next few days. The Central Bank has estimated that it could be US$ 4.700 million. And that amount can be withdrawn at any time, without any age restriction,” said Picasso.

Multiple effects

The new rules and regulations will have an overall impact on the financial system in Peru. Picasso said that “activities linked to life annuity insurance have suffered a sudden-death; long-term funding will diminish; it is estimated that the long-term rate could increase by 2% or 3%; and we have had to halt virtually all of our investments because we have to have cash available to hand over those funds.” It is estimated that this will entail about US$16 billion less funds in the capital markets over the next 10 years.

This is a daunting challenge when it comes to liquidating positions, especially in the case of the Fund with the most equity. Solutions have been proposed, such as requiring six months advance notice of withdrawal from members, so as to avoid having to go on the market and selling abruptly, or being able to obtain liquidity against the portfolio.

Furthermore, in Peru the AFPs charge commissions on the managed balance, due to which this measure would entail less income on commissions, and this could cause an adjustment of the commission, or a reduction in expenditure.

On the other hand, withdrawing 25% of the fund, depending on the age at which it is done, could entail between 6% and 30% less pension for the member.

Withdrawal of funds violates regional agreement

Rafael Picasso warned that the rules and regulations that enable withdrawing the pension funds, prevent the proper functioning of the Paracas Agreement of the Pacific Alliance, which agreed to advance in the integration of these savings into the capital markets, and the portability of funds: “How can there be free portability if withdrawal is allowed in one of the countries?” From the legal standpoint, it is a breach of the Treaty with the Pacific Alliance.” Hence, he argued that one of the challenges of the President-elect of Peru, Pedro Pablo Kuczynski, and the new Congress, is to rebuild credibility and legal stability. “Regulatory risk exists all over the world, but the rules cannot be changed constantly,” he said. However, he is hopeful that a Commission for the comprehensive reform of the pension system will be created, as announced by Kuczynski. He hopes that the commission will acknowledge “that this law is an outrage” and must be repealed. Otherwise, he believes that limits could be put on withdrawals, and that instead of withdrawing 95.5%, members could withdraw up to 20%, leaving the remaining 80% for securing a pension.”

“What is most serious, is that in some cases of 95.5% withdrawal, individuals will be left with nothing; they will spend it. And if they withdraw 25%, their pensions will diminish.”

Source: El Mercurio newspaper
Date: July 5, 2016