Chile has enacted social security reforms increasing employer contributions to enhance workers’ retirement outcomes. Employer contributions will rise significantly over nine years, with allocations dedicated to individual retirement accounts and funds for survivors’ pensions. New regulations for AFPs will foster competition and enhance investment options. Employers are advised to reassess their pension offerings in light of expected labor cost increases, especially given the current inadequacies of the system.
In Chile, recent congressional approval of social security reforms aims to enhance retirement outcomes for workers. These changes will significantly increase employer contributions while fostering competition among service providers. The compulsory individual defined contribution accounts, managed by private fund administrators (AFPs), are largely funded by employee contributions of 10% of covered pay. Increases in employer contributions will commence six months post-publication of the law, which is anticipated soon.
The reforms will see employer contributions rise from the current 1.5% of pay to 8.5% by 2034, potentially extending to 2036. The 7.0% additional contributions will be distributed as follows: 4.5% to individual DC accounts, 1.0% to a new fund for survivors’ and disability pensions aimed at improving women’s pensions, and 1.5% to a fund managed by the Social Security Institute to create a new retirement benefit. Eligibility criteria include a minimum insured employment period of 10 years for women and 20 for men.
New regulations for AFPs are expected to enhance competition by requiring a portion of AFP services to be auctioned every two years, awarding contracts to those with the lowest fees for a minimum of five years. Furthermore, the current five risk-based investment funds will transition to ten target retirement date funds designed for specific cohorts.
With the identified deficiencies in the AFP system and low private pension market participation, these reforms have been long overdue. A mere 10% of surveyed employers offer company pensions, while alarming statistics reveal that 85% of female social security pensioners exist below the minimum wage. Employers must reassess their benefit offerings and prepare for escalating labor costs as a result of these substantial reforms.
The recent social security reforms in Chile represent a significant evolution of the pension system, emphasizing higher employer contributions and improved retirement outcomes for workers. By fostering competition among AFPs and establishing targeted investment funds, these reforms seek to address longstanding deficiencies in the pension landscape. Employers must proactively adjust their benefit strategies to accommodate the impending increases in labor costs.
Original Source: www.wtwco.com
