private pensions in Chile and Peru

It looks like the beginning of the end for Chile’s system of private pensions based on forced retirement savings. The Chilean model has been promoted by the World Bank in an effort to move contributory pensions away from public, pay-as-you-go schemes to privately-managed, pre-funded schemes.

Developing countries around the world have implemented versions of the Chilean model, but there are increasing complaints of high administrative charges and poor returns for participants. The model seems to have lost its appeal even in the World Bank, which now places more emphasis on non-contributory pensions, referred to as a ‘zero pillar’.

Hundreds of thousands of people across Chile have taken part in protests against the country’s controversial privatised pension plan. The scheme was launched in 1981, during the military government of General Augusto Pinochet. ….

President Bachelet, who is left wing, … proposed an increase in employer’s contributions and a reduction in commissions paid to the fund managers. But protesters want the Pension Fund Administrators (or AFP) scheme to be scrapped altogether.

Leaders of the No More AFP movement have called a nationwide strike on 4 November.

Chileans protest against Pinochet-era private pension scheme“, BBC News, 22 August 2016.

Peru is one of the many countries that would like to reform the Chilean model of pensions that they implemented long ago. By coincidence, I received today in my inbox a Declaration of The International Federation of Pension Fund Administrators (FIAP), offering technical assistance to the Government of Peru in improving its system.

FIAP is based in Santiago, Chile. Its members are companies that administer the forced retirement savings deposited with them. Members are from numerous countries of Latin America, in addition to Spain, Kazakhstan and Ukraine.

The Declaration is brief and very self-serving.  For convenience, I am copying and pasting the substantive parts below, with a link to the full document. Note the absence of any mention administrative fees, and the desire to retain all savings under control of fund managers both before and after retirement.

[FIAP] is aware that the individually funded pension system in Peru has room for improvement, but the improvements must be made on the basis of a broad technical discussion, with experts discussing the best proposals for the comprehensive reform of the pension system, which in this case would include the Pension Fund Managers (AFPs) ….

The reforms that are implemented must ensure that t he pension system has ample coverage, grants sufficient pensions, is equitable and financially sustainable, avoiding reckless actions with populist goals and the approval of policies that are detrimental to the workers themselves (for example, the recently approved rule that allows the withdrawal of 95.5% of the funds at retirement age). ….

The purpose of social security systems is to compel workers to renounce present consumption, so that when they are no longer able to work, they will have sufficient resources for financing their retirement. It is contradictory that after being forced to save throughout their working lives, workers are allowed to withdraw all their resources, leaving them devoid of all their old-age savings. FIAP therefore offers to put its technical expertise at the disposal of the competent agencies in the upcoming debate of the Commission for the Reform of the Peruvian Pension System, which will be created by the Government of the new President, Mr. Pedro Pablo Kuczynski, to fulfill the need to grant a worthy pension to all Peruvian workers. FIAP is an international agency comprising the Associations of Pension Fund Managers of the European and Latin American countries that have incorporated individually funded savings regimes into their pension systems.

FIAP Declaration No. 4, 22 August 2016.

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