El Salvador: Pension reforms — aiming for sustainability

Employer Action Code: Act

New legislation (Decree No. 614) has significantly revamped El Salvador’s compulsory individual retirement account system (Sistema de Ahorro para Pensiones – SAP). Established in 1998, the SAP became the primary social security retirement benefit program (two legacy systems apply to workers covered by social security prior to 1998). The legislative changes are intended to tackle long-standing concerns regarding the system’s sustainability and benefits adequacy by increasing the employer contribution rate and abolishing the cap on covered pay, among other things.

Key details

Changes to the SAP, effective January 1, 2023, include:

• The employer contribution rate is increased from 7.75% to 8.75% of pay; the employee contribution rate is unchanged (7.25%). Of the 16% total contribution rate, 9% goes to individual retirement accounts, 6% (previously 5%) goes to the Solidarity Guarantee Fund (Cuenta de Garantía Solidaria – CGS) to fund benefits for SAP members whose account balances are insufficient to generate the minimum pension, and 1% goes to pension funds management companies (Administradoras de Fondos de Pensiones – AFPs). Previously, the AFP contribution allocation was 1.9% of covered pay, of which about 1.0% was for disability and survivor insurance with the remainder for administrative costs. The reforms remove the requirement for AFPs to buy disability and survivor insurance for account holders. Death and disability pensions will now be financed via the individual savings account of each member, supported by payment guarantees from the new pensions agency and the state. Existing insurance policies in effect before 2023 will remain valid for up to 10 years.
• Employer and employee contributions are now based on uncapped monthly earnings. The prior monthly earnings ceiling for determining contributions (US$7,045 in 2022) is eliminated.
• A newly established maximum monthly benefit amount is set at US$3,000. Retirement benefits in payment for most pensioners are increased by 30%, subject to the new maximum benefit. Pensioners receiving retirement benefits exceeding six times the minimum monthly pension (US$304) are subject to a 7% CGS contribution from their pensions (previously 3% to 10%, depending on the pension amount).
• Account holders no longer have the option to withdraw up to 25% of their account balance before normal retirement age.
• A new pensions agency (Instituto Salvadoreño de Pensiones) will administer the pension system’s current and legacy programs, protect the employees’ entitlement to retirement benefits and oversee the AFPs.

Employer implications

While the government’s stated aims for the reforms are to improve the system’s sustainability and benefits adequacy, prospects for achieving those goals are mixed. Eliminating the ceiling on covered pay for pension contributions and maximum benefit cap will result in higher costs and lower benefits for highly paid employees. Very few employers (7% of those surveyed) offer supplemental retirement benefits, but the reforms could encourage companies to consider doing so for highly paid employees. Providing supplemental life insurance is very common (80% of employers) — accident death and disability coverage less so. Employers are encouraged to review the new SAP provisions and their employee benefit plans to ensure they are in compliance.

Contact

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Mariano Thompson

Director, Integrated & Global Solutions

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