Chile: Proposal for employer contributions to social security pensions

Employer Action Code: Monitor

Proposed pension reforms aim to increase retirement pensions for current and future retirees, primarily by introducing and gradually increasing employer contributions to social security pensions. In Chile, social security retirement, survivors’ and disability benefits are based on compulsory individual defined contribution accounts managed by private fund administrators (Administradoras de Fondos de Pensiones – AFPs); these accounts are funded primarily by employee contributions (10.0% of covered pay). Employers are currently not required to fund social security retirement benefits, except for workers employed under arduous or hazardous working conditions.

Key details

• Employers would be required to contribute to a central Integrated Pension Fund (Fondo Integrado de Pensiones – IPF), with 70% of the contributions credited to employees’ individual accounts and 30% to a social solidarity fund to increase pension benefits for retirees receiving the minimum pension, increasing the benefit from 206,000 (as of August 1, 2023) to 250,000 Chilean pesos per month. The contribution rate would start at 1.0% of covered pay and increase by one percentage point each year until it reaches 6.0%.
• The minimum monthly employee contribution rate for funding the individual accounts would increase from 10.0% of covered pay to 10.5%. The monthly earnings limit for contributions would increase from 81.6 UFs to 122.6 UFs.1
• The current role of the AFPs, as both administrators and investment managers of the individual accounts, would end. A new public entity (Administrador de Pensiones Autónomo – APA) — a strengthened version of the existing Instituto de Previsión Social (IPS) — would take over administration. A separate new public entity (Inversor de Pensiones Público y Autónomo – IPPA) would be responsible for investment management of employer contributions and would be the default investment manager of employee contributions. Employees would have the option to select approved private investment managers instead of the IPPA for their contributions. The current AFPs would be permitted to apply for government approval to be private investment managers. The government expects that the overall fee rate charged to individual accounts for administration and investment would be substantially lower than today.

Employer implications

There is a broad consensus on the need for some type of reform due to the inadequacies of the AFP system and small size of the market for private company or individual pensions. Only 7% of employers surveyed by WTW offer company pensions. According to the government, 72% of current social security pensioners have income below the minimum wage, and one in four are below the poverty line. The reform proposals were initially announced in November 2022, but the government had no success in persuading Congress to act. In August 2023, the government relaunched the proposal following public consultations. The bill is currently with the Chamber of Deputies, but it’s unclear if the government has the votes for passage in both houses of Congress. Conservative opposition parties are arguing that the 6% employer contribution should go entirely to individual accounts, with any increase in minimum pensions to be funded by the government. Companies should monitor development of the legislation closely.