Chile’s Congress has approved substantial social security reforms to enhance retirement benefits, which include significant increases in employer contributions and measures to boost competition among fund providers. The reforms will raise contributions gradually, introduce new funds for survivors and disability pensions, and require periodic auctions of AFP services to secure the lowest fees for participants. Employers are advised to reassess their benefit provisions and prepare for rising labor costs due to these changes.
The Chilean Congress has enacted reforms aimed at enhancing social security, focusing on retirement benefits for workers. These changes will significantly raise employer contributions over time and promote increased competition among service providers. Currently, social security benefits are derived from compulsory individual defined contribution accounts managed by private fund administrators (AFPs), funded mainly by employee contributions at 10% of covered pay. Following the law’s publication in the coming weeks, these reforms will commence six months later.
The reforms entail a gradual rise in employer contributions from the current 1.5% of pay to 8.5% by 2034, with an extension possible until 2036. The additional 7% contribution will be allocated as follows: 4.5% to individual contribution accounts, 1% to a new fund for survivors’ and disability pensions which includes a minimum additional pension for women, and 1.5% to a fund for new retirement benefits managed by the social security institute, dependent on employment duration.
New regulations will also incentivize competition among AFPs by mandating that every two years, services for 10% of participants will be auctioned to the lowest-fee AFP, ensuring these rates remain fixed for at least five years. The existing five investment funds will transition into ten targeted retirement date funds that align investment strategies with specific participant cohorts.
For employers, these reforms highlight longstanding issues within the AFP system. With only 10% of employers offering company pensions and a concerning percentage of current female pensioners earning below the minimum wage, these changes necessitate a reassessment of benefit provisions and preparation for increased labor costs. It is crucial for employers to understand the implications of these modifications on their business practices and workforce management.
In summary, the recent social security reforms in Chile aim to improve retirement outcomes by increasing employer contributions and fostering competition among service providers. As these changes are implemented, employers must evaluate their benefit offerings and prepare for the impact on labor costs, particularly given the social inequities present in the current pension system for women. These reforms represent a significant shift towards better financial security for workers in Chile.
Original Source: www.wtwco.com
