Chile’s Congress has approved social security reforms that significantly increase employer contributions, enhancing retirement benefits. The reforms feature a gradual rise in employer contributions over nine years, the introduction of new funds, and mechanisms to boost competition among fund administrators. Employers should prepare for rising labor costs as a result of these changes.
The Chilean Congress has enacted significant reforms to social security that will improve retirement outcomes for workers by increasing employer contributions and fostering competition among service providers. Notably, retirement, survivors’, and disability benefits will now be derived from individual defined contribution accounts managed by private fund administrators (AFP). Starting six months post-publication of the law, the changes aim to enhance the current pension system.
The contributions from employers will rise gradually over a nine-year timeframe, starting from the present rate of 1.5% to 8.5% by 2034, with a possible extension to 2036. The additional 7.0% contributions will be allocated as follows: 4.5% will be directed to individual DC accounts, while 1.0% will support a new social security fund that enhances pensions for women and provides minimum benefits. The remaining 1.5% is designated for a fund managed by the Instituto de Prevision Social to finance a new monthly retirement benefit.
To stimulate competition among the AFPs, new regulations will require that 10% of the services for participants be auctioned off biennially to the lowest-fee AFP, ensuring better pricing for consumers. Furthermore, AFPs will transition from offering five investment funds to ten target retirement date funds tailored to each cohort’s needs.
The reforms address long-standing deficiencies in the AFP system, such as the limited availability of company pensions, with only 10% of employers indicating they provide such benefits. The government highlights alarming statistics revealing 85% of female pensioners earn less than the minimum wage, which underscores the need for these reforms. Employers are encouraged to reassess their benefits strategies and brace for the rise in labor costs associated with these changes.
The recent social security reforms in Chile represent a crucial step towards improving retirement benefits for workers, particularly women, through increased employer contributions and enhanced competitive practices among fund administrators. With structured contributions and targeted initiatives, these changes aim to rectify existing inequalities within the pension system. Employers must adapt to the impending increases in labor costs and reconsider their benefit provisions to align with the reformed policies.
Original Source: www.wtwco.com
