Chile’s Landmark Pension Bill Passes Last Congressional Vote

(Bloomberg) -- Chile’s Chamber of Deputies gave final congressional approval to a bill allowing early pension withdrawals amid the coronavirus pandemic, leaving it to President Sebastian Pinera to decide whether to promulgate the proposal he bitterly opposed.

On Thursday, 116 deputies voted in favor of the bill allowing citizens to tap 10% of their retirement savings, upholding changes that had been introduced the day before by the Senate, while only 28 voted against.

Rather than promulgate the bill, Pinera or government lawmakers could send it to the constitutional court for review as a last-ditch attempt to block its implementation, or the president could simply veto the proposal. Those two options would be unpopular though, given the legislation’s strong public support, according to Mario Mesquita, chief economist at Itau Unibanco.

“I don’t feel that one suffers a defeat if you fight with strength and conviction in what you believe is the best for Chile,“ Pinera said at a press conference earlier in the day.

Chile’s private pension system is one of the most contentious legacies of the dictatorship of Augusto Pinochet, and was a key driver of last year’s wave of anti-government protests. Pensions often fall below the minimum wage, and the companies that manage the funds have become deeply resented. Still, many economists and policy makers oppose the changes to the accounts, which hold about $200 billion in assets and are the bedrock to Chile’s capital markets.

Political Blow

Late on Wednesday, Senators backed the bill in rebuff to weeks of pressure from President Pinera, as well as top cabinet members including Finance Minister Ignacio Briones and Interior Minister Gonzalo Blumel, all of whom said the proposal is poorly-designed and will hurt future pension payouts. The government’s budget office said the bill will have a fiscal cost of $6 billion, equivalent to 2.5% of GDP.

In the days leading up to the congressional votes, Pinera’s government unveiled economic measures for the middle class aimed at dissuading lawmakers from backing the bill.

Still, Wednesday’s vote drew support from five members of Pinera’s own coalition, including former presidential candidate Manuel Jose Ossandon, marking another blow to an already weakened government. An opinion poll carried out this month by Cadem showed more than 80% of respondents back the proposal.

The Amendments

The Senate’s modifications allow current retirees to withdraw funds, while giving people up to a year to tap their savings and the pension funds no more than 40 days to pay the money. Meanwhile, lawmakers rejected a proposal to have the government or employers compensate for the funds that are withdrawn.

The private pension funds, known locally as AFPs, are Chile’s largest institutional investor and own about 75% of local government debt and 6% of local equities. If enacted, the pension bill may lead AFPs to unload close to $19.5 billion in assets under management within 30 days, according to local regulator CMF.

Read more: Pension Bill May Spark Turmoil on Chilean Markets: Analysts (2)

Chile’s central bank said in a statement on Thursday that it will mitigate possible financial market disruptions due to the pension bill. Policy makers wrote they will work to prevent excessive increases in volatility, and that they may adjust their previously-announced bond purchase program.

Meanwhile, Pinera’s government has also promised a “deep reform” of the pension system, instructing ministers to come up with a “national consensus” to improve payouts.

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