Chile Government Concedes Pension Defeat After Landmark Bill

(Bloomberg) -- Chile President Sebastian Pinera will sign into law on Friday a controversial but popular bill allowing early pension withdrawals amid the coronavirus pandemic, after bitterly opposing the proposal through its debate in congress.

In an unexpected decision late Thursday, the Chilean government said it will quickly enact the legislation, declining to veto it or send it to the constitutional court for review as a last-ditch attempt to block its implementation.

Chile’s Chamber of Deputies earlier in the day had given overwhelming support to the emergency bill: 116 representatives voted in favor of the proposal allowing citizens to tap 10% of their retirement savings, upholding changes that had been introduced the day before by the Senate. Only 28 deputies voted against the legislation, which received final congressional approval.

The decision to formally ratify the reform seeks to “make easier and speed up the withdrawal of pension savings given the difficult economic and social situation that many families are going through,” the government said in a statement.

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, on the grounds that it will hurt future savings.

Political Blow

Senators backed the bill late on Wednesday in rebuff to weeks of pressure from 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 as much as 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. Once 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

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.

The peso closed little changed on Thursday.

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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