Peru Congress Edges Closer to Giving State Control Over Pensions

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A Peruvian congressional committee approved a bill to overhaul the country’s pension system, triggering warnings from the fund-management industry that the government will get control of billions of dollars of private savings.

Lawmakers on the pension reform committee voted 6-2 in favor of legislation late Tuesday that seeks to replace the existing private and public pension plans with an integrated, government-run system. The bill will now be sent to the floor of congress for a final vote, at an undetermined date.

The proposals have alarmed the country’s private fund managers -- known as AFPs -- who say the $45 billion they manage will be vulnerable to state interference and even seizure. Giovanna Priale, who heads a group representing the industry, said the plan equates to a “nationalization” of the savings. “The AFPs want to keep improving -- with performance-based fees, higher returns and greater competition -- but by no means should that mean destroying what’s already there and starting from zero,” she said.

The overhaul would be the biggest since the current pension system was created in 1993, when the bankrupt national pension fund was replaced by a government-run, pay-as-you-go fund and the AFP system of individual accounts.

Peru Congress Edges Closer to Giving State Control Over Pensions

Other critics, which include several former finance ministers, say it’s the wrong time for such a large and complex reform given the political turmoil that’s gripped Peru in the last 18 months. The country has both a caretaker government and a transitional congress after President Martin Vizcarra dissolved the body in 2019 and was then impeached in November. President Francisco Sagasti is leading an interim government. The next presidential election is in April 2021.

Drain, Concerns

Fund managers are concerned that lawmakers and not technocrats are leading the reform given congress’ disregard for specialists’ advice during the pandemic. Congress let workers and retirees pull billions of dollars from private pension savings last year, despite opposition from the government and regulators. It also passed other bills later ruled unconstitutional.

According to the pension reform bill, a new government body would take over the AFPs’ administrative functions, leaving them strictly as fund managers. Other local and international fund management companies would be invited to bid for rights to manage the money in an effort to push down fees.

Read more: Peru Congress Approves Pension Payout Despite Opposition

Diego Macera, head of the Peruvian Economy Institute, said creating a new state pensions entity is a backward step. “It possibly gives too much power to an organization that that could be vulnerable to political capture or be extremely inefficient.”

The changes would also see a portion of workers’ savings transferred into a government-managed shared fund that would finance a basic pension for lower earners. The AFP association said in a statement Tuesday it equates to an indirect payroll tax on higher earners and “punishes those who save for their retirement.” Finance Minister Waldo Mendoza told the committee on Jan. 8 he didn’t see that proposal as viable. The Finance Ministry didn’t respond to a request for comment on the bill.

Peru Congress Edges Closer to Giving State Control Over Pensions

The legislation would also force employers to contribute toward employees’ pensions, with the rate to be determined by the government.

“Crumbling” System

While recent governments have tinkered with the pension system, there wasn’t sufficient support from congress for a wholesale reform. The economic and social havoc wreaked by Covid-19 changed that, exposing the South American country’s weak safety net and precarious labor market, according to Carmen Omonte, who heads congressional committee that drafted the bill.

“Some might say it’s the worst possible moment given we’re in the middle of a pandemic,” she said. “I see it as an opportunity because there is a sensitivity in the population due to the current context of hardship.”

Read more: Peru Congress Approves More Pension Withdrawals to Counter Slump

The reform seeks to fix the many problems with the current pension system. Off-the-books workers exceed 70% of the workforce, so only a minority of workers save for their retirement. The government’s pay-as-you-go pension fund can’t sustain itself and partly relies on transfers from the Treasury to pay retirees. A shortfall in revenue means it doesn’t pay a cent to workers who’ve made less than 20-years of contributions when they retire. Meanwhile private fund customers aren’t entitled to a minimum pension and management fees are high.

“The system is crumbling. It can’t go on as it is,” Omonte said.

Suggestions that savings are at risk is scaremongering, she said. The committee drafted the bill after reviewing five government-commissioned reports on pension reform, and speaking to regulators and the AFPs. It also consulted experts at the Inter-American Development Bank, the Organization for Economic Cooperation and Development and the International Labor Organization.

Omonte said the Finance Ministry didn’t make specific contributions to the draft legislation, adding there will be time to include comments from any entity before the bill is voted on the floor of congress.

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