Chile has a mandatory individual retirement account system, in which workers can choose between the public pay-as-you-go system and the privately managed system. New entrants to the labor force must join the new capitalization system. The public pay-as-you-go system is being phased out as the number of beneficiaries declines and is expected to close by 2050.

Employees contribute 10% of their monthly earnings, up to a maximum of 60 Unidades de Fomento (UFs) (approximately US$2,400), per month to their individual accounts. Employees may also make voluntary contributions to their individual accounts and to separate voluntary retirement savings accounts. Employers are not required to contribute to their employees’ accounts and participation is voluntary for the self-employed.

Individual accounts are managed by pension fund management companies (AFPs), which charge an administrative fee and a premium for survivors and disability insurance.

At the normal retirement age (65 for men and 60 for women), the insured person can use the balance in his individual account to do one of the following:

  • Purchase an annuity from an insurance company.
  • Set up programmed withdrawals to provide income over the retirees expected life span. If the retiree dies early, dependents may inherit the remaining balance.
  • Purchase a deferred annuity, which means setting a future date for purchasing an annuity and until that date make programmed withdrawals from the individual account.
  • Purchase an annuity with a portion of the funds in the individual account and make programmed withdrawals with the rest of the funds.

Early retirement is permitted for individual retirement account holders under certain conditions. Excess funds can be withdrawn from an individual account for any reason as long as the person’s account balance is sufficient to finance 150% of the minimum pension.

In order to improve competition among the AFPs, a law passed in 2008 introduced a bidding process between AFPs to be held every 24 months. The AFP selected must maintain the lowest fee among all AFPs for 2 years. New employees must remain with the winning AFP for 2 years unless: (i) another AFP offers a lower fee for at least 2 consecutive months; (ii) another AFP provides a higher rate of return sufficient to make up for a higher administrative fee; or (iii) the winning AFP does not maintain the required minimum rate of return, is declared insolvent or must liquidate its assets. Further, employees already in the system may switch to the winning AFP. As of August 2010, Modelo – a new AFP that won the bidding process launched in November 2009 – covers all new entrants to the labor force for 2 years. The government estimated some 700,000 new workers will enter the labor force during the 2-year period.

On December 1, 2010, the Central Bank of Chile raised the pension funds’ limit on foreign investment to allow them to further diversify their portfolios. The overall percentage of assets permitted in foreign instruments rose from 60% to 65% and will continue to increase by 5% every 3 months until it reaches 80% on September 1, 2011. In addition to the increase in the overall ceiling, the Central Bank of Chile set new limits on foreign investment for each fund type.

Apart from that, employer-sponsored voluntary pensions (APVC) are highly encouraged by the government. APVC plans are intended to supplement the mandatory individual accounts managed by AFPs. For an APVC plan to be put into place, 15% of a company’s employees or 100 workers, whichever is lower, must sign up. APVC plans must be set up by agreement between an employer and an institution authorized to administer the plans, such as AFPs, banks, insurance companies, mutual fund administrators, and investment fund administrators.

Employers must contribute to all participants’ accounts; the amount of the contribution depends on the terms of the specific plan. After 24 months within 60 months of employment with the same company, the employee has the right to permanently own the money the employer has contributed to his account.


Article with courtesy of Social Security Online

Sources: Superintendencia de Pensiones, Comunicado de Prensa, el 8 de enero de 2010 y el 1 de febrero de 2010; "Valor Diario de la UF, Año 2010," UF.CL, febrero de 2010 "Adjudicación de Afiliados a AFP Modelo Crearía Conciencia de Precios, Según Ex Regulador-Chile," Business News Americas, el 2 de febrero de 2010; " A Partir del 1 de Agosto: Nuevos Afiliados a AFP's Accederán a la Administradora con la Comisión Más Baja del Mercado," Gobierno de Chile Noticias, el 6 de febrero de 2010; "Recent Changes to the Chilean System of Individual Accounts," Social Security Bulletin, 2001/2002; "Chile," International Update, October 2008, US Social Security Administration; "Número de Contratos Vigentes Según Actividad Económica," Superintendente de Pensiones, el 28 de febrero de 2011; "Norma de Carácter General Número 305," Superintendencia de Pensiones, Superintendencia de Bancos e Instituciones Financieras, and Superintendencia de Valores Y Seguros, el 12 de abril de 2011; "Reguladores Modifican Normative Sobre Ahorro Previsional Voluntario Colectivo," Superintendiente de Pensiones, el 12 de abril de 2011.


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