In the 1920s, Chile implemented a social security system aimed at providing retirement income for the elderly as well as other social benefits. From the early years, different pension schemes geared to servicing different occupational groups coexisted. The differences between these schemes were not the result of a well designed social security policy, but rather of lobbying and interest groups pressures. By the 1970s, and as a result of this trend, there were very significant differences in the benefits received by the different groups of workers.
Although by 1979 there were 32 pension funds (“Cajas”) in operation, three of them were dominant in terms of both affiliates and contributions. A common feature of these funds was that they all operated under the pay-as-you-go system. Under this scheme, active contributors financed retirement payments to pensioners. It was expected that increasing obligations would be met both by drawing on the stock of accumulated savings as well as their accumulated net income. The system was linked to public finances through portfolio management. In order to avoid fraud and give a public guarantee to mandatory contributions, the surplus of the funds (contributions minus benefits) were transferred to the government for investment.
The reform of the Chilean pension system — implemented in 1981 — replaced the pay-as-you-go regime with a fully-funded pension system based on individual capital accounts, managed by private companies known as Administradoras de Fondos de Pensiones (AFPs).
The diversification of the pension funds portfolio towards equity allowed them to participate in the big capital gains that took place in the early nineties, when domestic and international markets realised that Chilean assets were undervalued given the success of economic reforms and of the political transition to democracy.
Since 1995, the situation has changed: the Mexican crisis affected adversely the price of equity, and the economic adjustment induced by the authorities as well as a significant fall in the terms of trade, contributed to produce a negative rate of return in 1995 for the first time since the advent of the new system.
Since late 2002, the private pension system has offered Chilean workers 5 optional portfolios with different risk levels, associated to fund types:
- Fund type A —— Most Risky
- Fund type B —— Risky
- Fund type C —— Medium Risk
- Fund type D —— Conservative
- Fund type E —— Most Conservative
So chilean workers can shift their pensions funds between any of this diversified portfolios and we have been advising them in making that choice. FondoAlerta customers manage pension funds worth hundred million dollars, according to customer service evaluation made in 2011.
Any dependant worker is forced to contribute 10% of his income monthly, and can contribute almost double of that rate free of pretax deductions. There are various other mechanisms for volunteer contributions.
More details in OECD working paper AWP 5.6 “THE CHILEAN PENSION SYSTEM“
This AFPs are private firms regulated by Chilean Goverment Superintendencia de Pensiones