The Chilean pension system, once the darling of free market enthusiasts, is going to be replaced by a new system in which the taxpayer will play a much larger part, according to a report in the New York Times.
The report says the funded defined contribution system has proved unpopular because of the high expense ratios, of which the pension fund administrators consume the largest part. Third party estimates claim that administration fees eat as much as a third of contributions, say the New York Times report.
A package of pension reforms announced on 15 December, and scheduled to go to the Chilean Congress early next year, includes measures to tackle the expenses by increasing competition. But it also includes a guaranteed minimum pension of $143 a month, open even to those who have never contributed to the scheme, and supported by tax credits for employers that support the scheme.
The Chilean system introduced in the 1980s requires employees to pay 10 percent of their salaries into private investment accounts that they control. Employers do not participate, and the contribution of the taxpayer is limited.
One reason for public dissatisfaction, says the New York Times report, is that the system has failed to deliver the benefits (most importantly, a pension worth two thirds of final salary) advertised. At present, says the newspaper, half the Chileans in the labour force will not qualify for a pension or will receive only a minimum payment – in some cases because they have not kept up their contributions, but critics also allege that the industry has exaggerated returns to savers.
Six companies, organized as the Association of Pension Fund Administrators, provide fund administration services to the system. There was originally 20 providers.