Occupational pension schemesTypes
What are the main types of private pensions and retirement plans that are provided to a broad base of employees?
There are several types of private pensions and retirement plans for employees. The most common in Mexico is the ‘defined benefit’ which is a pension plan where the company defines the remuneration that the employee will receive once he or she has retired, but in recent years, the use of hybrid or mixed plans has become more common.
The second type of private pension plan is the defined contribution where the employee has an individual account, the contribution is decided on by the employer and based on what the employee accumulates, plus the contribution of the company.
The third type of private plan pension is known as Hybrid or Mixed, it takes into consideration the amount of contributions made in the name of each employee, as well as the amount that the company defines as the remuneration the employee will receive.Restrictions
What restrictions or prohibitions limit an employer’s ability to exclude certain employees from participation in broad-based retirement plans?
If the employer wants to keep all the tax benefits given for applying a private pension plan, it must offer the plan to all its employees of two main classes, unionised or non-unionised. However, the employer can define general rules or conditions such as the amount of the contributions made by each employee or seniority in employment.
Can plans require employees to work for a specified period to participate in the plan or become vested in benefits they have accrued?
Yes, in certain plans the employer can impose certain conditions, such as the employee’s seniority in his or her job, or in the case of an early retirement, that the employee must not withdraw the entire amount, but only the part determined by the employer. Parties can freely agree to the rules of the plan, but the only amounts that will always be respected or returned to the employee are those that are invested with the employee’s own contributions.Overseas employees
What are the considerations regarding employees working permanently and temporarily overseas? Are they eligible to join or remain in a plan regulated in your jurisdiction?
Given that the employer sets the terms and conditions of the private pension plan, employees who work permanently or temporarily overseas may participate. This could eventually cause some tax problems, as the benefits of the plan are not derived from the direct employment relationship and, therefore, it could be considered as taxable income.Funding
Do employer and employees share in the financing of the benefits and are the benefits funded in a trust or other secure vehicle?
This depends on the type of plan. In a defined benefit plan the company assumes the cost of the plan, including the risks of investment. In a defined contribution plan the benefits for the employees will be the difference between the sum of the contributions and the diminished profits of the losses and the expenses of administration of the fund.
These plans are usually administered through trusts or open contracts in investment fund operators or brokerage firms. Usually they invest in public debt or variable national income.
What rules apply to the level at which benefits are funded and what is the process for an employer to determine how much to fund a defined benefit pension plan annually?
The rules according to the plans as follows:
- Defined contribution. The company delivers pre-established amounts or percentages to a determined investment fund, the benefits for the employees will be the difference between the sum of the contributions and the diminished profits of the losses and the administration expenses of the fund. The benefits depend on the accumulated balance in the individual account of each worker and can provide both pre-established amounts or percentages.
- Defined benefit. The responsibility of the company ends with the liquidation of the benefits, and the retirement amounts are determined based on a structure established in the private pension plan. The investment risks and the cost of the plan are assumed by the company. The benefits are based on salary or years of service.
- Hybrids or mixed. These are a combination of variables of the two previous types. The company is not limited by a legally contracted amount, but can make additional contributions if the assets are insufficient to cover its obligations. The benefits depend on the accumulated balance in each worker’s individual account and have a minimum retirement benefit guarantee.
What are customary levels of benefits provided to employees participating in private plans?
Benefits from contributed amounts are amounts not considered as taxable income. There are other private pension plans that allow for voluntary contributions.Pension escalation
Are there statutory provisions for the increase of pensions in payment and the revaluation of deferred pensions?
What pre-retirement death benefits are customarily provided to employees’ beneficiaries and are there any mandatory rules with respect to death benefits?
There are no pre-retirement benefits provided by law.
Mandatory pensions and benefits commonly comprise:
- funeral expenses;
- money pension plans for widows and orphans, with the following exceptions:
- if the insured dies before turning six months of marriage;
- if the insured is 55 years old or older and has not been married one year;
- if at the time of marriage the insured had an old age retirement pension, unless they had a year of marriage; and
- a Christmas bonus of 15 days of salary, in relation to the amount of pension received.
Beneficiaries of employees or voluntarily insured people must comply with several rules depending on the pension structure, the cause of death, and amount of social weekly contributions recognised by the Social Security Mexican Institute.
The most commonly requirements are described as follows:
- a recognition of payment by the Social Security Mexican Institute of at least 150 weekly contributions of the deceased;
- pensioned owing to a disability;
- evidence of a relationship with the deceased; and
- that the death was not owing to a work-related accident.
Mandatory rules also determined that the beneficiaries have to choose an insurance company to arrange the pension guidelines considering the contributions accrued by the deceased.Retirement
When can employees retire and receive their full plan benefits? How does early retirement affect benefit calculations?
For public pensions once the employee turns 60 (early retirement) through 65 (full retirement) years old, his or her registration with the Mexican Social Security Institute is cancelled, with a minimum payment of 1,250 weekly recognised contributions. This is applicable to those who started their employment relationship after 1997. For those who started before, the age is the same, but the weekly amount is 500 weekly recognised contributions.
Usually, plan benefits are given to the employees once they have retired or at the moment of their employment termination.
Early retirement affects benefit calculations as regards tax treatment, by law. If the contributions are withdrawn before the agreed term of the private plan, its tax burden will increase.Early distribution and loans
Are plans permitted to allow distributions or loans of all or some of the plan benefits to members that are still employed?
There are some private plans that allow loan or distributions of the plan benefits, but it is not common given that such withdrawals may affect the deductibility of the benefit.Change of employer or pension scheme
Is the sufficiency of retirement benefits affected greatly if employees change employer while they are accruing benefits?
Private plans are for all employees, considering that this is a requirement for its deductibility.
Therefore, if an employee changes his or her employer, he or she would have the following options:
- transfer his or her benefits to his public retirement savings (AFORE);
- hire a private pension individual plan and continue with his or her voluntarily contributions; and
- in case the new employer has a private pension plan with the same financial institution, then his benefits can be transferred to the new pension plan. However, this would be determined by the private pension plan.
With respect to the mandatory retirement plan, the change of employer does not affect.
In what circumstances may members transfer their benefits to another pension scheme?
If the private plan establishes the possibility, then employee can transfer. However, he or she would have to consider that a tax burden can be imposed on his or her benefits, and will have to comply with the requirements of the new pension scheme. It is not customary in Mexico to change funds from one benefit plan to another. Commonly, employees lose the right upon termination of employment.Investment management
Who is responsible for the investment of plan funds and the sufficiency of investment returns?
Financial institutions registered under the CONSAR (National Savings System for Retirement Commission), considered as funds administrators.
Such financial institutions enter into agreements with the employers to execute a collective private pension plan in favour of their employees.Reduction in force
Can plan benefits be enhanced for certain groups of employees in connection with a voluntary or involuntary reduction in workforce programme?
Are non-broad-based (eg, executive-only) plans permitted and what types of benefits do they typically provide?
Mexican law recognises the same benefits and prerogatives for union and non-union employees and, therefore, retirement plans will generally have the same terms and conditions for every participant. While some plans may be restricted for non-union employees, if the plan allows the participation of any employee, it will not establish different requirements for access to retirement benefits.
How do the legal requirements for non-broad-based plans differ from the requirements that apply to broad-based plans?
The CONSAR has the authority to review the requirements established for the registration of private retirement plans, according to the regulations applicable to these. Once registered, the plans will only be subject to the review of the CONSAR in case of a change to their terms and conditions of employment that should also be filed and registered with the CONSAR.Unionised employees
How do retirement benefits provided to employees in a trade union differ from those provided to non-unionised employees?
Employers that fail to comply with applicable Mexican legislation with respect to their private retirement plans will not be allowed to take the deductibility of the contributions made to plan.
How do the legal requirements for trade-union-sponsored arrangements differ from the requirements that apply to other broad-based arrangements?
Mexican law recognises the same benefits and prerogatives for union and non-union employees and, therefore, retirement plans will generally have the same terms and conditions for every participant. While some plans may be restricted for non-union employees, if the plan allows the participation of any employee, it will not establish different requirements to have access to retirement benefits.