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Occupational pension schemes

Types of scheme

What are the most common types of pension scheme provided by employers for their employees in your jurisdiction?

By means of withholding, employers must pay:

  • social security fees to the Mexican Social Security Institute;
  • housing fees to the National Workers' Housing Fund Institute; and
  • retirement fees to the Retirement Savings System.

The retirement system is comprised of pension fund administrators (AFOREs), which are private financial institutions responsible for managing employee’s retirement accounts. In order to protect employee resources, administrators are regulated by the National Commission for the Retirement Savings System (CONSAR). Employees may select an AFORE that suits them – failure to do so within a year will result in the employee being assigned an AFORE that is generating high returns.

Pension fund administrators are responsible for investing employee resources in a retirement fund investment company (SIEFORE). The SIEFORE’s objective is to generate returns for each individual, thereby increasing the amount of his or her pension.

Statutory framework

Is there a statutory framework governing the establishment and operation of occupational pension plans?

Yes. The following sections of the Constitution establish the legal framework that governs the establishment and operation of social security:

  • Articles 123(A)(XII), 123(A)(XIV) and 123(A)(XXIX);
  • Articles 123(B)(XI), 123(B)(XIII), 123(B)(XIIIbis) and 123(B)(XIV);
  • Articles 28(5) and 28(VIII);
  • Article 115(IX); and
  • Article 4 (relating to health and housing rights). 

The social security system comprises three fundamental sectors:

  • the private sector, which governs all private employers under the Mexican Social Security Institute (IMSS);
  • the public sector, which governs all government employees under the Public Social Security Institute; and
  • individuals that use IMSS facilities.

What are the general rules and requirements regarding the vesting of benefits?

All employees enrolled in the social security system will be entitled to a pension, but must meet certain requirements. The Mexican pension system has evolved and is working under two different systems at present:

  • one that governs all employees registered before or in 1973; and
  • the other which came into effect in 1997 and governs employees registered thereafter.

For employees retiring under the 1973 system, retirement insurance must be returned in full on receipt of the respective pension, as it is not considered in the calculation of the pension.

The following is a comparison of the two current pension systems:

Widower, disability and death pension

 

1973 system

1997 system

Wait time

150 weeks registered as beneficiary

150 weeks registered as beneficiary

Calculation

90% of the pension

90% of the pension

Who pays?

IMSS

Insurance company

 

Old age retirement pension

 

1973 system

1997 system

Wait time

Determined on salary and seniority.

1,250 weeks registered as beneficiary

Calculation

Determined on salary and seniority

Monthly payment according to the individual account balance

Who pays?

IMSS

IMSS, AFORE and/or insurance company

 

Early retirement pension

 

1973 system

1997 system

Wait time

N/A

1,250 weeks registered as beneficiary

Calculation

N/A

With the balance of the individual account, the employee should receive a survival insurance with a life pension of over 30% of the minimum wage

Who pays?

N/A

Insurance company

 

What are the general rules and requirements regarding the funding of plan liabilities?

Employees have individual accounts which are funded by their employers through withholding. Each account is managed by an AFORE, which must:

  • manage funds;
  • invest funds in a SIEFORE; and
  • maximise returns for beneficiaries.

These returns guarantee liabilities, expenses and any other fees incurred by each pension fund administrator.

Under the Law for the Retirement Pension Plan, AFOREs and SIEFOREs which fail to comply with the legal requirements must use their own assets to fund any resulting charges, notwithstanding the civil or criminal liabilities they must face.

What are the tax consequences for employers and participants of occupational pension schemes?

According to Article 93(IV) of the Income Tax Law, this type of income is exempt up to a daily amount of Ps1,209 (as of 2018).

Is there any requirement to hold plan assets in trust or similar vehicles?

No. The only way to participate in the pension system is through AFOREs and SIEFOREs, which are regulated by CONSAR.

Are there any special fiduciary rules (including any prohibited transactions) in relation to the investment of pension plan assets?

Yes. AFOREs are in charge of investing employee resources in an investment company specialising in retirement funds (a SIEFORE). SIEFOREs aim to maximise returns for employees and increase employee pensions. The investment horizons of each SIEFORE differ according to the age of the employees, and the new provisions set out in the recently approved bill to reform the retirement system.

Is there any government oversight of plan administration and/or insurance coverage for plan benefits in the event of an employer’s insolvency?

Employers do not hold pension funds – these are held by AFOREs and invested in SIEFOREs. However, the government is reviewing this matter through different agencies.

If an employer declares insolvency, all pending wages, labour benefits and severances will be handled by the labour authorities. However, all social security coverage, benefits and plans will be handled by the IMSS and AFOREs in accordance with the payments made by the employer before insolvency.

Are employees’ pension rights protected in the event of a business transfer?

Yes. Employee pension plans are protected in the event of a business transfer. The new employer will be liable for any and all omissions in withholding and paying forward social security, housing and retirement funds.

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