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State pensions and mandatory schemes
Do employers and/or employees make pension contributions to the government in your jurisdiction? If so, briefly outline the existing state pension system.
Employers must register under the Mexican social security system, which includes a three-way administrative structure:
- the Mexican Social Security Institute (IMSS), which provides full government medical coverage, including out-patient, maternity, disability and injury benefits to all registered employees, as well as daycare services for working mothers;
- the National Workers' Housing Fund Institute, which provides government housing and credit opportunities for acquiring property; and
- the Retirement Savings System and retirement funds administrators (AFOREs), which provide retirement and pension plans.
Social security services are financed through fees or quotas, that are funded by employees and employers via withholding – which is a primary obligation of all employers when disbursing salaries. Other than the obligation to register all employees with the IMSS, social security fees are essential to compliance and workplace stability, as they replace employees’ compensation, 401(k) and retirement coverage (ie, all other types of insurance and benefit), while entitling them to health, maternity, injury and disability benefits. The IMSS also provides wages during medical treatments and approved absences.
This trade-off (a single payment) should be considered in light of the fact that a single legal social security administrative system exists to provide housing and retirement plans, as well as free medical clinics, hospitals, childcare and eligible services to employees and their families. The IMSS also pays for a percentage of an employee’s salary in the event of a job-related accident, illness or temporary or permanent disability, and grants assistance to beneficiaries in case of work-related accidents or death.
Can employers deduct any state pension contributions from their taxable income?
Yes. Employer state pension contributions – including social security, housing, retirement and all other aspects covered by the IMSS – are tax deductible.
Are there any proposals to reform or amend the existing system?
Yes. A major reform bill was passed and approved on January 26 2018. It revised the entire retirement system’s financial provisions and made the investment process more efficient for all pension fund administrators (AFOREs), which are private financial institutions responsible for managing employee’s retirement accounts.
AFOREs are the foremost institutional investors in Mexico – in 2017 they invested Ps1.06 billion in productive activities. By broadening the spectrum of investment for AFOREs, they are expected to grow exponentially over the next decade and guarantee better returns for all beneficiaries and account holders.
The bill’s most relevant reforms included:
- simplifying investment rules for AFOREs;
- improving access to investment instruments;
- encouraging investment in institutions that comply with environmental, social and corporate governance criteria and regulations;
- mandating analysis of active risks relating to natural disasters; and
- broadening investment access to New Zealand, Taiwan, Thailand, South Africa and Malaysia.
Another significant reform expected in 2018 is the transformation of the mandatory social security system for all businesses in the construction industry – the only industry requiring a bespoke system outside the standard social security registration and rules. The System of Affiliation of Workers in the Construction Industry system has been replaced by the Integral Service of Registry of Construction Works. The new system aims to make registration, compliance and overall functioning easier for all construction businesses in Mexico.
Other mandatory schemes
Are employers required to arrange or contribute to supplementary pension schemes for employees? If so, briefly outline how the scheme is enforced and regulated.
No. Employers must register and comply only by withholding mandated social security benefits that are handled by and paid into one administrative system for retirement plans.
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