Pensions & Retirement Plans in Chile

Statutory and regulatory framework

What are the main statutes and regulations relating to pensions and retirement plans?

Decree-Law 3,500 (DL No. 3,500), published 13 November 1980, established and regulates the Chilean pensions system.

What are the primary regulatory authorities and how do they enforce the governing laws?

The Chilean Pensions Supervisor and the Social Security Agency are the technical authorities responsible for the supervision and control of the institutions involved in the Chilean pension system. These authorities enforce the governing rules through internal rulings and normative guidelines.

What is the framework for taxation of pensions?

In order to encourage employers to offer their employees collective voluntary savings plans, employer contributions are treated as expenses necessary to produce income.

In any case, if the resources contributed by the employer do not become property of the employee, owing to non-compliance with the minimum period of employment in the company as established in the contract, withdrawal of funds by the employer will be considered income for tax purposes.

There are different tax alternatives for both collective and individual savings schemes, allowing employees to choose a tax regime that will require payments of, or offer exemptions from, taxes at the time of contribution to or withdrawal from the funds.

An employee may choose one of these tax regimes:

1. Make use of a tax benefit when contributing to a fund. The employees’ contribution will be deducted from the tax base when calculating his or her income tax. In return he or she will pay tax upon withdrawal, based on the tax affecting withdrawals from voluntary savings; or
2. Not use the tax benefit when contributing to the funds. The employee will only pay taxes on the returns of the investment at the time of withdrawal.

Additionally, there is a state-financed bonus for those who use voluntary pension savings or collective voluntary pension savings, (ie, employees who have chosen to not use the tax benefit when contributing to the fund (see ii)), and who allocate all or part of the contributions to advance or enhance their pension. These persons are entitled, upon their retirement, to a bonus paid by the state.

The amount of this bonus is equivalent to 15 per cent of the employee’s voluntary contributions, voluntary retirement savings or collective voluntary pension savings, up to a maximum of six UTM (monthly tax units, the value of which varies according the readjustment of the Chilean peso) per calendar year. The bonus is paid if the employee’s voluntary contributions, savings deposits and voluntary pension contributions to his or her collective voluntary pension savings in that calendar year do not exceed the total mandatory contributions made by the employee in that year by 10 times.

State pension provisions

What is the state pension system?

It is a pension system that consists of mandatory membership by all employees with pension fund administrators (AFPs) - the institutions with which pension funds supported by the employer are deposited - which then paid the pension to the employees upon their retirement. It is a system that provides benefits to the employees in cases of sickness, disability, old age or death, based on the individual capitalisation of each person. The capitalisation is done by the AFPs, which invest the funds of their affiliates and capitalise on the money of each employee to increase the funds in the future.

How is the state pension calculated and what factors may cause the pension to be enhanced or reduced?

All employees must pay approximately 13 per cent of their salary to a pension fund, which is accumulated in an individual account. They must also pay 7 per cent of their salary for health insurance. These contributions are withheld by the employer from the employee’s monthly salary and paid directly to the AFPs and private healthcare institutions.

There is a limit to the contributions an employee can make to a pension fund. The monthly remuneration limit is considered to be the equivalent of 78.3 UF (an inflation-indexed unit, the value of which varies daily).

The value of a state pension is determined by the employee’s contributions, the years of affiliation to the system, and the investment done by the AFPs through different capitalisation instruments.

Is the state pension designed to provide a certain level of replacement income to workers who have worked continuously until retirement age?

The purpose of the current law was to provide a replacement income to employees who have worked until retirement age. However, since the enactment of DL No. 3,500, retirees’ pensions have been very low and the aim of replacing their monthly income has not been achieved. Consequently, the Chilean government is now looking at modifying the pension law and the pensions system.

Is the state pension system under pressure to reduce benefits or otherwise change its current structure in any way on account of current fiscal realities?

In August 2016, President Michelle Bachelet announced some measures to improve the pensions system. One of the main objectives was to gradually increase the social security contribution rate by five percentage points of the sole obligation to be paid by the employer.

This proposal was designed to ‘strengthen a mixed and tripartite system with an emphasis on solidarity, by gradually increasing the contribution rate by 5 per cent in a maximum period of 10 years, with an exclusive charge to the employer’. The government pointed out that a collective solidarity pillar will be created, one part of which will be used to raise current pensions and the other part to achieve greater equality in future pensions.

Occupational pension schemes

What are the main types of private pensions and retirement plans that are provided to a broad base of employees?

There are two main types of private pensions and retirement plans in Chile: agreed deposits and voluntary pension savings accounts (APVs). They both permit and encourage employees to save voluntarily, and so increase the balance accumulated in individual capitalisation accounts and so the amount of pension employees will receive. Alternatively, they open the possibility of early retirement. Similarly, these voluntary contributions can compensate for periods when no contributions were paid, due to unemployment or other causes.

Agreed deposits

An employee may agree with his or her employer to deposit amounts into his or her individual capitalisation account, in order to increase the capital to finance an early retirement pension or increase the amount of the pension.

The agreed sums may correspond to a fixed amount paid by the employer on a single occasion (ie, a bonus), a monthly percentage of the employee’s taxable wage or a fixed monthly amount. These amounts are independent to the state pension or mandatory contributions and do not constitute income for the employee up to an annual limit of 900 UF.

The employee is not allowed to withdraw the agreed deposit before he or she retires. However, Law No. 19,768 allows these resources to be withdrawn as part of freely usable surplus (funds the employee can withdraw freely as agreed deposit before retiring but will be subject to tax), but this involves payment of the corresponding global complementary tax.

APV

These voluntary pension savings accounts, also called ‘account two’, are independent to and complement individual capitalisation accounts and provide employees with an additional source of savings.

The employee can, personally or through his or her employer, make regular or occasional deposits. The APV does not constitute taxable income for the employee, up to a monthly limit of 50 UF.

Withdrawals can be made before the employee’s retirement, but require payment of the corresponding global complementary tax with a surcharge ranging between 3 per cent for lower incomes and 7 per cent for higher incomes.

What restrictions or prohibitions limit an employer’s ability to exclude certain employees from participation in broad-based retirement plans?

Employers may not exclude employees from making voluntary savings.

Can plans require employees to work for a specified period to participate in the plan or become vested in benefits they have accrued?

See question 9.

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?

An employee can personally, or through the employer, make deposits to an APV, even if he or she is working overseas on a permanent or temporary basis.

In the case of agreed deposits, employees working overseas and their employers can agree to keep the deposit in the employees’ individual capitalisation accounts, via an employment contract annex. As the system is voluntary, employees are eligible to join or remain in an APV if they are overseas.

Do employer and employees share in the financing of the benefits and are the benefits funded in a trust or other secure vehicle?

Employers and employees do not share the financing of private or voluntary pension plans: the plans are financed by voluntary contributions made by employees. However, the employer and employee can agree, via the execution of an employment contract annex, that the employer will contribute to the employee’s voluntary saving account.

An employee can voluntarily save in any of the following authorised institutions, which will be responsible for handling his or her funds:

• banks;
• mutual funds;
• AFPs;
• insurance companies;
• housing fund managers; and
• others.

These entities are supervised by the Securities and Insurance Supervisor, the Pension Fund Supervisor or the Bank Supervisor, as applicable.

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?

Not applicable.

What are customary levels of benefits provided to employees participating in private plans?

Generally, employees with high incomes agree with their employers to deposit amounts into their individual capitalisation account as agreed deposits for tax purposes.

Are there statutory provisions for the increase of pensions in payment and the revaluation of deferred pensions?

No, as it is a voluntary system.

What pre-retirement death benefits are customarily provided to employees’ beneficiaries and are there any mandatory rules with respect to death benefits?

Survivorship pensions are awarded to surviving beneficiaries (eg, a spouse, offspring or parents) on the death of the employee. If there are no beneficiaries, the pension’s balance goes to the deceased employee’s individual capitalisation account to augment his or her inheritance.

When can employees retire and receive their full plan benefits? How does early retirement affect benefit calculations?

In the case of private or voluntary pensions, employees can withdraw their APV at any time before they retire, but this involves payment of the corresponding global complementary tax with a surcharge ranging between 3 per cent for lower incomes and 7 per cent for higher incomes.

On the other hand, the employee is not allowed to withdraw the agreed deposit before he or she retires.

However, Law No. 19,768 allows these resources to be withdrawn as part of the freely usable surplus, but this involves payment of the corresponding global complementary tax.

In the case of state or public pensions, employees can retire at 65 years old for men or 60 years old for women. Nevertheless, it is not mandatory to request the funds from the pension system once these ages are reached. It is only the minimum age from which people are entitled to claim them. The law allows early retirement for public or state pensions, provided that the employee can obtain a pension that is equal to, or greater than, 50 per cent of his or her average taxable income for the last 10 working years, and equal to or greater than 110 per cent of the minimum pension guaranteed by the state.

Are plans permitted to allow distributions or loans of all or some of the plan benefits to members that are still employed?

See question 17.

Is the sufficiency of retirement benefits affected greatly if employees change employer while they are accruing benefits?

No, as it is a voluntary system.

In what circumstances may members transfer their benefits to another pension scheme?

Members are free to transfer their voluntary savings to any authorised institution. However, members who transfer any funds from one account more than twice in one calendar year must pay an exit fee.

Who is responsible for the investment of plan funds and the sufficiency of investment returns?

See question 12.

Can plan benefits be enhanced for certain groups of employees in connection with a voluntary or involuntary reduction in workforce programme?

This is not possible under Chilean legislation as private pension plans are selected by individual employees, so the employers or the situation of the company’s workforce programme have no bearing on them. The employee chooses the institution that he or she wishes to join for private pension plans, and may change from one administrator to another whenever he or she thinks it advisable. (See question 20.)

Are non-broad-based (eg, executive-only) plans permitted and what types of benefits do they typically provide?

Non-broad based plans are permitted and may be offered by the AFPs or by insurance companies. Through the agreed deposit plan, employers agree to make payments (such as bonuses) into employees’ individual capitalisation accounts, which are added to the mandatory pension contributions. These agreements are usually offered to workers in managerial positions. This type of investment has tax benefits for both parties.

Regarding APVs, members may pay in contributions of up to 50 UF per month. This contribution represents a tax benefit for the employee, because it is treated as tax-exempt income up to the maximum allowance. This plan also makes the resources more liquid, enabling these contributions to be withdrawn by the employee at any time in his or her working life, not only on retirement, by paying an additional rate on the corresponding global complementary tax, or withdrawn as freely usable surpluses, if applicable.

Voluntary social security savings can also prove useful in providing employees protection in case of unemployment.

How do the legal requirements for non-broad-based plans differ from the requirements that apply to broad-based plans?

This is not applicable in Chile as there is no specific regulation for broad-based and non-broad based plans.

How do retirement benefits provided to employees in a trade union differ from those provided to non-unionised employees?

There are no regulatory differences regarding retirement benefits in relation to unionised employees, because plans are voluntary for the employees, regardless of their position or union affiliation in the company.

However, the employer could agree to offer certain retirement benefits to unionised workers in their respective collective instruments, but this is not common practice.

How do the legal requirements for trade-union-sponsored arrangements differ from the requirements that apply to other broad-based arrangements?

There are no legal requirements applying specifically to trade-union-sponsored arrangements. (See question 25.)

Enforcement

What is the process for plan regulators to examine a plan for periodic legal compliance?

The Pensions Supervisor is the technical authority responsible for the supervision and control of the institutions involved in the management of private and voluntary pension plans, such as AFPs. The Pensions Supervisor ensures the unrestricted compliance with the legislation in force, in order to confirm that the benefits contemplated in the various legal bodies are granted in accordance with the law. The Pensions Supervisor applies an integral monitoring model to the audited institutions, which is based on allowing global monitoring of the risks associated with the different areas that make up its activity.

What sanctions will employers face if plans are not legally compliant?

Considering that private plans are voluntary for employees, and are managed by independent and private entities, such as AFPs, employers have no responsibility for the management of these plans.

How can employers correct errors in plan documentation or administration in advance of a review by governing agencies?

Employers do not manage or administer private pension and retirement plans, so this is not applicable in Chile.

What disclosures must be provided to the authorities in connection with plan administration?

See question 29.

What disclosures must be provided to plan participants?

AFPs must provide information about affiliates’ investment portfolios on the last business day of each month, to those who request it. Details of the information are published on the Pensions Supervisor’s website. The Pensions Supervisor also publishes a monthly notice with information on the profitability of the quota and the pension funds, the earnings of fund administrators, and the commissions for the administration of voluntary pension plans.

What means are available to plan participants to enforce their rights under pension and retirement plans?

Voluntary savings in AFPs have minimum profitability guarantees for the plan participants, which are measured using the average real profitability of all pension funds of the same type as a basis.

If all the mechanisms are applied, and all other possibilities established in the law have been exhausted, but the minimum profitability is not met and the AFPs do not have additional financial resources to comply with their obligations, the state will pay the missing compensation and may liquidate the administrator.

The state plays a vital role within the pension system, providing guarantees and exercising continuous supervision.

Plan changes and termination

What restrictions and requirements exist with respect to an employer’s changing the terms of a plan?

The employer cannot change the terms of a plan, as the employers do not administer nor operate employees’ pension and the retirement plans.

What restrictions and requirements exist with respect to an employer terminating a plan?

Not applicable. (See question 33.)

What protections are in place for plan benefits in the event of employer insolvency?

Not applicable. (See question 33.)

How are retirement benefits affected if the employer is acquired?

Total or partial changes to the ownership of a company do not modify the rights and obligations of employees arising out of their employment contracts or the collective bargaining contracts that apply to them - including any retirement benefits. The rights continue with the new employer or employers, as the new entity or transferee will assume all preexisting labour obligations. This also applies in the following cases:

• companies contributing one or more branches of their ownership to incorporate a third company;
• companies splitting into a third entity;
• the affiliation of companies;
• the merger of companies;
• sales of shares in a company;
• the acquisition of all operative assets;
• the acquisition of part of a company’s assets and liabilities;
• the lease of a company;
• the lease of the real estate in which the company operates; and
• the sale of machinery.

The transfer of the rights and obligations of the employees in such cases occurs by operation of law. For this reason, it is not necessary to conclude a new employment contract or modify an existing one. However, the Labour Inspection Body can request this in some cases. Also for reasons of good order and clarity, it is advisable to draft appendices to the employment contracts, putting on record the full name of the new employer and the fact that the transfer has been made in accordance with law. This will help to reduce the likelihood of labour claims being made against the former employer in future.

Upon plan termination, how can any surplus amounts be utilised?

Since we are dealing in this question with private pensions - APVs - any surplus amounts can be utilised at any time by those affiliated to the institution.

Fiduciary responsibilities

Which persons and entities are ‘fiduciaries’?

Mutual funds, AFPs, insurance companies and housing fund managers can be deemed as ‘fiduciaries’.

What duties apply to fiduciaries?

Fiduciaries’ duties include the administration of third parties’ funds, lace obligation (an amount of money that those institutions cannot spend and have to reserve as a legal obligation), and paying a pension to the affiliates.

What are the consequences of fiduciaries’ failing to discharge their duties?

Administrative or monetary fines and the dissolution of the entity.

Legal developments and trends

Have there been legal challenges when certain types of plans are converted to different types of plan?

No, there have been no legal challenges when certain types of private plans are converted to different types of plans.

Have there been legal challenges to other aspects of plan design and administration?

No. Regarding private pensions, there have not been legal challenges to other aspects of plan design and administration because they have been a good solution for private pension saving and retirement benefits.

How will funding shortfalls, changing worker demographics and future legislation be likely to affect private pensions in the future?

Considering that the public or state pension system provides very low retirement pensions to employees, and that the private pensions system is used primarily for employees with high incomes, workers in Chile will likely move towards private pensions.

Update and trends

Are there any current developments or trends that should be noted?

In October 2018, President Sebastian Piñera filed the draft Pension System Reform bill, which must currently be approved by the Chilean Congress before it can be implemented. The main objective of the pensions system reform is to improve current and future pensions, giving special urgency to those groups that are more vulnerable, to the middle class, to women and to those who voluntarily extend their stay in the workforce. The main objectives of the bill of law are to:

• improve current and future pensions of the Solidarity Pillar, which will gradually grow the amount of the benefits to a current and future pensioner depending on his or her age. The Basic Solidarity Pension and the Solidarity Pension Contribution will improve by 10 per cent and 15 per cent respectively the first year. These will continue increasing depending on the age of the pensioner;
• improve future pensions self-financed; the contribution rate will increase gradually by 4 percentage points, from 10 to 14 per cent of the remunerations and taxable income, which will be financed by employers; and
• improve current and future pensions of the middle class and women. For this objective the Pensions System Reform proposes the creation of an additional contribution of pension for the middle class, which will be financed by state resources, the monthly amount of this additional contribution will be 0.15 UF for each year contributed, with a minimum of 16 years of contributions for women, and 22 years for men.

In addition, the Pensions System Reform proposes the creation of an additional contribution of pensions for middle-class woman, which will be financed by state resources. The monthly amount of this additional contribution will be 0.05 UF for each year contributed, from 16 years of contributions.

Additional contributions to the effort of the middle class financed by the state will also be created, for those who voluntarily postpone their permanence in the labour force and their retirement age, increasing the amount of the pension by 50 per cent.

• The creation of a Severe Dependency Insurance and Subsidy for older adults who, suffering a severe dependency, physical or mental (current and future), the Severe Dependency Insurance, will be financed with an additional contribution of 0.2 per cent of the employer’s charge and Subsidy of Severe Dependency with State Resources.
• Admission of new participants for the administration of funds (entities with and without profit purposes, compensation funds, savings and credit cooperatives, insurance companies, general fund administrators, AFPs or others).