OECD Reviews of Pension Systems: Peru

Description

This review assesses Peru's pension system in its entirety, looking at both public and private, pay-as-you-go (PAYG) financed and funded pension provisions. The review then provides policy options to help tackle old-age poverty; establish a solid framework for the contributory pension system to meet its objectives; improve the coverage and level of pensions; and optimise the design and improve the regulation of the funded private pension component. A further goal of these proposals is to improve the Peruvian population's trust that the country's pension system will be able to deliver secure retirement income in old age. The review is the fifth in a series of country reviews of pension systems [Ireland (2014), Mexico (2016), Latvia (2018), and Portugal (2019)]. These reviews provide countries with policy options that will help them improve the functioning of their overall pension system. Tailored policy options are proposed based on the specificities of the national pension system, and on international best practices regarding reforms, design and regulation of pension systems. Foreword Executive summary Chapter 1. Introduction to the review of the Peruvian pension system 1.1. Objectives of the review 1.2. Structure of the review Chapter 2. Context and description of the current Peruvian pension system 2.1. Macroeconomic and demographic context 2.2. The Peruvian pension system: reforms and current structure 2.2.1. Historical background 2.2.2. Description of the current pension system 2.3. Non-contributory pension for the elderly 2.4. The pay-as-you-go national pension system 2.4.1. Early retirement 2.4.2. Disability pensions 2.4.3. Survivor pensions 2.4.4. Reserve fund 2.5. Special regimes 2.5.1. Civil Service scheme (Cédula Viva) 2.5.2. Police and military personnel (Caja de Pensiones Militar Policial, CPMP) 2.5.3. Fishermen (Regimen Especial de Pensiones por los Trabajadores Pesqueros, REP) 2.5.4. Journalists 2.5.5. Leather industry workers 2.5.6. Housekeepers 2.5.7. Pilots and co-pilots 2.5.8. Maritime workers 2.5.9. Civil construction workers 2.5.10. Mining, metallurgy and iron and steel industry workers Underground Open pit Mining, Metallurgical and Steel Centres 2.6. The funded private pension system 2.6.1. Retirement savings accounts 2.6.2. Asset management fees 2.6.3. Disability and survivor insurance 2.6.4. Retirement age 2.6.5. Pay-out from the retirement savings accounts 2.7. Workers in risky occupations 2.8. Voluntary pension savings Notes References Chapter 3. Tackling old-age poverty 3.1. Addressing old-age poverty 3.1.1. Poverty levels 3.1.2. Pensión 65 3.2. Coverage and benefit of Pensión 65 3.3. Impact of Pensión 65 3.4. Policy options 3.4.1. Increase awareness of benefits 3.4.2. Increase benefit amount and threshold 3.4.3. Change the benefit to a top-up payment rather than flat-rate References Chapter 4. Establishing a solid framework for the contributory pension system 4.1. The choice between the SNP and the SPP 4.2. Procedural errors from a parallel system 4.3. Cost and financing of the SNP 4.4. Cost of special pension schemes 4.5. Policy options 4.5.1. Design a complementary and financially sustainable pension system Benefit formula for the public pension component Minimum pension Survivor and disability pensions Split of contributions Implementation 4.5.2. Centralise the contribution management and data collection of the entire system to promote information sharing and efficiency gains Notes References Chapter 5. Improving the coverage and level of pensions 5.1. Coverage of the contributory pension system 5.1.1. Affiliation with the pension system 5.1.2. Labour market and informality 5.2. The level of pension benefits 5.2.1. Contribution levels 5.2.2. Contribution density 5.2.3. Replacement rates 5.2.4. Replacement rate sensitivities 5.2.5. Withdrawals during accumulation in the SPP 5.2.6. Early retirement in the SPP 5.3. Policy options 5.3.1. Promote formal employment and improve coverage of the pension system Increase the relative cost of informality Encourage informal and independent workers to join and contribute to the pension system Targeted subsidies for low-income informal workers Mandating participation for independent workers Nudges for independent workers 5.3.2. Increase contribution levels and density Increase mandatory contribution rates Automatically enrol individuals to contribute higher amounts in the SPP Improve accessibility and incentives for voluntary contributions 5.3.3. Allow withdrawals of only voluntary contributions for first home 5.3.4. Close the gender gap for early retirement 5.3.5. Limit early retirement Notes References Chapter 6. Optimising the design of the private pension system for the accumulation phase 6.1. Investment of pension assets 6.1.1. Available funds and investment choice 6.1.2. Asset allocation and fund performance 6.2. Cost and services of the AFPs 6.2.1. Management fee structure 6.2.2. Competition 6.2.3. Profitability and costs 6.2.4. Switching between AFP 6.2.5. Administration and services provided 6.3. Policy options 6.3.1. Adapt the default investment strategy to a more optimal lifecycle approach and allow for flexibility in the default for voluntary savings Provide a more gradual path to de-risk investments Allow different investment strategies for voluntary savings 6.3.2. Implement independent investment benchmarks to assess and compare investment performance 6.3.3. Ensure charges are aligned with costs and promote competition Improve disclosure and reporting of costs and fees Impose a fee structure to better align the incentives of providers and members Align fees on voluntary contributions with those for mandatory contributions Establish limits around frequent switching 6.3.4. Remove the minimum guaranteed return 6.3.5. Align the responsibilities of the institutions with their expected role in the system Notes References Chapter 7. Optimising the design of the private pension system for the pay-out phase 7.1. Options for pay-out at retirement 7.2. Annuity market 7.2.1. Annuity sales and pricing 7.2.2. Reserving and capital requirements 7.2.3. Managing longevity risk 7.2.4. Protecting members in insolvency 7.3. Policy options 7.3.1. Address poor incentives created by the lump-sum pay-out option Require a minimum pension to be paid Introduce financial incentives to encourage individuals to take a pension instead of a lump-sum Introduce incentives to limit gaming of the pension system 7.3.2. Simplify the options available 7.3.3. Ensure the security of pension benefits Ensure the appropriateness of assumptions used to calculate benefits Ensure that appropriate mechanisms are in place to safeguard pensioners’ benefits Notes References Chapter 8. Trust and confidence in the pension system 8.1. Measures to improve the understanding of the pension system 8.1.1. Financial education efforts 8.1.2. Communication on the pension system, pension accounts, and benefits 8.2. Trust and confidence in the institutions of the pension system 8.2.1. Reasons for dissatisfaction with the financial institutions of the SPP 8.2.2. Low levels of trust in public institutions 8.3. Governance and supervision 8.3.1. Corporate Governance 8.3.2. Supervision of the SPP 8.4. Policy options 8.4.1. Promote financial literacy and education about the pension system 8.4.2. Improve confidence in the private financial institutions of the SPP Provide a centralised and neutral contact point for the affiliate to file requests, initiate procedures and manage payments Improve accountability and governance of AFPs 8.4.3. Improve confidence in the public institutions of the SNP Improve transparency and governance of the management of contributions Strengthen regulatory and supervisory powers of the SBS Establish broad based and comprehensive reforms and implement them gradually without losing sight of their long term horizon Notes References Chapter 9. Summary of recommendations from the OECD review of the Peruvian pension system 9.1. Tackle old-age poverty 9.2. Establish a solid framework for the contributory pension system to meet its objectives 9.3. Improve the coverage and level of pensions 9.4. Optimise the design of the private pension system to improve outcomes 9.5. Improve trust and confidence in the pension system