Chilean Pension Reform Law 20,255
Law 20,255: Pension Reform
Key Benefits
This law introduces several pension benefits for AFP and INP members, pensioners of slender means, and others. It also includes miscellaneous amendments to the pension system.
1. Solidarity Pension System (SPS)
This tax-funded system includes two benefits:
- Basic Solidarity Pension (PBS)
- Solidarity Contribution Support Services (APS)
A) Basic Solidarity Pension (PBS)
Granted for old age and disability. These are non-contributory, requiring no prior beneficiary contributions. Generally, beneficiaries must be resourced and have resided in Chile for a certain number of years.
PBS for Old Age
- Granted to men and women aged 65+
- Not entitled to a pension insurance scheme
- Belong to a family group within the lower 60% of income (temporarily 40%)
- Minimum 20 years of continuous or discontinuous residency since turning 20
- Residency in Chile for 4 of the last 5 years preceding the application
Applications should be submitted to the former INP (now IPS) upon reaching age 65. The PBS amount is $60,000 per month until June 30, 2009, then $75,000.
PBS for Disability
- Granted to individuals between 18 and 65
- Residency in Chile for at least 5 of the last 6 years preceding the application
- Declared invalid by the Superintendent of Pensions’ medical commission
- Belong to the lower 60% of income (temporarily 40%)
The PBS amount for disability is similar to that for old age.
These PBS benefits replace the welfare pensions under DL No. 869 of 1975.
B) Solidarity Contribution Support Services (APS)
These benefits generally require prior contributions and supplement individual AFP accounts to reach a sufficient statutory pension or maximum joint pension. They also supplement survival pensions and INP pensions.
APS are fiscal contributions that improve pensions below the legal maximum for those with insufficient contributions for old age, survival, death, or disability. They also improve INP pensions and survival benefits under the old occupational accidents and diseases system.
APS Beneficiaries
- Those entitled to pensions under DL No. 3,500
- Recipients of survival pensions
- INP retirees
- Survivors under the Law on Occupational Accidents and Diseases
APS eligibility requirements mirror those for old-age PBS: at least 65 years old, 20 years of residency since age 20, residency in 4 of the last 5 years, belonging to the lower 60% of income, and receiving a benefit less than the maximum solidarity contribution pension.
From July 1, 2008, the Maximum Solidarity Contribution Pension (PMAS) is $70,000, applying to the lower 40% of the income bracket. From July 1, 2009, it increases to $120,000 for the lower 45%, rising to $255,000 for the lower 60% by 2012.
APS for Disability
The solidarity contribution amount depends on the degree of disability and supplements the PBS disability benefit, provided residency and low-income requirements are met.
Solidarity contribution benefits cease upon reaching age 65, when individuals can opt for old-age APS. Benefits also end upon death, leaving the country for over 90 days in a calendar year, or failing to meet other legal requirements.
2. Bonus for Each Child Born
A fiscal contribution of 10% of 18 minimum monthly incomes (currently $286,200) per child, effective July 1, 2009. The amount increases annually based on the average return of AFP Type C funds, less management fees, until the mother turns 65. At that time, the bond is added to the AFP account or increases the existing pension.
Beneficiaries
- Women affiliated with AFP
- Recipients of old-age PBS
- Recipients of survival pensions from AFP or INP (including the old system) who meet the minimum residency requirements for old-age PBS
Paid to biological and adoptive mothers. Pensions before July 1, 2009, are not eligible. Applications must be submitted to the IPS upon reaching 65.
3. Extension of Disability and Survival Insurance
Extends coverage for disability and survival insurance from 60 to 65 for women affiliated with AFP, allowing them to continue working and defer old-age pensions. This aligns coverage with that of insured male workers.
4. Differentiated Contributions for Women
Women pay lower contributions for disability and survival insurance due to lower risk profiles. The difference is added to their individual capitalization accounts.
5. Survival Pension Benefits
Spouses and parents of illegitimate children of deceased workers are eligible for survival pensions, even if not disabled.
6. Balance Transfer in Divorce/Annulment
In divorce or annulment cases requiring compensation, the court can transfer up to 50% of the amount accumulated during the marriage in the capitalization account to the spouse. Applies to trials starting after October 1, 2008.
7. Increased Minimum Taxable Income for Domestic Workers
The minimum taxable income for domestic workers will gradually increase from 75% of the minimum wage to 83% on March 1, 2009, 92% on March 1, 2010, and 100% on March 1, 2011.
8. Subsidy for Hiring Young Workers
A) Subsidy to Employers
Monthly subsidy to employers hiring workers aged 18-35, equivalent to half the pension contributions on a minimum income, as long as the worker’s income is less than 1.5 times the minimum wage.
B) Contribution to Employees
Employees receive a contribution to their AFP account equal to the subsidy paid to the employer. Both benefits apply for the first 24 months of contributions. The employer subsidy starts October 1, 2008, and the employee contribution starts July 1, 2011.
9. Employer-Paid Additional Contributions
Employers with 100+ workers must finance the additional contribution for disability and survival insurance from July 1, 2009. Employers with fewer than 100 workers must do so from July 1, 2011. State agencies are required to pay from July 1, 2009, regardless of the number of workers.
10. Disability Pension Determination
Total disability is determined by a single, final opinion from the Regional Medical Committee. Partial disability involves a first opinion and a final second opinion after three years.
11. Gradual Membership for Self-Employed
Self-employed individuals will gradually contribute to the pension system based on their taxable income: 40% from January 1, 2012, 70% from January 1, 2013, and 100% from January 1, 2014. A 7% health contribution becomes mandatory from January 1, 2018. The IRS determines the annual pension contribution amount, applied to 80% of gross taxable income. Income cannot be below one minimum monthly income or above 720 UF. Contributions are deductible from tax, and provisional monthly payments are allowed.
12. Voluntary Affiliation
Allows anyone, employed or not, to join an AFP and contribute to a pension. Targets individuals without pension coverage, such as housewives, students, and unpaid caregivers. Starting October 1, 2008, individuals can open an AFP account and make monthly, single, or occasional contributions. Spouses can ask employers to deduct voluntary contributions from their pay and deposit them into the affiliate’s account, including disability and survival insurance. Contributions are based on a minimum of one minimum monthly income without the 60 UF cap, which applies only to disability and survival insurance.
13. Additional Benefits Related to APV
A) Collective Voluntary Pension Contribution (VCCT)
Allows employers to make contributions to employees’ APV accounts. These contributions become the worker’s property upon leaving the company or dismissal under Rule No. 161 of the Labor Code. Otherwise, the employer can withdraw the contributions, which are considered income for tax purposes.
B) Taxation Options for VCT and VCCT
Employees can choose how their voluntary contributions are taxed: either not lowering taxable income (no tax on withdrawal) or lowering taxable income (tax applied upon withdrawal).
VCT and VCCT Tax Credit
The Treasury refunds 15% of employee contributions to APV or VCCT, up to 6 UTM, if annual savings do not exceed ten times the compulsory contributions and the employee chooses the tax system for withdrawal, intending the funds for early retirement or pension increase.
14. Other Changes
New members are assigned to the AFP with the lowest management fee for 24 months. All AFPs must tender for disability and survival insurance, awarded to the best financial offer. The 60 UF tax ceiling is adjusted annually based on CPI. AFP boards must have at least five directors, two of whom must be independent. Employers have until the last working day after the deadline to declare the end of employment for contribution purposes. Electronic payments extend the deadline to the 13th of the month.
15. New Pension Institutions
Establishes the Social Security Institute (IPS), which administers the SPS and old system pension schemes (excluding occupational accidents and diseases, which are transferred to the Institute of Work Safety). The IPS also manages a Previsional Data Information System and a network of Comprehensive Pension Care Centers (CAPRI). The Institute of Work Safety (ISP) manages work injury insurance and disease prevention. The Superintendent of Pensions supervises the SPS, the IPS, and the old pension system. The Social Security Superintendent supervises the ISP. CAPRI centers provide information and processing services for pension matters. The Committee on Members of the Pension System reports on the pension system and proposes education strategies. The Technical Board of Investments makes proposals on pension fund investments.
Audit and Performance of the Labor Directorate of Social Security
Authority
The Labor Directorate oversees employer compliance with declaration and payment of pension and health contributions. This authority extends to both private and public sector employees, including municipal workers. However, the Labor Directorate does not interpret social security and pension standards; this falls under the respective Superintendents (AFP, Social Security, and Health) or the Internal Revenue Service.
Audit Actions
The Labor Directorate verifies the correct declaration and payment of contributions to various social security institutions:
- AFP: Verifies correct declaration and remuneration records.
- ISAPRE: Controls timely payment and reporting of health contributions.
- INP: Verifies declaration and payment of pension contributions for members of INP schemes and health contributions for FONASA members.
- Mutuals: Verifies employer contributions under Law 16,744.
- Family Allowance Compensation Fund: Verifies payment of 0.6% contributions for workers with FONASA or FONASA AFP and family allowance payments.
Debt Constitution
The Labor Directorate can establish security liabilities when employers fail to declare and pay contributions. Auditors determine the existence and period of employment relationships, verify deductions and contributions, and create a record of pension liabilities if necessary. This record is sent to the respective institution for legal recovery of funds.
Penalties
Failure to declare contributions results in a fine of 0.5 UF per worker. Incorrect or incomplete declarations are exempt from fines if contributions are paid within the following month. The fine increases to 1 UF per worker per month for incorrect or missing payments related to unemployment insurance. A fine of 0.2 UF per worker per month applies for failure to record procurement codes, severance pay, and allowances on AFP forms. Fines related to INP are applied by the Public Service.
Statute of Limitations
A five-year limitation period applies to actions for collecting contributions after employment termination. No special limitation period exists for active employment relationships, subject to the Labor Code and Civil Code.
Special Cases
- Heavy Duty Work: Law 19,404 mandates contributions for heavy work, determined by the National Ergonomics Committee.
- Domestic Workers: Employers must contribute at least 4.11% of the worker’s compensation to an AFP fund.
- Pension Ceiling: Pension deductions and employer contributions are capped at 60 UF per month. Voluntary contributions above the ceiling are allowed.
- Retired Workers: Retired workers can continue working and contribute to pension insurance but must continue making health contributions.
- Foreign Technical Workers: Foreign technical workers with certification from their consulate are exempt from health and pension contributions, except for the employer contribution under Law 16,744.