De Soporte ó Pasivos

The new Salvadoran pension law was passed in December 1996. In mid-1997, the financial sector in El Salvador experienced a severe crisis after some major incidents of fraud. As the climate was not judged favourable for the introduction of the new pension system and the interest of foreign investors to participate in the new system was small, the introduction of the new pension system was delayed. By March 1998, however, five fund management companies had been authorised by the Superintendency and affiliation is expected to begin in April 1998. Of all the second-generation pension reforms, the Salvadoran reform is the one most similar to the Chilean pension reform.The new system will eventually replace the existing defined-benefit pay-as-you-go system which will be phased out. It consists of fully funded individual accounts managed by competing private pension funds, the Instituciones Administradoras de

Fondos de Pensiones (IAFP).

Participation in the new system will be mandatory for all new labour market entrants as well as for all affiliates of the existing system up to the age of 35. Male workers over 55 and female workers over 50 must remain in the old system institutions ISSS (for private sector employees) and INPEP (for public sector employees); workers between these age limits will be able to choose whether to transfer to the new system or to remain in the old system. According to government estimates, the new system will start with about 400 000 affiliates. Workers who switch over to the new system will receive a “transfer bond” to honour their past contributions to the old system. In order to provide for transition financing, the

government has set up a “transition fund” to which funds will be transferred annually; in 1998, the transfer amounted to 0.5 per cent of the government budget; this fund will be invested by the fund management companies in the same way as the pension funds.

These recognition bonds will carry a real interest rate of 0 per cent, i.e. they will be indexed to prices. They will be calculated applying a formula very similar to that used in Chile. The retirement age in the new system will be 60 years for male workers and 55 years for female workers. Originally, an increase of the retirement age to 65 and 60 years for men and women, respectively, had been proposed for the new and the old system. This proposal, however, was rejected by Congress. In addition, Congress introduced a new provision allowing workers to retire after 30 years of contributions regardless of age in both systems. The contribution rate in the new system will start out at 4.5 per cent and gradually increase by 2002 to 10 per cent of the monthly salary; approximately two thirds of this are payable by the employers and one third by the workers. In addition, workers will have to pay an insurance premium to cover the risks of disability and survivorship as well as a fee charged by the IAFP for fund administration. Based on the experience of other Latin American countries, it is estimated that the premium and the administrative fee will amount to about 3.5 per cent of salaries which is the maximum allowed by the supervisors. Workers are allowed to make additional voluntary contributions. Workers will be allowed to switch between fund management companies every six months, including the processing delay of three months effectively every nine months.

In order to rationalise the existing system, contribution rates will be increased for ISSS affiliates from currently 3.5 per cent to ultimately 14 per cent of wages. In order to provide an incentive for affiliates to switch over to the new system, the contribution rate for ISSS will be 8 per cent in 1997 while the new system will require only 4.5 per cent during the first year. For INPEP affiliates and teachers who stay in the public system, contribution rates will increase from currently 9 per cent and 12 per cent, respectively, to 14 per cent. If they choose to go to the new system, however, their contribution rate will be 8 per cent in the first year.

The law contains investment provisions very similar to those in Chile. Ranges are prescribed within which the limits for investment in each instrument will be set through regulations; taking account of the low level of financial sector development in El Salvador, the proposed ranges are wider than in Chile. Investment in foreign securities and shares is not allowed. The draft law envisaged the possibility of foreign investment but this was modified in the political process. During the first ten years of operations, the new system will be required to invest a declining percentage of assets in the public housing fund, Fondo Social de Vivienda (FSV). This provision was seen as necessary in order to integrate the previously mandatory contributions to the FSV into the pension system. Originally, the share of FSV investment was proposed to start out at 25 per cent of the pension funds’ assets; Congress changed this to 30 per cent, however.

Like in Chile, there is a relative rate of return guarantee and a minimum pension set by the Ministry of Finance. It had been proposed to index the minimum pension to prices but this was rejected; instead, adjustments will be made at discretion of the Ministry of Finance. Upon retirement, workers will have the same benefit choices as in Chile: programmed withdrawal of funds, an annuity or a combination of the two. The pension fund management companies will be regulated and supervised by a specialised supervisory agency. The IAFPs must be established as joint stock companies with a minimum capital of C. 5 million corresponding to about US$570 000. All of the five authorised AFPs have been established with capital that exceeds this amount by five times.

Ownership of IAFP shares has to be authorised by the Pension Superintendency; foreign ownership is allowed but subject to several restrictions and allowed only together with national or Central American shareholders. All national and foreign banks, financial institutions and insurance companies established or operating in El Salvador or, in the case of foreign financial institutions, holding shares in national financial institutions are prohibited from owning shares or operating an IAFP. This restriction does not apply to subsidiaries of foreign financial institutions. Of the five pension fund administrators authorised by March 1998, only one company is purely domestic. Foreign investors include Chilean pension fund management companies and several European and American banks.