For years, Peru has been in dire need of a reform to its pension system. The approval of seven laws between 2020 and 2023, which allowed for ‘extraordinary’ withdrawals from individual pension accounts – meaning the withdrawal of funds that should have been reserved for retirement security – alongside regulation that approved in 2016 the withdrawal of 95.5 percent of account contents upon reaching retirement age, had distorted the system’s purpose. Additionally, only 30 percent of the country saves for retirement through the pension system, and multiple regulatory hurdles limit the adoption of more flexible saving regimes. This, together with the lack of a minimum pension, further underscored the urgency for change.
A few months ago, after extensive political and technical discussions, Congress approved a law to address this need, marking a clear first step in the right direction towards a more inclusive and effective pension system. Once the law is implemented by the Executive branch, which must officially set the rules and details for how the law is to work in practice, the next step will be to promote a national conversation about how we envision our future, as well as to refine certain aspects of the current reform.
We are making significant efforts to promote financial literacy
The important point, however, is that the deadlock has finally been broken and the benefits for Peruvians are self-evident. To begin with, the new law aims to put a stop to fund withdrawals, allowing nine out of 10 Peruvians participating in the private system – who are currently at risk of having no savings left in their accounts – to rebuild their retirement funds. Also, the law has established a minimum pension, conditioned to the individual’s saving discipline and frequency. Furthermore, it opens up the pension sector to increased competition, which should result in better services as fund administrators strive to attract participants. Additionally, new commission structures based on fund performance respond to user demands for different types of fees.
In short, the implementation of the new law can lead to a healthier and more robust pension system. The question now is: what happens the day after? As I mentioned, there is still work to be done on our journey towards a strong system. Much of this responsibility lies with the government, in its capacity to reduce the informal labour market and to address regulations that hinder competition. Our challenge now, as pension fund administrators, is to change how our affiliates, and Peruvians in general, value the pension system and to keep making efforts to get closer to them, and to innovate vigorously in a largely traditional industry.
But I must insist that we should not see this recently approved law as the culmination of the reform process. This is just the beginning. We still have to tackle, for example, the ‘auction’ process where a single winner among the administrators gets new affiliates automatically, which goes against increasing competition and allowing the creation of differentiated value, beyond fees, from fund managers.
Also, we need more commitment from the Government and the private sector in imparting information as to why it is important for people to save money in the pension system, employing new education methods based on behavioural science. We must not sit back and relax.
Transparency is key
At Prima AFP, we put our clients at the centre of our decisions, and an important part of that commitment is to make our services more approachable and transparent. For years, the pension system has had a distant relationship with its affiliates, partly due to the nature of the service itself – a long-term savings scheme intended to be accessed at the age of 65. Additionally, the system of individual capitalisation accounts, through which investments are made to supplement savings with returns, can be too arcane for some users to fully grasp. But we believe our affiliates deserve to know how the system works and to be informed about how their funds are performing – whether the results are positive or negative – and where their money is being invested.
As the reform progresses, it is essential for pension fund administrators to lead by example
We see this as a way to build trust with the people we work for and, also, to establish healthy channels for communication and information sharing. Our aim is to be empathetic, and with this in mind, when sending our monthly reports to our clients about their funds, we use simple graphs and language instead of complex and tedious investment jargon.
At the same time, we are making significant efforts to promote financial literacy, for example, through a series of online courses on our webpage and on our YouTube channel called ‘Ahorrando a fondo,’ where we address the most pressing questions about the pension system. Additionally, we have implemented special tools on our website that allow users to calculate their ideal pension and stay informed about the latest laws and regulations.
Simplify to include
Technology and digitalisation are vital to how we manage our relationships with clients, but we also see them as a path to offering more inclusive services. For example, there is no reason to make it difficult for independent workers to contribute to their pension funds. To simplify this, users can now add money to their funds using ‘Yape,’ Peru’s most popular digital wallet. This is a simple decision that can have largely positive consequences. Additionally, we have virtually eliminated the need to visit physical branches, as all our procedures can now be completed through digital channels. However, all this does not mean the experience at our branches has diminished in quality, as we continue to cater to the needs of all types of clients.
In general, at Prima AFP, we believe that as the reform progresses, it is essential for pension fund administrators to lead by example, offering transparent services, embracing innovation and promoting financial literacy. Building trust with our affiliates is key, while also ensuring we actively represent their interests in national discussions about the future of the pension system and, more importantly, the future of our country.
