In July, a government-appointed commission investigating pensions reform recommended allowing domestic banks to enter the sector, to increase competition and reduce the commission that pensions providers charge the public for running a private pension.
Currently, it is compulsory for those in salaried employment to contribute 10% of their earnings to one of six private pension funds. Providers charge a commission of 25% on the contributions.
In total, Chile has the equivalent of $80 billion of private pensions under management (compared with just $30 billion in its much more populous neighbour, Argentina).
Andras Uthoff, head of social development at think-tank the Economic Commission for Latin America (Eclac) and a member of the advisory commission on pensions, says: “The main reason for allowing domestic banks to come into the market is to reduce the commission levels, which we feel are too high. We did not suggest an appropriate level but recommended more players enter the market.”
One of the anomalies of the pensions system is that foreign banks are already allowed to have a banking arm in Chile and a separate affiliate with a private pensions fund.
Foreign banks own three of the six pensions funds providers: Provida by BBVA, Bansander by Banco Santander, and Santa Maria by ING.
Armen Kouyoumdjian, an economic consultant based in Chile, says: “When I first came to the country 15 years ago, there were 20 private pension funds. Now there are six.” Oligopolies are soon able to form in this country. “The current system is very unfair for domestic banks because their foreign rivals can set up pensions arms.”
The two Chilean banks with the most to gain from the reform, which is expected to be approved by the nation’s congress at the start of next year and come into effect on January 1 2008, are Banco de Chile and Banco del Estado.
The government is also expected to back plans to make contributions at 10% of income compulsory for all self-employed.
Kouyoumdjian adds: “The Chilean pensions system is supposed to be a miracle, but when you look more closely you see it has many problems. Only 60% of all workers contribute to private pensions under the scheme.”
Gonzalo Reyes, head of research at the Superintendencia de Administradoras de Fondos de Pensión, the government pensions watchdog, says: “As a whole, the planned reforms should have a significant impact. However, one of the issues with making contributions compulsory for the self-employed is that many cannot afford it.”
The government is also expected to increase the state pension for those who do not have any private cover from the equivalent of £75 a month to £100 ($188) a month.