Updates and reforms
June 2015, President Dilma Rousseff announced a short term fix to the countries haemorrhaging pension system. The rule will restrict access to full pensions, Rousseff's decree establishes a progressive scale limiting access to full pensions gradually through to 2022.
Brazil's pension's minister agrees this will ensure stability is restored within the pensions system.
This reform has had a negative response from a Brasilia-based economic consultant, who claims that this reform will only put the country further away from a meaningful overhaul.
However, the cabinet minister does recognise that this fix will only stem the problem in the short term and more established deeper reform could take years.
The day before the announcement 'Rousseff vetoed Congress's bill containing a so-called 85/95 formula, which allows women to draw full pension benefits if the sum of their age and years of pension payments reached 85. The same would go for men if the sum reached 95.
Instead, Rousseff issued a decree gradually increasing that sum by a total of five points over the next seven years: One point would be added to the required sum in 2017, 2019, 2020, 2021 and 2022.'
11/11/2015
----------------------------------------------------------------------------------------------------------------
The Brazilian pension system has been subject to a series of ongoing reforms undertaken since the late 1990s. The need for reforms stemmed primarily from an overgenerous pension system that placed heavy pressure on the governmental budget. With the end of the military rule in 1988, the new democratic government implemented legislation that made the pension system the most generous and expensive among developing countries. The Asian and Russian crisis in the late 1990s further stressed the country's financial stability. The adoption of fiscal reforms was essential to control inflation and to recover internal and external fiscal imbalances.
The pension schemes for civil servants and private sector workers were amended in two rounds. Amongst other reforms, benefits were reduced and limited to a monthly ceiling, a minimum pension age was established and vesting periods were implemented, which has curbed the more generous excesses of the system. Before, the only variable used to respond to financial imbalances was the raising of contribution rates. This undermined the incentives to work and limited economic growth as overall social security contributions amounted to 50%. Despite the initial reforms, the government did not succeed in ensuring long-term financial stability of the system, which forced Brazil to enact further changes.
Total pension assets under management amount to USD 97.4bn, accounting for 18.8% of GDP in 2003. Nevertheless, the overall coverage rate of complementary pension provision remains very low. In terms of assets under management, publicly owned company pension funds remain the largest shareholders providing pension provision mainly of the defined benefit type.
Public Pensions
In Brazil, the 1st pillar consists of two schemes. The so-called Regime Geral de Previdência Social (RGPS), the general regime of social security, covers the private-sector workforce. It is financed through payroll taxes (shared by the employer and the employee), revenues from sales taxes and federal transfers that cover shortfalls of the system.
The RGPS is a mandatory, pay-as-you-go-financed single-pillar scheme, which is operated by the National Social Security Institute. A key element of the RGPS is the strong redistribution towards the poor elderly. Redistribution is mainly achieved by exemptions from contributions and reduced contribution rates for low-wage earners and certain sectors by providing a generous minimum pension level. However, these exemptions weaken the contribution basis, which is counterproductive to achieving the long-term financial sustainability of the system.
A high contribution rate under the general RGPS system and for social security as a whole leads to a shift from the formal to the informal sector. The Brazilian system lacks incentives to participate in social security as it provides generous social assistance with low eligibility requirements.
Private-sector employees are entitled to retire with a full pension at age 65 for men and 60 for women if they have a contribution record of at least 15 years. Alternatively, it is possible to retire after having contributed to social security for 35 years for men and 30 years for women, irrespective of the retiree's age.
Public-sector employees are covered by multiple special pension regimes at different governmental levels pooled to the Regimes Próprios de Previdência Social (RPPS). Municipal, federal and state entities manage their own schemes for their employees, but are jointly coordinated by the Ministry of Pensions and Social Assistance. In general, these pension plans are financed on a pay-as-you-go basis with the employee paying a percentage of their salary. The percentage varies depending on the public entity.
Compared to the private-sector scheme benefits, public-sector employees receive higher pensions for lower contribution rates. Reform measures in 1998 led to amendments in the benefit formula, to the establishment of minimum pension ages and to the implementation of a vesting period for employees switching to a public-sector scheme from the RGPS system.
Now, 10 years of work within the government are required to qualify for a pension, whereas there was no vesting period before. The pension benefit formula was also changed from a final salary scheme to one that takes into account the best salaries from positions the member held for at least five years. To be entitled to a full public-sector pension benefit, the statutory retirement age is 60 for men and 55 for women. This applies only to new members who join the system. Those who were already employed in the public sector are subject to more lenient eligibility requirements with men entitled to the pension at the age of 53 and women at the age of 48.
Besides the two schemes for civil servants and private-sector employees, social assistance programmes shield the elderly from poverty. These programmes are non-contributory, providing means-tested pensions amounting to the minimum wage. As a result, the poverty rate among the elderly is lower than the average population poverty rate.
Voluntary Pensions Plans
Complementary pensions have a long history in Brazil and the county has the oldest system in Latin America. Under the Regime de Previdência Complementar (RPC), both occupational and personal pensions are provided on a voluntary basis. Two pension vehicles exist that can be used to finance private pension benefits.
Closed private pension entities are non-profit organisations that can be established on a single-employer or multi-employer basis and by labour unions. The accumulated assets are legally separated from the sponsoring undertaking. In addition to the closed approach, which is predominantly chosen by large employers, authorised financial institutions provide complementary pension provision through open private pension entities.
This type of pension plan is not necessarily linked to employment. Open pension entities offer their services to employers, employees, the self-employed and even unemployed individuals. This approach to pension provision is mostly chosen by small and medium-sized employers and offered to their employees. Compared to closed pension entities, this type of pension plan can have disadvantages in the form of less flexibility in making investment decisions, higher fees and less administrative control.
The Brazilian complementary pension system can neither be classified as a second- nor as a third-pillar system as employers could contribute to a personal pension plan and individuals could participate in the occupational pension plan the employer offers.
The regulatory environment for open and closed private pension entities differs. The State Secretariat for Pension Funds supervises closed funds in regards to, amongst other areas, governance, disclosure, investment and fees. The National Board of Complementary Pensions, which is linked to the Ministry of Social Security, makes the main regulatory decisions. The supervision of open private pension entities is carried out by the Superintendence of Private Insurance, which is linked to the Ministry of Finance. The National Board of Private Insurance is in charge of setting the relevant regulations.
A comparison of the two pension vehicles reveals that closed pension funds clearly dominate the market with assets under management accounting for 15.9% of GDP in 2003, according to publications provided by the State Secretary for Pension Funds. The assets under management of open private pension funds amounted to USD 15.2bn, representing 2.9% of GDP. With total assets under management of USD 97.4bn amounting to 18.8% of GDP in 2003, Brazil ranks quite high in international statistics. According to more recent data from the OECD, total pension fund assets in Brazil have already grown to USD 166bn in 2006. Nevertheless, the overall coverage rate of complementary pension provision remains very low. In terms of assets under management, publicly owned company pension funds remain the largest shareholders providing pension provision mainly of the defined benefit type. Within the market for open pension funds, insurance companies are the main players in providing supplementary pension plans.
The government passed new legislation in 2001 to replace the 1977 regulations. The new law brought significant changes to plans offered under a closed entity arrangement. With effect from 2003, discretionary vesting promises were replaced with a statutory vesting period of three years and the portability of assets between pension plans was improved.
Tax treatment of contributions and benefits
In general, contributions to private pension plans are tax-deductible up to certain limits for both the employee and the employer. New legislation passed in 2001 focused on making supplemental pensions more attractive and terminated the Special Taxation Regime as of 2005. In contrast to the old legislation, the 20% withholding tax on pension fund investment returns was removed, which has generated higher net returns and lowered costs for defined benefit schemes.
Pension benefits are taxed as ordinary income.
Investment regulation
Quantitative investment restrictions apply to pension assets as follows:
- Low credit risk bonds are limited to 80%; this limit decreases with increasing credit risk
- Listed stocks are limited to 50%
- Private equity is limited to 20%
- Real estate is limited to 10%, which will decrease to 8% by 2009
- One single company must not exceed 20% of the company's capital, and only up to 5% of the pension fund assets may be invested in any one single company
Outlook
Due to the generosity of the state pension system, further reforms are inevitable as pension expenditures account for an increasing share of public spending. Besides the ongoing strengthening of complementary pensions, the OECD made a number of proposals regarding the general regime of social security for private-sector employees. Future reforms should primarily focus on the following:
- Abolishment of the strong link between minimum pensions and minimum wages.
- Presently minimum wage policy directly affects public finances through simultaneous movements in pension benefits.
- The number of years required to qualify for a full pension should be increased and a minimum retirement age implemented.
- Special grants for employees in certain sectors should be abolished.
The recommendations made by international organisations are considered necessary to ensure the sustainability of the public pension system.
It can be seen that complementary pensions are gaining in importance. New legislation, effective since 2005, made supplementary pensions more attractive and has contributed to the gradual shift towards private pensions.
Compiled by Allianz Global Investors
