Peru Congress approves bill to lower pension fees

Thu Jul 5, 2012 12:11pm EDT

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* New fund could enter market as early as December

* No reforms in 19 years, unlike Chile and Mexico

* Four funds currently have $30 bln in deposits

By Dante Alva and Omar Mariluz

LIMA, July 5 (Reuters) - Peru's Congress has passed the most significant reform yet to its 19-year-old private pension system, aiming to increase the number of workers enrolled and lower fees for contributors by allowing more competition.

The bill, based on a proposal from the finance ministry, passed Congress's permanent commission with 11 votes in favor, 10 against and one abstention around midnight on Wednesday.

Peru's four private pension funds, with about $30 billion in deposits, equal to 20 percent of gross domestic product, are the fast-growing economy's most important source of investment capital. They have been criticized for signing up only about 30 percent all workers and charging high fees.

The existing four funds are run by local banking groups and reformers say allowing new asset managers to enter the sector would drive down fees, currently around 2 percent of monthly salaries. The new system would gradually change to charge fees based on assets under management - which would lower income for operators in years when they lose money.

Fund managers have long complained that a vast informal sector limits their growth. The government has said the reform should increase enrollments by around 40 percent and reduce commissions by at least 30 percent by introducing competitors.

According to the reform, Peru's bank and insurance regulator will hold a tender every two years to allow funds to operate, possibly allowing new operators to enter the market. Bidding is to be held in December of this year.

Peru's private pension funds debuted in 1992 to essentially replace an ineffective public system. They are modeled after a system pioneered in Chile. But unlike Peru, Chile and Mexico have passed reforms to lower fees and increase competition in recent years.

"Competition is a means to ensure consumer welfare - here in Peru we are paying the highest commissions in the region," said the President of Congress's Consumer Protection Commission, Jaime Delgado.

Existing funds have criticized the proposed tender process because they say funds would be be rewarded for offering the lowest commissions, not for creating the highest returns through investment.

The reform also requires independent workers earning at least 1.5 times the monthly minimum wage, or 1,012 soles ($376), to contribute 10 percent of their income to one of the private pension funds, or to the small public system.

Contributions by independent workers who earn barely more than the minimum wage would initially be helped by a government subsidy worth 7 percent of their wages that would gradually be reduced to 4 percent. (Additional reporting by Caroline Stauffer; Editing by Andrew Hay)

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