On September 25, 2020, the Federal Executive submitted to the House of Representatives an amendment bill regarding an "INITIATIVE WITH DECREE PROJECT THROUGH WHICH CERTAIN PROVISIONS OF THE SOCIAL SECURITY LAW (LEY DEL SEGURO SOCIAL) AND THE RETIREMENT SAVINGS SYSTEMS LAW (LEY DE LOS SISTEMAS DE AHORRO PARA EL RETIRO) ARE AMENDED, ADDED AND REMOVED" (the "Bill").
The purpose of this Bill is to improve the quality of life of all workers subject to the pension regime of the Social Security Law ("LSS", as per its acronym in Spanish) by (i) increasing their pensions, (ii) increasing the percentage of workers receiving a guaranteed pension and (iii) a more efficient and competitive environment in the administration of workers' retirement savings. In addition, given the prevailing conditions in the market as well as the provisions of the Federal Economic Competition Law, the Bill intends that Mexican pension funds' administrators ("AFORES", as per its acronym in Spanish) charge commissions for the provision of their services, in similar terms as those of the international best practices.
I. Statement of Purpose of the Law
The Statement of Purpose of the Bill sets forth, inter alia, that:
- Social security is a human right and it is a fundamental element in the redistribution of wealth and the reduction of poverty in Mexico; the LSS is therefore considered to be of public utility and must ensure effective access to retirement, old age and unemployment insurances.
- In addition to the Decree published in the Official Gazette of the Federation on 8 May 2020, by which the right of persons over 68 years of age (or 65 years of age in the case of indigenous and afro-mexicans) to receive a non-contributory pension from the State was established, it is necessary to strengthen the pensions of all workers in Mexico.
- In particular, in formulating the Bill, the following was considered:
A. Demographic transition
In Mexico, the demographic transition leads to an aging population, which implies a lower capacity for the generation of income of the individual and, hence, greater vulnerability. In this context, one of the main challenges is the care of older adults. Today, a worker who reaches the age of 65 has a life expectancy of 18 more years, that is, he is expected to live up to 83 years.
As a result of population estimates, an inverted pyramid is expected. Thus, over the next few decades, the proportion of people who are retired or no longer in employment will increase, and they will have to be sustained by a smaller working-age population.
The model of individual savings accounts introduced with the 1997's amendment to the LSS did not achieve the expected results, mainly because (i) the number of workers with access to a pension was less than anticipated , and (ii) for those workers who do qualify for the pension, the pension is lower than expected2.
Additionally, according to the wage level criterion, workers with higher income reach a higher contribution density for having a career in the formal sector, which is more stable.
B. Contribution Density
Based on information from the National Retirement Savings System Database ("SAR", as per its acronym in Spanish), it is estimated that only 35% of SAR-affiliated workers would be entitled to a guaranteed pension, as well as only 56% of workers would achieve a lifetime pension3, while the remaining 44% will receive their savings at the time of retirement in a single exhibition.
In summary, while the 1997's amendment to the LSS established a guaranteed pension as a new benefit, the reality of the labor market4 showed that this benefit only covers a minority of workers.
C. Personal Savings
The operational structure of SAR has, as an essential component, the accumulation of the pension savings in an individual account administered by an AFORE. However, the savings accumulated in each individual account will hardly be able to exceed the amount required to obtain a pension greater than the guaranteed pension. Hence, pursuant to the Statement of Purpose of the Bill, the amount of savings established by the LSS in force, of 6.5% of the salary, is insufficient to obtain the target pension, which makes it necessary to raise the contributions to ensure that the worker can obtain the desired pension with his or her own savings.
D. Commissions
In Mexico, the average commissions that AFORES charge for providing their services have followed a downward trajectory; however, the charges remain higher than those observed with investment funds that manage comparable amounts of assets.
In a comparison of 43 different systems prepared by the International Pension Supervisors Organization, in terms of charged commissions, Mexico ranks at position 31, with costs above the international average.
In the Mexican financial market, investment funds' commissions that manage average amounts similar to those administered by AFORES are between 0.30% and 0.40%. Equity investment funds supported by the National Retirement Savings System Commission ("CONSAR", as per its acronym in Spanish) average commissions of 0.10%, while fixed income investment funds show average commission expenditures of 0.05%. Currently the average SAR's commission is 0.92% (in all cases calculated over the amount of managed assets).
In this scenario, it is considered desirable to reduce the charge of fees for the administration of individual pensions' savings accounts. According to the CONSAR, if the commissions were halved from their current level, the average worker savings would be increased by 12%, a situation that would increase the average replacement rate.
In accordance with the Agreement of the Board of Government of CONSAR5, which mandates commission's policies and criteria, Mexico is the country that presents the highest commission among selected countries, having an average of 0.98% (when published) compared, among others, with Colombia's 0.62%, Chile's 0.54% or the United States' 0.45%, which together average 0.54%. The Bill considers that the charging of commissions in Mexico would have to be similar to the average of what was charged in Chile, Colombia and the United States, taking into account that, in the first two countries the contribution system has the same objective, while their industrial organization, as well as the degree of development of their financial system, are very similar to that of Mexico. For the United States, the Bill considers to be the level at which Mexico should aim as a member of the United States–Mexico–Canada Agreement (USMCA).
The main proposed changes to the laws under the Bill are described below in a general manner:
II. Law Amendments
A. Social Security Law
If the Bill is approved, the LSS will be amended in order to implement the following changes:
- To reduce the number of weeks contributed by workers from 1,250 to 1,000 weeks of contribution so that they may benefit from the retirement, old age and unemployment insurances, with a higher guaranteed pension.
- This adjustment shall be carried out gradually and shall begin from the entry into force of the Bill, which pursuant to its First Transitory Article shall be on January 1, 2021 with a few exceptions, and provided that at least 750 weeks of contribution are accounted. This number will gradually increase to 1,000 weeks in 2031, as stated in the Fourth Transitory Article of the Bill.
- To include an additional option for the workers who have the required age and contributed weeks, in order for them to be able to choose one or both the following schemes (i) lifetime income insurance and/or (ii) scheduled withdrawals of the proceeds from their individual accounts, as best suited for their interests.
- To increase gradually, starting from 2023, the total contribution to the individual workers' account from 6.5% plus social contribution to 15% including social contribution. With this proposal, there is no need to increase the worker's contribution; the employer's contribution is increased from 5.15% over the salary based contribution to 13.875%6, while the composition of the State's contribution is modified to benefit only lower-income workers.
- The increase in the employer's contribution will be carried out from 2023 to 2030, in accordance with the table included in the Second Transitory Article of the Bill; the reconfiguration of the State's contribution will enter into force in 2023.
- To modify the way in which the amount of the guaranteed pension is determined, which is currently fixed and linked to the minimum wage, so that it is henceforth calculated by considering the weeks of contribution7; the average salary based contribution that workers earned during their working life and their age.
Likewise, the implementation of this change will be carried out gradually over time, between 2023 and 2030. At the beginning of the period, those who have 750 weeks of contribution, the age and salary indicated in the Fourth Transitory Article of the Bill will be covered. For each remaining year, 25 weeks will be increased until reaching the required 1000.
- To enable the beneficiaries appointed by the worker or retired adult that died, to exercise their rights without having to go to court.
- Accelerate the payment of pensions by the Federal Government through the Federal Treasury.
B. Retirement Savings Systems Law
Regarding the amendments to the Retirement Savings Systems Law ("LSAR", as per its acronym in Spanish), if the Bill is approved, the amendments would mainly consist in the reduction of the commissions charged by AFORES to match international standards.
It is therefore proposed to add an eighth paragraph to article 37 of the LSAR in order to link such commissions to a maximum amount, which will be the result of the arithmetic average of the commissions applicable in the United States, Colombia and Chile. To the extent that the commissions in these countries have downward adjustments, the same reductions will apply and, otherwise, the average that is currently being applied will be maintained.
III. Entry into Effect
Pursuant to the First Transitory Article of the Bill (and subject to compliance with the legislative process described below) the amendments would entry into effect on January 1st, 2020, except for provisions regarding:
- The gradual increase of the employer's contribution, which shall initiate on January 1st 2023, provided that from January 1 2021 to December 31 2022, employers shall keep covering for retirement, old age and unemployment insurances a fee of 3.150% over the workers salary based contribution.
- The amounts of the monthly contribution payable by the Federal Government provided for in the new article 168 Fr. IV will be applicable as from January 1, 2023, provided that, from January 1, 2021 to December 31, 2022, the Federal Government will continue to cover the social contribution in force before the Bill came into effect and regarding retirement, old age and unemployment insurances, the State will continue to make the contribution equal to 7.143% of the total of employer's contributions; and
- Regarding the amendment to commissions charged by AFOREs, the Board of Governors of CONSAR shall have a 30 business day term following the entry into effect of the Bill to make the necessary amends to the enabling regulations that may apply in order to comply with the Bill.
IV. Legislative Process
The Bill is subject to the Mexican legislative process, and shall receive the approval of the Mexican House of Representatives and of the Senate, where it may undergo amendments, for subsequent referral to the President of Mexico for its promulgation and publication in the Official Gazette of the Federation. In addition, several provisions of the Bill described above will need to be developed in enabling regulations.
1 Not having reached the minimum 1,250 weeks required to have the right to a pension.
2 Because of the low proportion of the salary that goes to the pension saving.
3 22% self-financed with the proceeds of his or her individual account and 34% with a guaranteed pension.
4 That only became evident as information on the workers' work-trajectories was produced over time.
5 Published in the Official Gazette of the Federation on August 22, 2019.
6 The employer's contribution will be variable, depending on the amount of the worker's base contribution salary. Article 168 of the LSS provides for differentiated contribution rates going from 1 minimum wage to more than 4 Units of Measure and Update (UMAs, as per its acronym in Spanish).
7 Which are being reduced from 1250 to 1000.
Click here to download Bill of Amendment to the Pensions System in Mexico (Spanish)
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