BCR: The success of the reform lies in stopping withdrawals

The president of the Central Reserve Bank (BCR), Julio Velarde, expressed his opinion on the new reform of the Peruvian pension system, whose purpose is to increase the membership base, as well as provide a minimum pension.

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For the head of the monetary authority, “the success of the reform is that it manages to stop the withdrawals of funds,” in reference to the seven provisions of funds authorized by Congress, as well as the law that allows up to 95.5 % of pension savings at retirement.

During his participation in the Investor Conference 2024, organized by Credicorp Capital, Velarde estimated that the seventh withdrawal of funds from the AFPs would have boosted consumption by 0.3%. He indicated that the impact has not been so significant, since a large part of the withdrawals have been allocated to savings.

“I have met many who retired because today the AFP is in danger. It is not that they want to spend the money, but rather that they prefer to have it in another financial instrument, due to the weakening and permanent changes that the AFPs have had,” he commented.

Pension of the absurd

Velarde also referred to the pension linked to consumption, proposed in the new reform, which would be financed with the VAT of contributors. The highest authority of the BCR described this pension as “almost absurd.”

He argued that the cost for the State is not limited to the loss of tax revenue due to the 1% of the VAT, which would be managed by the AFPs, but also includes a financial cost. This is because, by allocating part of the VAT for pensions, the State would have to go into debt to compensate for the reduction in its income, incurring the payment of interest.

Velarde also highlighted that the impact of the consumption pension on citizens’ income would be minimal.
“The cost of advancing payment is not being taken into account and (the pensions from this) are very small things,” he indicated.

The failures of the SPP

At another time, Velarde reflected on the failures of the Private Pension System (SPP). He recalled that, in the 90s, when he participated in the creation of the system, it was proposed that the contribution be deducted from the worker’s salary so that he would recognize that it was his own money.

However, he commented that, in other countries, where employers make contributions to the AFPs, the system has received less criticism, since members do not perceive that something is being taken away from them.

“People don’t complain so much about Essalud, which is a disaster, because the company largely pays for it,” he said.

Velarde indicated that another of the SPP’s failures is the lack of information on the part of the managers. He pointed out that members should have been informed before reaching retirement age about the possible gap between their expectations and the actual pension they would receive.
they would receive.

Finally, the president of the monetary authority highlighted that a little more competition should have been encouraged in the SPP from the beginning.