Starting this year, Chile is experiencing the implementation of a new pension system that will significantly change the way people save and invest for retirement. The reforms include additional contributions, the creation of generational funds and a portfolio bidding mechanism that will mark a before and after in the industry.

Additional employer contributions

The new scheme incorporates an extra mandatory contribution that will bring the total contribution to 18.5% of taxable salary. Of this amount:

• 4.5% will go directly to the member's individual account.
• 1.5% will be allocated to a "loan" to the Treasury to finance fringe benefits.
• 2.5% will feed the new Social Security, which will provide defined benefits and compensation, for example, to correct gender gaps.

This implies that part of the contribution ceases to be exclusively individual savings and becomes a solidarity and state-financed contribution.

Generational funds: the replacement of multifunds

The current system of five multi-funds (A-E) will be gradually replaced from 2027 by at least 10 generational funds, designed according to the age or year of birth of the member.

• In early stages, the portfolio will have more exposure to higher risk and return assets (equities, alternatives).
• Over time, it will migrate to more conservative instruments, seeking to protect capital as retirement approaches.
• Each member will be automatically assigned to a fund according to his/her age and will not be able to change his/her mandatory savings. However, there will still be freedom to choose the destination of voluntary contributions (APV).
• The Superintendency of Pensions will define the benchmarks and supervise compliance, with incentives and sanctions for the AFPs according to performance.

The international evidence is positive: Mexico, the U.S., Canada and other countries have seen improvements in profitability, lower volatility and greater diversification after implementing this model.

Portfolio bidding: more competition, but also uncertainty

Every two years, 10% of the affiliates will be automatically tendered among the AFPs, being awarded to the administrator offering the lowest commission. The member may reject the transfer within the first 30 days, but if he/she does not do so, he/she will remain in that AFP for 5 years.

• Each person can be moved up to 2 times in his or her working life by this route.
• The mechanism seeks to lower costs and increase competition, although it poses operational challenges: moving large volumes of resources can generate pressure on markets and relevant transaction costs.

Expected benefits:

• Better match between risk and life stage.
• Protection against bad individual decisions.
• Potential for improvements in profitability and diversification, according to international evidence.

Risks and challenges:

• Loss of member's autonomy due to the inability to change mandatory funds.
• Excessive standardization that could reduce innovation in the industry.
• Complexity in the operational transition and possible impacts on market prices.
• Need to adapt the technical design to the Chilean reality, considering members' equity and risk tolerance.

In our view, the three issues that will focus the attention of industry and regulators are:

1. Portfolio bidding and its effects on competition and market stability.
2. The change from 5 multifunds to 10 generational funds, a structural change that requires technical and communicational adjustments.
3. Secondary regulation, which will have to define the practical details of the model and will make the difference between an orderly transition and a complex process for members and AFPs.

For members, this new system may mean better returns and less risk of bad decisions, but also a reduced sense of control. For the industry, the next few years will be ones of technical adaptation, communication with clients and adjustment of investment models. The key will be for the transition to be made carefully, protecting both workers' savings and the stability of the financial system.