Pension reform: the points that continue to worry experts and AFP – Sectors – Economy

To the alerts sent by the private pension funds (AFP) about the impact that the pension reform project on life annuities, if approved as it is today, other voices who have the same concerns joined.

Consider that in the initiative there is no clarity about the continuity of said policies issued by the insurance sector in the decumulation stage, that is, the payment of the pensions.

(Also read: About to retire? This is how you have to prepare to get your pension)

“Life annuities are the most suitable modality for the administration and payment of pensions, since they assume the risks of extra-longevity of people and the interest rate”, warns Gustavo Morales, president of the Federation of Colombian Insurers (Fasecolda).

In addition, it explains that under this modality the companies of the sector constitute reserves that guarantee sufficient resources to support the payment of pension allowances until the death of the pensioners and/or until their relatives have the right to those saved resources.

However, with the bill, which is about to begin its debate in the Legislature, It is not very clear how this segment will look if approved as it currently is.

A concern shared by analysts Fitch Ratings, who see a mixed impact on qualifying insurers. “Life annuity premiums are expected to decrease, but it remains uncertain how the growth in pension insurance premiums will affect the proposal, since there are still many aspects of the draft to be defined,” says Fernando Cárdenas, associate director of the firm.

He further explains that, according to the project, the disability and survival insurance would only be acquired by Colpensiones and not by the AFPshow it works today Thus, insurers in the branch would be affected if the Government decides to purchase the policy in the private insurance market, if it opens a single tender or divides the population into segments and opens multiple tenders to cover them.

But at Fitch they go further and add that this depends on whether 2 percent of the contributions allocated to the disability and survival insurance it is enough to cover the risks of extra longevity due to longer life expectancies; the increase in coverage due to the inclusion of beneficiaries not contemplated in the original conditions of the issuance of the policy, as well as the absence of long-term assets available in the Colombian market to match the duration of those obligations that can exceed 40 years .

There is also the risk that the beneficiaries of the insurance increase due to legal provisions, although these are not included in the original coverage of the policy.

(Read also: Pension reform: do the ages of the solidarity and semi-contributory regimes increase?)

Policy performance

Industry figures indicate that to date some 110,000 pensions have been granted through the modality of life annuities, which represent 47 percent of the total pensions recognized by the Individual Savings with Solidarity Regime (Rais).

Retirees with this insurance mechanism and their families are guaranteed a lifetime pension, which is adjusted each year with the increase in the minimum wage or inflation. At the end of February, AFP pensioners totaled 290,212 under the modalities of old age, survival and disability, according to the Financial Superintendence.

And while this figure is far from the number of retirees from the public system (Colpensiones), which is already close to 1.6 million, in private funds the annual growth rate of pensioners is close to 18 percent per year, but this will increase as the system approaches its point of maturationwhich is foreseen in less than two decades, given that the current average age of contributors to private funds is about 35 years.

“If the system continues as it is, in 15 years both mechanisms will have the same number of pensioners; and in 2050, the ratio would be three retirees in the AFPs for one in Colpensiones”, warns Juan David Correa, president of AFP Protección.

Along the history, Protection has pensioned 102,000 people, 35 percent of the pensioners of the AFPs. Of these, 83 percent are in programmed retirement and the rest in life annuity (27 percent). Each month it receives 3,800 applications and they hope to close 2023 with 12,000 more retirees.

For his part, Miguel Largacha Martínez, president of AFP Porvenir, recently said that this year they plan to process about 85,600 applications for old-age, disability and survivorship pensions, the highest figure since when the company began its pension decumulation process.

The number of pensioners in said fund grows at a rate of between 10 and 15 percent per year, about 65 people are retiring every daybut that rate will increase as the years go by, a lot will wait for what is approved in the pension reform, he insisted.

I add that Until last March they have pensioned more than 137,500 Colombiansof which, 69,300 were for programmed withdrawal and 68,279 for life annuity.
In Colfondos, Marcela Giraldo, its president, said that the pensioners in Programmed Retirement total 32,127, while the transfers to Life Annuity, 14,283.

(Read also: Pension reform: these are the changes included in the project filed for debate)

Pension Insurance

Although since the creation of the Rais, three decades ago, the insurance industry has been key, people do not know well the role that companies in the sector play in pensionsmarket in which it participates both with life annuities and pension insurance.

What few people know is that part of the monthly contribution they make to their pension is destined, precisely, to pay a policy of this.

Felipe Herrera, vice president of Protection Investments, explains that the contribution made by a person (16 percent of the contribution base income) 11.5 percent goes to your individual account; 1.5 percent, to the minimum pension guarantee fund and the pension solidarity fund, and 3 percent corresponds to the cost of pension insurance (in case of disability, survival or funeral aid) and the AFP commission.

“Of that 3 percent, insurance is paid first and the rest is the income that the AFP has for each of the contributions received,” explains the expert.

And while life annuity covers the risks of living longer and the financiers to which the exposed capital that the person has accumulated over the years for their pension is exposed, the pension funds guarantee the payment of a pension in case of disability or an allowance for their beneficiaries in the event of the affiliate’s death, which is done effective when disability or death occurs due to illness or accident of common origin; that is, when these contingencies are not caused by work.

For the president of Fasecolda, the importance of this insurance was more than sustained during the covid–19 pandemic.

Nearly 800,000 million pesos were allocated to finance the survivorship pensions of more than 3,000 families who lost their loved ones for this disease.

“Currently there are 7 million people who have pension insurance coveragethat is to say that for said population, in the event of invalidity or failure, both the affiliate and their families will have guaranteed access to disability or survival pensions”, Morales specified.*EL TIEMPO is part of a conglomerate of companies to which an AFP belongs.

CARLOS ARTURO GARCÍA M.
On Twitter: @CarlosGarciaM66
artgar@eltiempo.com