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Author: Galantino Gallo, CEO of Prima AFP
For years, Peru has been in dire need of reform of its pension system. The approval of seven laws between 2020 and 2023, authorizing “extraordinary” withdrawals from individual retirement accounts – that is, the withdrawal of funds that should have been reserved for retirement security – as well as a regulation which approved in 2016 the withdrawal of 95.5% of the content of the accounts. at retirement age, had distorted the objective of the system. Additionally, only 30% of the country’s population saves for retirement through the pension system, and numerous regulatory barriers limit the adoption of more flexible savings plans. This, combined with the lack of a minimum pension, has further highlighted the urgency for change.
A few months ago, after extensive political and technical discussions, Congress approved legislation to address this need, marking a clear first step in the right direction toward a more inclusive and efficient retirement system. Once the law is implemented by the executive branch, which will have to formally set the rules and details of how the law should work in practice, the next step will be to promote a national debate on how we envisage our future, as well as to refine certain aspects of the current reform.
We make considerable efforts to promote financial literacy
The important point, however, is that the impasse is finally broken and the benefits for Peruvians are clear. For starters, the new law aims to put an end to cash withdrawals, allowing nine out of ten Peruvians participating in the private system – who are currently at risk of no longer having any savings in their accounts – to replenish their retirement funds. In addition, the law established a minimum pension, conditioned on the discipline and frequency of saving of the individual. Additionally, it opens the pensions sector to increased competition, which should result in better services as fund administrators strive to attract participants. Additionally, new commission structures based on fund performance address user requests for different types of fees.
In short, implementation of the new law can lead to a healthier and more robust retirement system. The question now is: what happens the next day? As I mentioned, there is still work to do on our journey toward a strong system. Much of this responsibility lies with the government, in its ability to reduce the informal labor market and tackle regulations that hinder competition. Our challenge today, as pension fund administrators, is to change the way our affiliates, and Peruvians in general, value the pension system, to continue making efforts to get closer to them and to innovate vigorously in a largely traditional sector.
But I must emphasize that we should not view this recently approved law as the culmination of the reform process. This is just the beginning. We still need to tackle, for example, the “auction” process in which a single winner among administrators automatically gets new affiliates, which counters growing competition and enables the creation of differentiated value, beyond fees, from fund managers.
Furthermore, we need greater engagement from government and the private sector in disseminating information about why it is important for people to save money in the pension system, in using new educational methods based on behavioral science. We must not stand idly by.
Transparency is key
At Prima AFP, we put our customers at the center of our decisions, and an important part of this commitment is to make our services more accessible and transparent. For years, the pension system has maintained a distant relationship with its members, in part because of the very nature of the service – a long-term savings plan intended to be accessible from age 65. whereby investments are made to supplement savings with returns, may be too obscure for some users to fully understand. But we believe our affiliates deserve to know how the system works and to be informed about how their funds are performing – whether the results are positive or negative – and where their money is invested.
As reform progresses, it is essential that pension fund administrators lead by example.
We see this as a way to build trust with the people we work for and, also, to establish healthy channels of communication and information sharing. Our goal is to demonstrate empathy, and with that in mind, when we send our clients our monthly reports on their funds, we use simple charts and language instead of complex and tedious investment jargon.
At the same time, we are making considerable efforts to promote financial education, for example through a series of online courses on our webpage and on our YouTube channel called “Ahorrando a fondo”, where we address the most urgent concerns regarding the retirement system. . Additionally, we have implemented special tools on our website that allow users to calculate their ideal pension and stay informed about the latest laws and regulations.
Simplify to include
Technology and digitalization are essential to how we manage our relationships with our customers, but we also see them as a pathway to more inclusive service offering. For example, there is no reason to make it difficult for self-employed people to contribute to their pension funds. To simplify this, users can now add money to their funds using “Yape”, Peru’s most popular digital wallet. It’s a simple decision that can have largely positive consequences. Additionally, we have virtually eliminated the need to visit physical branches, since all of our procedures can now be carried out through digital channels. However, all this does not mean that the experience in our agencies has diminished in quality, as we continue to meet the needs of all types of clients.
Overall, at Prima AFP we believe that as reform progresses, it is essential that pension fund administrators lead by example, providing transparent services, embracing innovation and promoting culture financial. It is essential to build trust with our members, while ensuring that we actively represent their interests in national discussions about the future of the pension system and, more importantly, the future of our country.