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Brazil Pension Funds Set for Jump

Brazil's pension fund assets could jump 50 percent thanks to a new plan.


Inter-American Dialogue 

A bill currently being debated in Brazil's Congress could create a new private pension fund-potentially the largest in Latin America-for all newly hired federal government employees, local media have reported. The government has made passing the bill, which has been in limbo for nearly a decade, a top priority this year. Why is the reform necessary, and what are the main features of the bill? Why has it taken so long for it to come to a vote? How will the bill change Brazil's pension system and the financial services sector more broadly?   

Renato Russo, vice president of SulAmérica Life and Pension in São Paulo: The government sent bill 1992/07 to the lower house for an urgent vote this month. The measure, which would create 'Funpresp,' a fund for civil servants, is an essential step to finally regulate the pension reform that was approved in 2003 during Lula's first term. The 2003 reform sought to bring together the pension schemes of the public and private sectors. Under the reform, new government employees will no longer be entitled to a pension equal to their last salary and will have a ceiling benefit equal to the RGPS, or the General Social Security System. In addition, they will have a complementary individual Social Security benefit that will be made up of voluntary contributions. The government will contribute up to 7.5 percent of the difference between the employee's salary and the RGPS ceiling. Employees working for the government before the law's passage will have 180 days to decide whether to join the new system. Changing the retirement system for government employees aims to reduce the growing pension deficit. It is estimated that over the next four to five years, nearly 40 percent of public servants will retire. If the bill is not approved, new government employees will continue to have rights of full retirement. President Dilma is in a hurry to pass the bill, but lacks support of the parliamentary base. The creation of Funpresp would add a significant volume of pension savings resources to the current private pension systems and there will be portability between them. The new fund for public servants would have greater transparency and would bring more equality among workers, great incentives for pension saving, long-term investment fiscal balance and economic development.

Milko Matijascic, consultant to the International Social Security Association: Constitutional Amendment 41, introduced in 2003, made pension benefit criteria for federal employees similar to those of private sector workers. The legislation also called for a supplementary defined contribution plan, but political obstacles and budgetary constraints involving transition rules for older workers meant that the initiative was postponed. In 2007, a new proposal called for only new employees to join the defined contribution scheme; however, left-wing parties continued to oppose it. Nevertheless, the increasing federal employees' pension burden led the current administration to revive the defined contribution proposal. If bill 1992/2007 is approved, the impact on Brazilian financial markets will be very significant. There will be more than a million insured when the plan matures. It could increase the assets of the pension fund industry about 40-50 percent by itself or even more if regional and local authorities decide to join the plan or if current public employees could be strongly persuaded to opt for the new plan. This approach was already adopted in the 1990s when defined benefit plans were shifted to defined contribution plans of pension funds in state-owned companies. Moreover, in the medium term, the federal public employees' pension fund contributions would provide extra resources and play a major role in financing Brazilian companies and infrastructure-which already receives financing from state-owned companies' pension funds. Those initiatives are stimulated by the central government in coordination with the Brazilian Development Bank, or BNDES.

Markus Jaeger, director of Global Risk Analysis at Deutsche Bank Research in New York: Brazilian pension expenditure is set to rise from 9 percent of GDP today to more than 15 percent of GDP in 2050. True, strong economic growth, declining labor market informality and record low unemployment have helped limit (or even reduce) pension deficits in recent years. However, according to the authorities, the public-sector pension regime, covering one million retired employees will register a deficit of 57 billion reais this year, up from 51 billion reais. By comparison, the private-sector regime, covering 28 million pensioners, registered a deficit of 42 billion reais last year, which is set to fall to 37 billion this year. The present pension bill would cap newly hired federal employees' pension benefits at the same level as (less generous) private-sector pensions. It would also create a fully-capitalized complementary pension scheme (Funpresp) funded by both employees and the government. Over time, Funpresp would become the largest pension fund in Brazil and boost the size of pension assets, currently amounting to 17 percent of GDP. In the short run, the reform will result in a larger fiscal deficit, as the pay-as-you-go system would both receive fewer contributions from new hires covered under the new rules and register higher expenditure linked to Funpresp contributions. Over the longer term, however, the reform will limit government-funded pension expenditure and related liabilities. The reform is likely to raise both government and household savings. Last but not least, it will help spur the development of domestic long-term capital markets. This is very welcome at a time when Brazil is facing huge infrastructure investment needs.

Republished with permission from the Inter-American Dialogue's daily Latin America Advisor newsletter


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