5.6.1. Peru’s Pension System

The current institutional framework was established in 1992. Until then a national PAYGO system was running in deficit and forecasts indicated serious funding problems in future. Today the pension system is based on two pillars which are not complementary but mutually exclusive. The worker decides in principle for one system but as the PAYGO system requires significant subsidies recent government policy is to improve the framework and attractiveness of the private system.¹¹⁷.

The National Pensions System (NPS), which is run by the state, is still operating as PAYGO with defined benefits. The Private Pension System (PPS) is managed by Private Pensions Fund Administrators (AFP (Administradoras de Fondos de Pensiones)) and is a funded system that offers a guaranteed minimum benefit on basis of the contribution plus return bonuses in accordance to the investment success 118 . By the end of 2011 the PPS manage assets of about 17% of Peru’s GDP (30bn US)¹¹⁹.

The Peruvian Private Pension System is obliged to fulfil three functions and regulations are set to somehow enforce them¹²⁰.

• Provide a stable income to members at the time of retirement which is linked to the individual contributions.
• Contribute to the development of the capital markets and increase the efficiency for individual savings. This objective would allow supporting domestic investment in attractive projects both for their yield as well as their contribution to development.
• Avoidance of possible political exposure under a state-run system and thus to establish an efficient pension scheme

Competition is guaranteed between AFP as members are free to transfer the individual savings account between AFPs.

Minimum contributions are fixed and were in 2011 around 13% of the employee’s compensation to the NPS and 10% plus fees totalling to 13,17% to PPS¹²¹

Since 2002, the PPS offer a Multiple Funds Scheme that allows the contributor to invest in accordance to his/her individual chance/ risk profile, depending mostly on his/her age.

• Type 1, Preservation fund: lowest risk profile; seeks for stable growth with low volatility (risk); designed for members over 60, nearing retirement
• Type 2, mixed fund: moderate risk profile; equivalent to the single fund prior to the introduction of the multiple funds scheme. Designed primarily for members in middle age, with an investment horizon of minimum 5 years.
• Type 3, Growth Fund: high risk profile; aggressive fund that seeks longterm returns above average and is designed for young members with an investment horizon of minimum 20 years.

¹¹⁷ Ministerio de Economía y Finanzas
¹¹⁸ Ministerio de Economía y Finanzas, Los Sistemas de Pensiones en Perú, 2004
¹¹⁹ OECD Global Pension Statistics
¹²⁰ Banco Bilbao Vizcaya Argentaria, A look at the Peruvian Pension System Diagnosis and Proposals, 2008
¹²¹ PwC