/ Pension Reform In Chile and Its Impact on Labor Relations

The approval of Chile’s pension reform marks a milestone in the evolution of the pension system, introducing structural changes that redistribute responsibilities among workers, employers, and the State. This reform seeks to address the shortcomings of the individual capitalization system by implementing a tripartite financing scheme, strengthening social security, and ensuring more equitable and sustainable pensions.

It is expected to be enacted in March 2025 and will come into effect upon its publication in the Official Gazette. The measures will be implemented gradually over a period of up to nine years.

Tomás Becerra

Associate

Below, we analyze in detail the main changes introduced by the reform and their relevance to labor and business dynamics.

I. Increase in Employer Contributions to the Pension System

One of the central aspects of the reform is the restructuring of the pension financing scheme through an increase in the employer’s contribution rate. Currently, workers contribute 10% of their taxable remuneration, while the reform establishes an additional 7% contribution from employers, distributed as follows:

• +4.5% allocated to individual capitalization accounts (AFP).
• +1.5% corresponding to the “Contribution with Protected Returns” (transitional for 30 years).
• +1% allocated to the new Social Security Pension Fund, which absorbs the current Disability and Survivorship Insurance (SIS).

The increase in the contribution rate will be implemented gradually over nine years, starting six months after the law’s publication. The annual distribution of the increase will be as follows:

• Year 1: +1% contribution to the Social Security Fund.
• Year 2: +1% contribution through the Deferred Contribution with Protected Returns mechanism, in addition to integrating the SIS into the Social Security Fund with a total contribution of 2.5%.
• Year 3: +0.5% contribution through the Contribution with Protected Returns and 0.25% to individual accounts (total 0.75%).
• Years 4 to 9: Progressive annual increase of 0.7% in contributions to individual accounts until reaching 4.5%.

This increase in contributions is expected to sustainably raise current and future pensions, advancing toward a mixed system. However, this measure also imposes a financial burden on companies, which must adapt their strategies to comply with these new obligations and avoid penalties for non-compliance.

II. Creation of the Social Security Pension Fund

The reform establishes a new Social Security Pension Fund designed to absorb the current SIS and expand coverage for contingencies such as disability, survivorship, and differences in life expectancy between men and women.

This fund will be financed through a 2.5% contribution (formerly 1.5% SIS + 1% from the reform) on the worker’s taxable remuneration, fully covered by the employer.

An additional 1% contribution to the Disability and Survivorship Insurance (SIS) is proposed to balance pension disparities affecting women. This gap arises because women retire earlier and have a higher life expectancy than men. With the reform, the SIS will be absorbed by the new Social Security Pension Fund, which will provide coverage for disability, survivorship, and longevity.

The goal of this measure is to ensure that men and women retiring at age 65, under equal conditions regarding age, accumulated balance, and family structure, receive an equivalent pension. To this end, a minimum monthly amount of 0.25 UF is established as compensation to reduce this disparity.

Regarding benefit eligibility, all women receiving an old-age pension will be eligible. The assigned amount will depend on the age at which they choose to retire. Those retiring at 65 will receive 100% of the compensation, while those retiring at 64 will receive 75%. As retirement age decreases, the compensation percentage will also decrease. However, women who opt to retire before the legal age (60 years) will not be eligible for this compensation.

III. Contribution with Protected Returns and the Autonomous Pension Protection Fund (FAPP)

The Contribution with Protected Returns, equivalent to 1.5% of pension contributions, will be allocated to the Autonomous Pension Protection Fund (FAPP). In return, workers will receive a “social security bond”, a financial instrument with guaranteed returns credited to their individual accounts.

From a labor perspective, the FAPP strengthens social security by ensuring that a portion of workers’ contributions is allocated to a fund providing additional retirement benefits. For employers, this scheme does not represent a direct additional financial burden.

The FAPP establishes a compensation mechanism based on years of contributions, with monthly payments equivalent to 0.1 UF for each year of contributions, up to a maximum of 25 years, resulting in a maximum benefit of 2.5 UF per month.

The eligibility requirements for this benefit will differ by gender:

• Women: Must demonstrate a minimum of 10 years of contributions initially, increasing progressively to 15 years.
• Men: Must contribute a minimum of 20 years within the pension system.

This scheme aims to recognize differences in career paths between men and women, promoting equity in pension benefits and reducing the gender gap in retirement income.

IV. Increase in the Universal Guaranteed Pension (PGU)

The reform includes an increase in the Universal Guaranteed Pension (PGU) to CLP 250,000 per month to improve pensions for the lowest-income population. This increase will be implemented progressively over 24 months and funded with fiscal resources.

This adjustment will not represent a direct cost to employers.

V. Conclusions and Challenges for the Business Sector

This pension reform is expected to be enacted by the President of the Republic in March 2025. However, its effective date remains uncertain, as it will come into force upon its publication in the Official Gazette. Notably, the measures will be implemented gradually over a period of up to nine years.

The substantial recent modifications to the pension system directly impact businesses and their labor relations. The progressive increase in pension contributions presents new financial challenges for employers, who must adjust their cost structures to comply with the new obligations without compromising their competitiveness.

However, the reform also presents opportunities to strengthen labor market stability and promote formal employment. In this context, it will be crucial for companies to implement strategies that efficiently manage the transition toward a pension responsibility framework shared between the private sector and the State.

Finally, the implementation of this reform will require a coordinated effort among employers, workers, and the government to ensure an orderly transition and the long-term sustainability of the new pension system.

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