Pension Reform in Brazil and the Complementary Pension System

scenarios, challengesand debates

Summary

▪ Brazilian Pension System

▪ Capitalization and the Complementary Pension System

▪ Brazilian Pension Reform

Brazilian Pension System

RGPS: 30,3 millions beneficieries

RPPS: 8,1 millions beneficieries

Pillar 1

4,8 millons beneficieriesPillar 0

Source: RGPS (BEPS/2018); RPPS (RREO 2018); RPC (Reports SURPC/PREVIC).Social security result= recipe - expenses.

Population: 16,6 millions

Assets: R$ 1,75 trillions (25,7% of GDP)

Pillar 3

Assistencial

Social Pension – Compulsory PAYG

Up to R$ 5,839,45

• General System – RGPS (Regime Geral)

• Civil Servant – RPPS (Regime Próprio)

Compulsory Complementary Pension

Optional Complementary

Pension

Currently inexistentPillar 2

Benefit amount

Population coverageLower income Higher income

Current Social Security Context

1. Quick demographic change;

2. Too benevolent;

3. Socially unfair; and

4. High fiscal impact.

Quick Demographic Change

✓ Brazil is undergoing a very rapid and intense population aging process;

✓ Europe has taken 50 years (1950-2000) from 11% to 20% of the population aged +60;

✓ Latin America and the Caribbean will have a similar trajectory in 25 years (2015 to 2040 - from 11%

to 21%);

✓ Brazil is in this process and would take about 20 years (2015 to 2035 - 11% to 21%).

Evolution of the Fertility Rate in Brazil: 2000 to 2060 Life Expectancy After Retirement (number of years)

60 years 65 years 70 years

Dependency Ratio (proportional weight of the population in non active)

Too Benevolent

1. The average retirement age is low: in Brazil is 57,7 for women and 59,4 years for men. The ODCEaverage is 63,2 for women and 64,2 for men;

2. It is possible to retire by contribution time in RGPS, without minimum age requirement:contribution time is 30 years for women and 35 years for men;

3. Retirement by age requires little time to contribute: only 15 years of contribution at age 65 formen or 60 years for women

4. Average benefits have evolved above inflation: in the last twenty years the retirement by agewere multiplied by 6, the inflation (INPC) were multiplied by 3.3.

5. Several categories have special schemes and need to work less to retire (teachers, military etc)

6. The pension for death diverges from international good practices: in Brazil the pension isintegral and lifelong after age 44. Normally, it defines basic value below 100% of replacement andassociates the value with the number of dependents.

Too Benevolent

Brazil also stands out for its highpension benefits relative toworking-age incomes.

The indexation mechanism forminimum pension benefitscontributes substantially to thehigh level of pension benefits inBrazil (according to theconstitution, the minimumpension cannot be lower than theminimum wage).

✓ The average age of pensions by contribution time (richest) is 54years. But more than 64% of pensions are by age (poorer). Andthis occurs only at 65 for men and 60 for women.

✓ 66% of the pensions paid by INSS (RGPS and BPC) are equivalentto one minimum wage, 83% are below two minimum wages

Socially Unfair

Total Pension Spending (RPPS and RGPS) as a share of GDP and Dependency Ratio

Source: IBGE (2013), OCDE (2015)and World Bank own estimates

✓ The expenses with RGPS is 8.5% GDP in 2018✓ Without reform, expenses will reach 16.7% GDP in 2060.

Source: IBGE (2013), OECD (2015) and World Bank estimations.

High Fiscal Impact

▪ Brazilian Pension System

▪ Capitalization and the Complementary Pension System

▪ Brazilian Pension Reform

Pension Reform Principles

✓ Fair and egalitarian system (rich willretire at the age of the poor)

✓ Those who earn less pay less

✓ Ensure sustainability of the system

✓ Guarantee vested rights

✓ Separation between Assistance andSocial Security

✓ Capitalization Option

Pension Reform – Main Rules

or

Retirement by contribution time

Retirement by age

MinimunAge MinimunContribution

60 65 years old 15 years

General Rule - Today General Rule - Proposal

MinimunAge MinimunContribution

No required

30 35 years

IdadeMínima Tempo de Contribuição

Nonexistent

MinimunAge MinimunContribution

62 65 years

old

20 years

Retirement by age

Retirement by contribution time

✓ New rule for retirement of men and women.

✓ 53% of people retire by age. In the long term there will be no more retirements for contribution time.

Urban Clientele

✓New rule for calculating pensions - General and Public Civil Servants Schemes.

The value of the pension may not be less than a minimum wage or higher than the general scheme cap.

Pension = 60% + 2% per year of contribution * average of contribution salaries.

Pension Reform – Main Rules

Unification of RGPS and RPPS Contributions

Quemganha mais pagamais

Today Proposal

✓ Decrease the aliquot for lower salaries and increase the aliquot for the higher ones

✓ Effective aliquot results from the application of the progressive aliquot on each salary range

✓ For private and public workers the highest aliquot will be 14%. For federal public civil servant, who ingress before 2013,the highest aliquot will be 22%.

Proposal For civil publicservant before 2003

Pension for Death

✓ New formula for calculating de benefit

✓ Current formula: 100% of the benefit, limited to the RGPS ceiling;

✓ Proposal: 60% + 10% per dependent;

✓ For RPPS the proposal is the same for RGPS.

✓ New rule for benefits accumulation

✓ Currente rule: It is allowed to accumulate different types and schemes.Eg: pension and retirement from RPPS and RGPS;

✓ Proposal: 100% of the higher benefit + % of the others(limited to 2 minimum wages for each additional benefit).

90

80

70

601 dependent

2 dependents

3 dependents

4 dependents

5ou + dependents 1100

Pension Reform Fiscal Impact

✓ The total fiscal impact of the RGPS and RPPS reform is an economy ofR$1.236 billions in 10 years.

Economy (R$ bi of 2019) 10 years

RGPS Reform 807.9

RPPS da Union Reform 224.5

BPC and salary bonus 204.2

TOTAL 1,236.5

Inactivity and Pensions of the Armed Forces 92.3

TOTAL 1,328.8

▪ Brazilian Pension System

▪ Capitalization and the Complementary Pension System

▪ Brazilian Pension Reform

Capitalization on the Pension Reform - Guidelines

▪ Capitalization on a DC basis;

▪ Minimun wage guaratee with solidarity fund;

▪ Individual accounts;

▪ Worker choose the entity or modality of reservations management, admittedportability;

▪ Transparency;

▪ Admitted notional capitalization;

▪ It will provide non-programmed benefits (maternity, disability and death) andlongevity risk.

Source: PEC 06/2019.

Assistencial programs – Phasic: R$ 400,00 from the age of 60 and 1 minimum salary from de age of 70

Optional Complementary Pension• Several formats (DB or DC, employer-sponsored, individual

investments accounts etc.)• Collective and individual retirement plans

Solidary Fund

Notional PAYG

• Coverage of minimum income and other risk benefits

Notional PAYG• Control by individual accounts • Correction of the accounts due to productivity gains, GDP

or growth of the average salary of workers• Benefit calculated based on the accumulated balance and

the expected life expectancy• Resources not directed to the financial market

Capitalization compulsory for those who join

0

1 2

3

Pension Structure - Pillars

Main Expected Impacts of the PEC in Complementary Pension Funds

Institution of Complementary Pension Funds

Required in 2 years – all the RPPS

Promulgated the PEC 06/2019

Complementary Pension Funds for Public

Employees

Source: Previc / Elaboration: COANC/SURPC

Updated: 08/03/2019.

Current Scenario

Open Pension Funds

Multi-sponsored Closed Pension

Funds

Closed Pension Funds instituted

by the Federative Body

or or

Bidding

2,135 States and Municipalities

of 5,595 entities

Thank you!

Paulo Fontoura Valle Subsecretário do Regime de Previdência Complementar

paulo.valle@previdencia.gov.br

(61) 2021-5320/5482