OECD - OECD Reviews of Pension Systems: Peru

This review assesses the Peruvian pension system in its entirety, looking at both public and private, pay-as-you-go (PAYG) financed and funded pension provisions. It draws on international best practices and the specificities of the Peruvian pension system to propose a set of policy options to improve its functioning and ability to deliver adequate and secure retirement income.

These policy proposals should be implemented as a package. All the components work together to balance the different trade-offs. Implementing them separately in a piecemeal manner will break the balance and could jeopardise the whole reform. Nevertheless, implementation could be gradual taking into account fiscal capacity, institutional capability and labour market developments.

The review provides policy options to help tackle old-age poverty; establish a solid framework for the contributory pension system to meet its objectives; improve the coverage and level of pensions; and, optimise the design and improve the regulation of the funded private pension component. These proposals also aim to improve trust that the pension system and its institutions will work in the best interests of the population to provide a secure retirement income.

Tackle old-age poverty by establishing a non-contributory pension that provides a safety net for all Peruvians in old age

The safety-net programme Pensin 65 that provides a flat benefit payment for the elderly in extreme poverty has largely been a success. However, coverage could improve.

• Benefit levels (currently around 9% of average wages) should increase and should grow, at least, with inflation to maintain purchasing power.

• Publicity campaigns could increase peoples awareness of the programme and the programmes eligibility criteria could reach a larger population.

• With the expansion of coverage, Pensin 65 benefits may need to change from a flat-rate to a top-up payment.

Establish a solid framework for the contributory pension system to meet its objectives

The PAYG public and funded private pension components currently operate in parallel, competing against each other rather than building on complementarity. Strict eligibility requirements for the public system mean that many contributors will not be eligible for benefits. Furthermore, a lack of coordination among public institutions overseeing the whole pension system has led to pensioners losing contributions.

The public PAYG and the funded private pension should complement each other. One main recommendation is to retain both, and require that everyone contribute to and receive pensions from both components.

• Apply the new rules to all new contributions to the system immediately after the reform while protecting past entitlements.

• Adjust the public system benefit formula to ensure financial sustainability. Introduce automatic mechanisms to adjust the parameters and benefit levels to the macroeconomic and demographic realities.

• Reduce the minimum number of years required to contribute to the PAYG system before being eligible for benefits.

• Establish a minimum level of pension that increases with the number of years of contributions so that individuals can see merit in continuing to contribute. Coordinate the minimum pension benefit with the increased safety-net Pensin 65.

• Create a centralised platform to collect contributions and manage information collection for the entire system.