Informality and the Challenge of Pension Adequacy: Outlook and Reform Options for Peru

IMF Working Papers, July 11, 2019

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Past reforms have put the Peruvian pension system on a largely fiscally sustainable path, but the system faces important challenges in providing adequate pension levels for a large share of the population.
The study uses administrative microdata at the affiliate level to project replacement rates in the defined benefit (DB) and defined contribution (DC) pillars over the next 30 years and to simulate the impact of various reform scenarios on the average level and distribution of pensions.
Baseline forecast for replacement rates in the DC pillar: 25-33 percent.

Data and horizon:
- Administrative microdata at the affiliate level.
- Projection horizon: next 30 years.
Pillars analyzed:
- Defined benefit (DB) pillar: replacement rate projections and distributional impacts assessed.
- Defined contribution (DC) pillar: replacement rate projections and reform scenario simulations assessed.
Scenarios considered include changes to contribution base, contribution rates, and alternative net real rates of return.

DB pillar:
- The regressive minimum contribution period should be re-thought.
DC pillar:
- Broadening of the contribution base and/or an increase in contribution rates would help increase replacement rates relative to the baseline forecast of 25-33 percent.
- A higher net real rate of return than assumed in the baseline would also have a significant positive impact.
System-wide and labor market observations:
- Given low pension coverage, having a strong non-contributory pillar will remain important for the foreseeable future.
- In the medium-term, labor market reform to tackle informality should be a priority.
- A broad pension reform to restructure the system and avoid competition between the DB and DC pillars should be a priority.

DB pillar:
- Re-assess and redesign the regressive minimum contribution period to improve adequacy and equity.
DC pillar:
- Broaden the contribution base.
- Increase contribution rates.
- Consider measures to achieve a higher net real rate of return than assumed in the baseline.
System-wide reforms:
- Pursue labor market reforms to reduce informality and increase coverage.
- Undertake a broad pension reform to restructure the system and prevent counterproductive competition between DB and DC pillars.
- Maintain and strengthen a non-contributory pillar to protect those with low or no contributions.