Mexico: Amendment to the Retirement Fund System (RFS)
On 22 July, President Andres Manuel López Obrador announced and amendment to the Social Security Law and the Retirement Fund System with the aim of strengthening the employee’s retirement plans.
The main purpose of this amendment is to allow Mexican employees to achieve a higher retirement plan and in a lower number of weeks of contribution, thus favoring well-being at the retirement stage. Among the most relevant topics is the reduction of contribution weeks to 750 weeks, the increase in the contribution of the employer, the reduction of commission percentage of the Retirement Fund Agencies (AFORES) and increase in the coverage of the “guaranteed retirement plan”.
It is importance to notice that the Retirement System is regulated in the Social Security Law of 1997, known as the “New Regime”, which establish a retirement scheme through individual accounts, meaning that the retirement plans are financed with the resources that employees accumulated during their working life in their individual account, that is, they were generated by themselves.
Moreover, the 1997 Social Security Law established a transitional system for employee who were already working prior to the entry into force of the Social Security Law, allowing them to decide on the possibility of subjecting themselves to the abolished law of 1973 or in accordance with the new applicable rules.
Based on the above, and in addition to the current unemployment landscape, the labor market uncertainty, the lack of stability at work, low salaries and excessive growth in the informal market, in conjunction with the severe crises we have suffered over the past 25 years, 76% of employees would not be entitled to a Retirement Plan because they did not meet the statutory requirements (1,250 weeks of contributions or have sufficient capital to generate the minimum guaranteed Retirement Plan, which is approximately $3,274 pesos per month).
Due to the above, the Government propose amending the scheme as follows: (i) Reduction of forced retirement weeks from 1,250 to 750; (ii) Increase the employer’s contribution of 5.50% gradually to 13.875% of the basic contribution salary for the retirement; and (iii) The commissions charged by retirement fund managers (AFORES) operating in Mexico (0.98 percent on average) should not be higher than those observed in other countries at the same stage of development or age of the defined contribution systems.
The Reform is absolutely necessary to avoid a serious social and humanitarian problem. With this, it is expected that the minimum guaranteed Retirement Plan will be 0.70% of the General Minimum salary, which covers the Minimum Welfare Income. The increase in the contributions is mandatory in order to be able to grant Retirement Plans to employees in a medium term, taking into account that Mexico increased its population of older adults.
For more information on these articles or any other issues involving labour and employment matters in Mexico, please contact Oscar De La Vega (Partner) of De La Vega & Martinez Rojas S.C. at ODelaVega@dlvmr.com.mx or visit www.dlvmr.com.mx.
