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On July 1, the resolutions adopted by the Central Bank of Uruguay (BCU), which modify the conditions for calculating new pensions for saving in the AFAPs, called life annuities. According to the Workers’ Representation Team (ERT) in the Social Security Bank (BPS), it would imply that life annuities continue the decline that began in 2018.
In January 2018 the calculation mechanism for pensions by AFAP, where the formula is modified every six months (for new retirees), according to the technical interest rate, which is added to individual savings at the time of calculation of the annuity.
According to the ERT-BPS report, since the first semester of 2018, the semi-annual changes caused a cumulative decrease in life annuities, close to 14%.
Meanwhile, the modification carried out by the BCU was foreseen, to use as a reference for the technical interest rate a yield curve in Pension Units (UP), whose value is tied to the Average Nominal Salary Index.
According to the ERT-BPS, this modification would mean an increase in annuities of approximately 10%.
In turn, as the BCU pointed out through its Institutional Communication Area to El País, “the change in the reference interest rate for the determination of the pension income, to the rate curve in UP, it was foreseen since 2017 for when there would be a yield curve in that currency, for a period of 24 months, which happened now ”.
Along these lines, he added that “the validity of said curve calculated by the Electronic Stock Exchange and it was considered adjusted to make the change. The previous reference of the interest rate curve in Indexed Units (UI) minus 1.7% was adequate to approximate a rate of returns in Adjustable Units (UR), but the new rate is tighter, as had been anticipated since the PU is determined based on the evolution of the Average Nominal Salary Index ”(IMSN).
Is that retirements are adjusted year by year based on the evolution of the IMSN.
This change, according to the ERT-BPS report, would not only prevent the 2.5% drop in life annuities by AFAP, but it would mean an increase of 7% for them.
On the other hand, given the change in the yield curve in UP, the BCU resolved the modification of the margin that insurers have to reflect management costs and other items, the document indicates. Said margin doubled, from 0.75% to 1.5%, as of July 1.
“This measure practically neutralizes or cancels the effect of the previous one. While the change in the yield curve represented a interest rate increase of 0.78 percentage points, this increase in the margin of 0.75 percentage points leaves the curve at a very similar level to the one that would correspond in the case of applying the UI minus 1.7 percentage points ”, indicated the ERT-BPS .
In turn, according to the ERT-BPS, the combination of both modifications will cause a 2.4% drop in life annuities in the second half of the year.
The report highlights that “although on this occasion both changes generate an almost ‘neutral’ effect, the increase in the margin for insurers becomes a long-term parametric change, while the yield curves in UP will continue to vary from six to six months. semester”.
Meanwhile, the BCU stated that it determined the mortality tables, the reference interest rate and a maximum value to be discounted from the interest rate, “as a margin for the insurer to cover its costs of providing the service.”
Along these lines, he added that “the benefit of switching to using a technically tighter reference rate than the previous one is expected, allowing both the insurer to have rights (investments) and obligations (reserves for pay pension income) in the same reference interest rate and, for the beneficiaries, the determination of the income also with a reference rate adjusted to the legal requirement ”.
In the same way, the BCU explained that the increases or decreases that occur every six months are due to changes in market rates and, those that occur annually, due to the adjustment of the mortality tables.
In view of these resolutions, the ERT-BPS pointed them out as inappropriate and that “they demonstrate the enormous uncertainty generated by the individual savings system.”
Although these modifications do not affect those who are already retired, they highlight that they do affect workers who “are close to retiring due to the mixed system (a system made up of the BPS and the AFAPs).”
In turn, the ERT-BPS document states that the Central Bank of Uruguay “rushed”, since the Commission of Experts on Social Security (CESS) is working on the reform of the retirement system.
In particular, it highlights that “the individual capitalization regime has been analyzed, both in its accumulation stage (when it receives the worker’s savings), and in its decumulation (when it transfers the funds to the BSE so that it pays the annuities)”, therefore, the BCU should have “waited for the CESS to present the recommendations to take the resolutions”.
On the other hand, from the Institutional Communication Area of the BCU they concluded that “the modifications are independent of the performance of the CESS, but are in line with its performance”.