Government wants to relax pension fund rules, but reach generates impasse

The Jair Bolsonaro (PL) government is preparing a bill to change the rules of operation of the civil servants’ supplementary pension schemes and state-owned pension funds. The scope of the changes, however, has generated controversies internally.

While one wing of the government wants to focus efforts on greater flexibility for future beneficiaries, another group wants to expand the measure and include current participants — including allowing the portability of those who integrate defined benefit plans, which have the biggest holes in their accounts.

Technicians in the government’s fiscal area fear that the broader proposal, which would allow the migration of these plans to private institutions, would result in a billion-dollar bill to be contributed immediately by the Union and its state-owned companies.

The impasse sparked an arm wrestling behind the scenes, and the project remains stalled in the Ministry of Economy’s pigeonholes.

The so-called closed supplementary pension entities manage assets of R$ 1.17 trillion, of which R$ 631.2 billion are in the hands of pension funds sponsored by federal institutions.

Only the largest defined benefit plans of Previ (Banco do Brasil), Petros (Petrobras) and Funcef (Caixa) bring together R$ 380 billion of these assets.

In this modality, the employee knows how much he will receive in the future, regardless of the amount accumulated over his working life. The offer of this type of plan is increasingly rare precisely because of the tendency to imbalance, since the contributions collected are insufficient to cover the promised payments.

But pension funds still have defined-benefit plans in the pipeline, with extra charges paid by participants and their sponsors over the years to ease the shortfall.

Active and retired employees of the Correios, for example, pay extra amounts to the Postalis pension fund to cover a deficit of around R$6 billion accumulated between 2012 and 2014. At Funcef, participants in one of the plans pay an extra contribution of 19 .16% on the remuneration to help solve a hole valued at R$ 20 billion.

The original draft with the changes planned by the government, obtained by Sheet, provides more flexibility for future beneficiaries and allows the contracting of private institutions to manage the retirement plans of public servants. It was prepared by the IMK working group (Capital Market Initiative) and is supported by the government’s fiscal area and the Ministry of Labor and Welfare.

The Special Secretariat for Privatization, Divestment and Markets, the body responsible for the government’s relationship with its state-owned companies, defends a broader proposal, which extends flexibility to current participants and allows portability of all plans.

In a first round of negotiations, the IMK working group agreed to authorize portability for current participants of defined contribution plans. In this modality, payments are fixed, and the benefit amount is calculated according to what has been accumulated. However, they represent a much smaller share of the funds’ assets: R$ 153.3 billion, considering public and private sponsors.

The impasse remains, involving the participants of the defined benefit plans, whose assets total R$ 711.4 billion.

Former Secretary of Privatization, Divestment and Markets Diogo Mac Cord led the discussions of the broader proposal in the body, which continues to participate in the debates even after his departure from office.

THE Sheet he defends greater freedom for current participants in pension funds on the grounds that the funds were, in the past, used to finance projects guided by political interests, resulting in harm to their beneficiaries.

According to Mac Cord, “the defined benefit is not so defined anymore.” “Today you have an extraordinary contribution of 25%? Tomorrow it may be 30%, then 35%”, he says, noting that the higher rate means, in practice, a cut in the benefit. “[A proposta é] each chooses, [o participante] may want to make a stop loss [estancar as perdas].”

He also counters criticism that the project would cause an imbalance in funds and a cost to the Union and its companies. “You don’t have to allow instant portability, every day, every month. You can set windows every five years,” he says.

The extraordinary contributions already paid by the sponsors, in turn, could follow the current payment flow, with the only difference that the transfer would be made to the entity chosen by the participant. Thus, according to Mac Cord, there would be no risk of immediate billionaire contributions.

“You can define the rules, but the most important thing is the right to choose. What you can’t do is condemn that person to stay the 30 years of his life [na mesma entidade]”, it says.

Mac Cord also suggests that the portability of current participants be allowed up to a limit of the plan’s equity, precisely so that there is no mismatch between the fund’s investments and its benefits obligations.

In search of profitability, pension funds invest funds in different investments, ranging from medium and long-term government bonds (up to 40 years) to private securities or participation in infrastructure projects.

The fear of portability critics is that an immediate redemption of a significant volume of resources, with the objective of migrating to another entity, jeopardizes or discourages this type of investment.

“Migration could break the structuring of a very long-term contract. It seems hasty and wrong”, criticizes the president of Abrapp (Brazilian Association of Closed Entities of Complementary Pensions), Luís Ricardo Martins. “I don’t see how to unstructure and try to take reservations from the past to open entities.”

For the president of Abrapp, pension funds are today one of the few instruments for the formation of long-term savings, and their mischaracterization can compromise projects that need this source of funding. “There is a whole structuring of investments within a plan, there is a reserve formed”, he says.

According to him, the pension reform approved in 2019 paved the way for the regulation of the relationship between public authorities and open entities, but he says that insurers offer products with a “more financial character”, while pension funds are non-profit. and, therefore, offer differentiated administration fees.

“It’s a much bigger discussion than the specific issue of portability”, he says.

He also highlights that, after the CPI (Parliamentary Inquiry Commission) of Pension Funds, created in 2015, the “inconsistencies” detected in the investments of these entities were corrected. “The system is now shielded, this past is resolved”, says Martins.

Despite the controversies, there are other points of consensus in the project. Among them, the permission for public bodies to sponsor plans managed by open supplementary pension entities, such as insurance companies. They would be chosen after public selection, following criteria of transparency, technical qualification, impersonality and economy.

Today, the Union, states, municipalities and their state-owned companies can only finance plans managed by closed entities, such as pension funds. The change follows a logic of greater competition.

The draft also obliges state-owned companies and mixed capital companies (such as Petrobras) to offer their employees plans in more than one entity.

The text also allows public bodies to automatically enroll their employees in supplementary pension plans, and it is up to them to request cancellation in case of disinterest. Today, the logic is reversed. The government’s argument is that the change promotes social security inclusion and savings.

UNDERSTAND WHAT IS UNDER DISCUSSION

Defined benefit plan

The employee knows how much he will receive in the future, regardless of the value accumulated over his lifetime. The offer of this type of plan is increasingly rare precisely because of the tendency to imbalance, since the contributions collected are insufficient to cover the promised payments.

Defined or variable contribution plan

The participant receives in the future a benefit calculated in proportion to the effort accumulated through the contributions

What is the government’s proposal?

Easing pension fund rules to increase competition in the sector, reduce costs and expand the earning potential for participants

What is already consensus?

• Permission for public bodies to sponsor pension plans managed by open supplementary pension entities, such as insurance companies
• Force state-owned companies and mixed capital companies (such as Petrobras) to offer their employees plans in more than one entity
• Permission for public bodies to automatically enroll their employees in supplementary pension plans, and it is up to them to request cancellation in case of disinterest. Today, the logic is reversed.
• Authorization for defined contribution plan participants to request portability to another entity

What is a deadlock target?

• The eventual permission for participants of defined benefit plans, many in the phase of solving imbalances, to request portability to another entity
• Supporters of the measure argue that the participant must have the right to stem losses. Critics warn that the bill could end up falling into the lap of the Union and its state-owned companies.