Reforming Peru’s pension industry

From calling for reform to addressing issues around financial inclusion, pension fund administrator Prima AFP is on a mission to improve Peru’s private pension system – and support wider society in the process


Between 2020 and 2022, nearly $24m was withdrawn early from Peru’s private pension system, resulting in a significant reduction of pension funds for millions of affiliates. Early withdrawals can have a detrimental effect on fund performance, and part of our commitment is to provide transparency regarding the amount of pension that affiliates will receive in the future. Currently, more than two million affiliates have no funds remaining for their retirement. Moreover, affiliates who still maintain a fund but have made partial withdrawals run the risk of not having a minimum pension for their retirement.

These issues are among the reasons Credicorp – the leading financial services holding company in Peru, to which Prima AFP belongs – is calling for reform. We believe the current model needs to be readjusted to adapt to the needs and demands of each individual, and we believe it’s our duty to put forward ways to improve the system and ensure its sustainability in the future. Alongside efforts to boost financial inclusion and address the gender gap, it’s one of several actions we’re taking to help support the private pensions system in Peru.

Proposed reform
Our proposal for reform is based on three main pillars, and our aim is to achieve a fairer, more flexible pension system. We want to reformulate how funds are saved and managed, and encourage more voluntary contributions from informal and formal workers. For informal workers, we propose a matched contribution scheme.

Simply put, for every S/1 ($0.27) contributed by the informal worker, the state would also contribute S/1. For formal workers, we propose deductions of up to four UIT in voluntary contributions, applied to their work income (UIT, or Unidad Impositiva Tributaria, is the reference unit set each year by the Peruvian Ministry of Economy, equivalent to S/4,950 ($1,350) in 2023).

We believe the system should be flexible, allowing public and private entities to be permitted to offer the fund management service, under the same regulatory conditions. We’re also calling for a shared risk pension system, in which the fund manager gets paid when returns are generated. These payments would have a fixed component to guarantee the quality of operations and investments, as well as a variable component to provide an incentive for fund profitability.

Financial inclusion: an ongoing obstacle
Action needs to go beyond just addressing the pension system itself, however. Financial inclusion remains a key obstacle in Peru, and we believe the private sector and government need to work together to enhance understanding of, and participation in, the financial system. Unfortunately, a significant number of Peruvians lack awareness about their financial situation and have limited understanding of financial management.

This lack of knowledge contributes to a low level of interest in financial products and services among the population, with the pension system being one of the areas least understood. As a result, fewer Peruvians are able to benefit from access to financial products and services, hindering their ability to achieve their financial goals. The country has made some improvements compared to last year’s figures, but it still lags behind the regional average in terms of access to financial products and services.

In Credicorp’s 2022 Index of Financial Inclusion, the country ranked sixth among the seven Latin American countries surveyed. According to the Financial Inclusion Index in Peru IIF 2022, seven out of 10 Peruvians do not have a credit product, and 43 percent do not have any financial product for savings. The findings also show that three-quarters of Peruvians face barriers when trying to obtain financial products.

The pandemic further highlighted these issues; as a result of the ensuing economic crisis, 73 percent of Peruvians did not save last year, according to the 2021 Credicorp survey. During the crisis, the government provided financial support to hundreds of thousands of people in the form of subsidies for low-income families, but the low level of participation in the banking system made these efforts challenging.

While the financial sector has implemented initiatives to improve access over the years, one of the main challenges lies in the informal nature of the Peruvian labour market; according to data from the National Institute of Statistics and Informatics, the informal employment rate in Peru stands at 76.1 percent of the employed population. This poses a significant obstacle to financial inclusion, while rising inflation and the current economic crisis have also compounded the issues.

Taking action
At Prima AFP, we believe we have a role to play in helping to improve financial inclusion, and in strengthening the financial knowledge of both clients and non-clients. Providing education on the country’s private pension system is a key aspect of our sustainability pillars, and over the years we’ve collaborated with various platforms to achieve this.

One example is ‘El Depa’ – a web series on financial and pension education that we introduced six years ago. Made up of 27 episodes, the series has garnered more than 80 million views on social networks and covers various topics, from fund types to profitability, in a light-hearted way. We also recently launched a new website, ‘Ahorando a Fondo’, designed to inform users about pension basics, address common doubts, dispel myths around the private pension system and provide access to training courses and free workshops.

Promoting gender equality
Financial inclusion differs considerably between urban and rural areas and different socioeconomic levels and age groups – and there’s also a gender gap. Although there has been improvement over time, men still have higher levels of financial inclusion than women. According to the latest Credicorp Financial Inclusion Index, 21 percent of men in Peru have reached a level of financial inclusion, compared to only 14 percent of women.

It’s not only around financial inclusion that this gender gap exists – it’s seen in pension savings too. A recent study by the Pontificia Universidad Católica del Perú revealed a 37 percent gender gap in pensions. This issue is not unique to Peru; research published in 2021 found that women over the age of 65 in OECD member countries received on average 26 percent less retirement income than men, indicating a global trend.

These disparities reflect the broader gender inequality present in the Peruvian labour market, where women earn nearly a third less than men for performing similar work. Addressing these gender gaps and promoting financial inclusion for women is crucial for achieving greater equality and empowering women economically.

Prima AFP is dedicated to promoting gender equality and has taken significant steps to address the gender gap and combat sexual harassment in the workplace. Among the key initiatives is our Equality Now programme, designed to ensure our recruitment processes are as fair as possible and promote diversity within the organisation.

We have also partnered with the ELSA programme, a digital project developed by GenderLab with the support of the Inter-American Development Bank. This is targeted at preventing and addressing sexual harassment in the workplace. We’re also committed to addressing the gender pay gap, actively working to ensure roles and responsibilities are appropriately valued and compensated, irrespective of gender.

Investing responsibly
Our social responsibility efforts extend to wider issues, too – not least climate change. Since 2016, we have been strengthening our commitment to the Sustainable Development Goals (SDGs) and integrating environmental, social and corporate governance (ESG) criteria into our investment processes.

We implemented a climate change policy designed to measure the impact of climate change on our portfolio. These are aligned with the recommendations provided by the Task Force on Climate-Related Financial Disclosures (TCFD) – a working group established by the Financial Stability Board that gives recommendations on climate-related information that companies should disclose to their stakeholders.

We have been strengthening our commitment to the Sustainable Development Goals

We have also implemented a Responsible Investment Policy, which applies to all assets under management. This involves four key tenets: negative screening (not investing in certain activities in order to avoid incurring unnecessary risks in the portfolio); integration, referring to our analysis of ESG factors in our investment decisions; impact investments; and active engagement. By the end of 2021, 62 percent of our portfolio had undergone ESG analysis, which increased to 97 percent by the end of 2022. Our target is to have 100 percent of our portfolio undergo ESG analysis by the end of 2023.

Additionally, we have been actively working on incorporating climate change into our risk analysis through the implementation of a dedicated policy. Separately from this, we also implemented a Relationship Policy, designed to enhance our relationships with companies in which we invest; and a Voting Guidelines Policy, established in 2019 to encourage active engagement from stakeholders.

A global vision
Since 2016, we have also been part of the Responsible Investment Programme (PIR), which seeks to promote responsible investment practices, contributing to the sustainable development of Peru and the wider region. We also became signatories to the Principles for Responsible Investment (PRI) in January 2019 – an international network of investors backed by the United Nations that aims to understand the impact that ESG issues have on investment, and encourage integration of these issues into the investment decisions of its signatories. As signatories, we are obliged to report on our fund management annually; in 2020, we received the highest rating for our integration process in governance and strategy.

In January 2020, we became members of the Carbon Disclosure Project (CDP), a non-profit organisation that seeks to promote the disclosure of information on the impact of climate change, water management and forest management. And in 2021, we joined the Sustainable Development Goals Advisory Committee (SDG Advisory Committee), which provides advice on issues related to investment aligned with the Sustainable Development Goals.

Through these efforts, we hope to not only create resilience in our portfolios and boost our long-term financial performance, but also do our bit for the planet and build on our efforts to support society at large – setting a positive example for others to follow both in Peru and beyond.