The Mexican government and key private sector groups (employer and employee representatives) have reached an agreement to reform the AFORE (Admistradoras de Fondos para el Retiro) defined contribution system that would, among other things, increase employer retirement contributions and shorten employees required insured employment period.
The proposed reform is expected to be approved by Congress by early 2021. The reform is very likely to be approved by the Mexican Congress as it enjoys full support from political parties, unions and business associations.
Currently, the pension scheme is comprised of a monthly contribution of 6.5% of pensionable salaries, divided as follows:
- Employer contribution of 5.151%
- Employee contribution of 1.125%
- Government contribution of 0.225%
Mexican pension contribution rates are some of the lowest in the world. The proposal aims to align Mexico’s pension contribution rates with international standards and is expected to benefit more than 20 million employees, allowing more workers in the formal sector to have access to a pension.
The reform would include the following changes:
- Employer contributions would gradually increase from 5.151% to 13.875% of pensionable salary over a period of eight years.
- The government contribution to the pension system would gradually increase over a period of eight years from 0.225% to 8.724% of pensionable salary for employees earning the minimum wage and to 1.798% for employees earning up to four-times the measurement and evaluation unit or UMA.
- The required minimum insured employment period to be eligible for a pension would immediately decrease from about 24 years (1250 weeks) to about 14 years (750 weeks). This would subsequently increase to 1,000 weeks (19.2 years) over a 10-year period.
- Commission charged by the AFORE on retirement savings would gradually decrease from a rate of 1% to a maximum of 0.7% per year.
- Retirees will be able to take pension benefits as a combination of a lifetime annuity and programmed withdrawals instead of one or the other.
- The current six-month waiting period to make withdraws from savings would be waived.
- Pensioners or survivors would be able to claim the remaining balance on their individual AFORE pension account 10 years after the pension became payable.
Given the current economic uncertainty caused by the COVID-19 pandemic, a two-year grace period will be given to employers during which employer contributions will not increase. The proposal also states that the pension system should be reviewed every 10 years and changed if needed to ensure continuous performance.
Employers should monitor the implementation timeline of the proposal and ensure compliance.