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03/1999  
  Pension Funds in Brazil  
  By Mario Dias Lopes

 

1. Two main classes of Pension Funds

The Brazilian law defines two different types of pension funds: "entidades fechadas e abertas de previdência privada"

"Entidades fechadas de previdência privada" are occupational pension plans, organized as pension funds, sponsored by corporations and until recently only for organizations with more than 100 (one hundred) employees. They are non-profit organization by definition and are ruled by a special Government Agency "Secretaria da Previdência Complementar - SPC" under the Ministry of Social Security.

The other class is the "entidade aberta de previdência privada" they can be either a profit or a non profit organization, but the majority of them are profit organizations run by commercial banks and insurance companies. The are ruled by the Government agency that supervises the insurance business nation wide: "Superintendência de Seguros Privados -- SUSEP"

They are saving plans in essence -- defined contribution plans available to any person that open an account in such an organization -- according to the rules contracted between the parts and following government legislation. Until now they had very little success as a whole and all these funds control total assets that are less than 6% of the assets of all pension funds.

For the remaining of this paper when we refer to pension funds we mean "entidades fechadas de previdência privada."

2. Recent History

The oldest pension Funds in Brazil in the modern conception of pension schemes were created in the 1970's.

The expression "fundos de pensão" (the correspondent of pension funds) is used by the market and the media quite recently (less than 9 years). One of the reasons is that "pensão" has a different meaning in Portuguese -- it means the monthly payment for the survivor after the death of a retired person or of an active employee prior to retirement and covered by a pension plan or by the Social Security. Nevertheless in 1990 the market started naming the "Fundações" as "Fundos de Pensão."

APEP - Associação dos Fundos de Pensão de Empresas Privadas, was the first institution to use such expression to designate pension funds.

The pension funds are organized as a non profit-organizations both as a foundation and as "sociedade civil" -- private organization.

There are two Associations of Pension Funds at national level: Abrapp and APEP. The first one Abrapp - Associação Brasileira de Entidades Fechadas de Previdência Privada, was created in 1978 and has as members 250 pension funds sponsored by the Government--state owned companies and by the private enterprise. The second one APEP - Associação dos Fundos de Pensão de Empresas Privadas, was created in 1989 and comprises only the pension funds sponsored by the private sector -- has a total of 70 members.

Around 20 pension funds, in this modern version, were created before the existence of specific government legislation on the subject. The equivalent of the ERISA law is the "Lei no. 6,435 of July 17, 1977" complemented by the "Decreto no. 81,240 de January 20, 1978".

The first qualified pension fund under those rules was approved only in 1979.

In 1970's Government Companies sponsored most of the existing pension funds. The majority of entities sponsored by the private sector were created in the late eighties.

Today the pension funds supported by the private sector outnumbers the ones from the government sector.

3. Benefit Design

During the 70's until mid 80's almost all pension plans were defined benefit plans.

Today the majority of pension plans supported by public entities still bears that characteristic -- defined benefit plans and predominantly contributory -- sponsored jointly by the employer and by the employees. But this is changing. A lot of Government Agencies has already change their plans to a Defined Contribution plan according to orientation from the Federal Government. Several pieces of legislation presently under discussion in the Congress are toward the forbidden of creation of new Defined Benefit plans and the obligation of old ones to change into Defined Contribution plans.

In the private sector approximately 30% are defined benefit plans and 70% are defined contribution plans or a combination of both -- a defined benefit plan plus a supplemental defined contribution plan. A substantial proportion of those plans is not contributory (around 40%) -- that is only the employer is responsible for the funding of the plan. The vast majority of new plans conceived in the 90's are of defined contribution nature or a blend of both.

Employee participation (and contribution if any) is not mandatory. It cannot be required as a condition of employment.

Not all plans have a vesting clause in the event of employment termination; but is becoming standard in the new plans. On the other side a great number of plans have a provision for the ex-employee to remain in the pension plan at his or her only decision; in that case the participant must pay the employee and employer cost for the remaining period.

The investment rate of return assumption used for the projected cost of the plan, in Brazil, is usually a real interest rate of 6%.

The idea of plan termination is quite different in Brazil. The law has only provision for sponsors withdraw leaving opportunity to plan continuation.

Usually the pension plans do not transfer the risks of pension by death or disability to an insurance company.

There is no standard annuity contract available in the market. It only can be done through a special arrangement with an insurance company.

The Brazilian ERISA established that the maximum limit of the administrative cost of a pension plan is 15% of the contribution revenue, the investment revenue should cover the cost of asset management contracts.

Since 1983 the Government are trying to tax the capital gains of the pension funds. There is a big fight at the bar to exempt the pension funds from several different kinds of Government taxes (Federal, State and local taxes) and restore the tax exemption for the pension funds.

4. Social Security

Since 1967 the Social Security -- "Previdência Social" is administered solely by the Federal Government through the Ministry of Social Security. The Social Security covers all employees from the private sector and employees of State owned companies, such as Petrobrás, Banco do Brasil, etc.

Participation is mandatory for employees of companies and corporations. Employers pay 22% of payroll (for pension and health) and employees pay 8 to 10% of the total compensation up to a limit.

The highest pension payable to an individual that complies all the requirements is US$900.00 (Jan 99).

The basic pension benefits provided by the Social Security are:

• retirement:

old age retirement- for participants that reached the minimum of 65 years of age for men and 60 years for women, with a minimum of 180 months of contribution;

long service retirement -- 35 years of contribution, for man and 30 years of contribution for women, with age limit of 60 for man and 55 for woman (for people already working is 53 and 48);

special retirement -- for employees working under special severe environmental conditions and special classes of workers (school teachers) The number of years of contribution can fall even to 25 years;

disability retirement;

• pension by death -- for the survivor and dependents.

5. National Figures

Total population: 159.9 million (1997);

GDP: Gross Domestic Product: $760 billion (1998);

GDP -- growth annual rate: + 4.1% (1993); + 5.7% (1994); + 4.2% (1995); + 2.9% (1996); + 3.7% (1997); + 0.2% (1998).

Consumer Price Index: % Change last 12 months: 1.99 %
% Change month ago: 4.44 %
(City of São Paulo) % Change last 12 months: -0.81 %
% Change month ago: ‹0.56 %
Industry Production Index: % Change year ago: -2.6%
Government expenses with retirement systems: 6.1% GDP (1997), 7.1% GDP (1998);
Total workers (work force): 65 million;
Workers participants of Social Security: 30.0 million;
Retired employees: 17.9 millions (Dec 1998);
Minimum wage: $75 (Mar 99)

6. Pension Funds Figures

Qualified Pension Funds: 352 (Dec 98)
Pension Funds sponsored by the private sector: 227
Pension Funds sponsored by State owned Companies: 125
(Federal: 51, State : 71, Local: 3)
Total employees covered by pension funds (active workers): 1.7 million (Nov 98)
Retired people: 455,007 (Dec 98)
Total Assets: US$ 77.2 billion (Dec 98)
Total Assets in %GDP: 10.2% (Dec 98)
Total assets of Pension Funds sponsored by the private sector: $20.2
Total assets of Pension Funds sponsored by State owned Companies: $57.0

 
Pension Funds - Ranking by Assets
  Sponsor (Pension Fund Initials)   US$ million

1

Banco do Brasil (Previ)

 

17,711

2

Federal Savings Co. (Funcef)

 

5,503

3

SP Electric Power Co. (Cesp)

*

4,169

4

Telebrás (Sistel)

 

3,909

5

Petrobrás (Petros)

 

3,787

6

Federal Reserve Bank (Centrus)

 

3,283

7

Vale do Rio Doce Co. (Valia)

*

1,509

8

Itau Bank (Itaubanco)

*

1,305

9

Varig Airline (Aerus)

*

1,288

10

Minas Gerais Electric Power Co. (Forluz)

 

1,142

11

Copel

 

1,047

12

Furnas Electric Power Co. (Real Grandeza)

 

951

13

National Development Bank (Fapes)

 

867

14

Eletrocee

 

711

15

Telos (Embratel)

 

700

16

Federal Railroad Network (Refer)

*

674

17

Portus

 

661

18

Funbep

 

648

19

Northeast Bank (Capef)

 

641

20

São Paulo Steel Mill (Cosipa)

*

605

    * = Private Sector
  Source: Abrapp Dec 98  

 

Pension Funds - Ranking by participants
  Sponsor (Pension Funds Initials)   active retired

1

Banco do Brasil (Previ)

 

74,298

57,000

2

Post Office Co. (Postalis)

 

77,265

3,744

3

Telebrás (Sistel)

 

70,211

18,651

4

Multi Employer (CCF)

 

59,450

3,832

5

Federal Savings Co.(Funcef)

 

49,597

14,786

6

VW (Volkswagen)

*

45,887

298

7

Petrobras (Petros)

 

43,007

46,918

8

Varig Airline (Aerus)

*

34,486

5,679

9

Itau Bank (Itaubanco)

*

30,620

1,509

10

SP Electric Power Co. (Cesp)

*

30,190

18,069

11

Previ -GM (GM)

*

26,266

407

12

Banespa (Banesprev)

 

22,772

2,308

13

Minas Gerais Savings Co (Previminas)

 

22,771

1,492

14

Sadia (Atilio Fontana)

*

21,491

2,364

15

São Paulo Sewage Co. (Sabesp)

 

19,741

1,645

16

Brahma Brewer Co. (Brahma)

*

17,182

2,257

17

Vale do Rio Doce Co. (Valia)

*

13,954

16,683

18

State of São Paulo Savings Co. (Economus)

 

13,729

1,578

19

Nestlé (Funepp)

*

13,398

1,119

20

Minas Gerais Steel Mill (Usiminas)

 

13,061

8,189

     
   

* = Private Sector

 

Source: Abrapp Dec 98