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Brazil’s social security reform creates boom in private pension market

. Mar 05, 2020
Protest against the pension reform in Belo Horizonte. Photo: Antonio Salaverry/Shutterstock Protest against the pension reform in Belo Horizonte. Photo: Antonio Salaverry/Shutterstock

Approved in late 2019, Brazil’s pension reform tightened up retirement rules in the country and have now forced the new generation of workers to wait longer and longer until they can retire. A minimum retirement age was introduced—65 for men and 62 for women—as well as a cut-off for length of service. Regardless of age, Brazilians will have to work for a minimum of 20 (men) or 15 (women) years until they can receive a state pension. As a result, the private pensions market is beginning to surge.

The model of private pensions involves the interested party choosing a retirement plan and contributing to a fund.

The benefit that the individual may redeem after 15 or 20 years of contributions will be calculated in accordance with contributions made over that period.</p> <p>Before the social security reform was even approved, the market of private pensions saw significant growth in demand and in the volume of deposits into their fixed-income funds. Data from Fenaprevi—the federation representing companies in the sector—shows that between January and October 2019, contributions grew by almost 36 percent, from BRL 86 billion in 2018 to just over BRL 101 billion last year.</p> <div class="flourish-embed flourish-scatter" data-src="visualisation/1226344"><script src="https://public.flourish.studio/resources/embed.js"></script></div> <p>Net inflows—total contributions after service cost discounts—also increased from BRL 28 billion in 2018 to BRL 42 billion in 2019. Currently, private pension plans have around 13 million customers in Brazil, with around BRL 1 trillion in combined contributions.</p> <p>However, according to Alessandro Souza, the Commercial Superintendent of Brazil&#8217;s biggest private pensions company Brasilprev, the sector is expecting <a href="https://brazilian.report/business/2019/03/17/brazil-healthcare-system-pension-system/">demand to rise even higher</a>. He explains that this growth comes as a result of deeper debates in society about long-term financial planning, motivated by the pension reform process. “It raised people&#8217;s awareness of the need for a supplementary income in the future,” he said.</p> <p>Mr. Souza says that the market began growing back in 2018, before the pension reform discussions had even started. That year, Brasilprev launched a simplified private pensions product and was able to attract some 280,000 new customers according to company estimates.</p> <p>But this change in mindset is recent. A 2018 survey by Anbima and Datafolha showed that 47 percent of Brazilians expected to have a public pension to support themselves in old age, and another 28 percent said they would likely work their entire lives.&nbsp;</p> <h2>Private pension system for the few, not the many</h2> <p>Economist Camila de Caso, who works as an advisor for the <a href="https://psol50.org.br/">Socialism and Freedom Party</a> in the House, sees a different scenario. While she agrees that the private pension market will grow in the coming years, she disagrees with the motivations why. In Ms. De Caso&#8217;s view, the shift has less to do with a heightened sense of financial awareness among the population, and it is more related to the realization that public pensions will become much harder to come by.</p> <p>Ms. De Caso highlights that in addition to the majority of the population being unable to retire under the new rules, the actual pension that the lucky few will receive will be much lower than expected, and insufficient to maintain their standards of living.</p> <p>So, in the economist&#8217;s view, those who can afford a supplementary pension plan will do so. When it comes to the poorer classes, Ms. De Caso warns that these segments of society are not even on the radar of the private pension market, as the companies&#8217; revenue will come from investments, and not necessarily wage increases in society.</p> <p>Thus, she adds, many people will not have room in their monthly budget to put money away for retirement savings. At the same time, the costs of housing, education, and other essential services are on the rise.

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Brenno Grillo

Brenno has worked as a journalist since 2012, specializing in coverage related to law and the justice system. He has worked for O Estado de S. Paulo, Portal Brasil, ConJur, and has experience in political campaigns.

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