Pension funds in Brazil

The history of Brazilian pension funds is quite old, predating the institutionalization of social security from the government. In 1835, by decree of the Regency, which ruled the country before the age of D. Pedro II, was founded Montepio Case of Brazil Bank staff. As the government did not know how to ride the pension system and did not want to commit money from the Treasury, sought a private sector partner. Montepio pension paid to the families of deceased civil servants and military. The state only failed to pass lottery quotas to Montepio in 1930 in the government of Getulio Vargas, who argued that the company was surplus and therefore did not receive grants  (Jornal do Brazil, 2002).

Therefore, only in the twentieth-century social security began to be seen in an institutional manner. The first milestone occurred on April 16, 1904, when it was founded the Montepio Case of Brazil Bank staff. The first official measure of social protection that is known is the Law No. 3,724, of January 15, 1919, which established the insurance accidents, making it mandatory to indemnity by the employer, the accident occurred in the execution of work.
A step which corresponded to the development of Brazilian capitalism was Retirements Boxes system and Pensions (CAPs) in the process of accumulation was not yet controlled by the industrial sector, as only took urban workers whose activities were essential to the operation of the agro-export sectors hegemonic (maritime, rail, road). In 1923, these boxes were regulated by law Eloy Chaves.

Getulio Vargas created between 1930 and 1945 when the state’s role in the dynamics of the economy and of Brazilian society organization had changed, Institutes of Retirement and Pensions (IAPs), which were gradually replacing the CAPs. Such entities had adopted the capitalization system, forming the guarantee funds of the benefit plans during the working lives to the insured.

In the early ’70s, following the economic boom, there was a proliferation of pension funds. The private pension bustled about 10% of the working of bags in Brazil. The industry did not have state regulation but grew unequivocally. In the middle of the decade, they proved massive fraud in pawnbroking who rode on actuarial plans with promises that could not be fulfilled. Applications focused on dubious solvency and assets were tied to investments several times were unviable. The need to regulate private pension became apparent to moralize and enable institutional segment that stood out as an important means of financial leverage in other countries.
The search for alternatives to the regulation of funds allowed the private sector long-term resource control without state interference. On the other hand, private pension demonstrated the ability to organize, more appropriately, the human resources policy through diversification benefits or easing of retirement.

pension funds regulated by Law No. 6,435 / 77 of 15 July 1977 and its basic structure predicted the operation of private pension as an institutional investor, which redundava the strict regulations on the allocation of resources of entities among the options market. These institutions were classified into two segments: The Open Private Pension Entities (EAPP’s) and the Closed Private Pension Entities (EFPP’s). The EAPP’s are corporations that may or may not have profit, open membership to all who wish to pay contributions. The benefit will depend on the compensation achieved by the application of funds in the capital market, which typically is a defined contribution plan.
The EFPP’s, on the other hand, are non-profit organizations, whose access is limited to employees of the entity, which is so named sponsor. If more than two companies come together to form an EFPP, this is called multipatrocinadora.
The Foundation receives contributions (s) company (s) Sponsor (s) and usually the employees who joined the plan manages these resources or hire external managers and directly or indirectly paid the benefits stipulated in the plans. The inspection and standard-setting bodies attached to the Ministry of Finance are the CGPC  and SPC . We have, for example, the IAPP (AmBev Pension Fund) and Previ (Bank of Brazil Foundation), which is now the largest entity closed the country’s security.

It is more interesting for the participants to be part of an EFPP because in them there is the contribution of the sponsoring companies and therefore for a given amount of contribution, the value of its benefits is greater than that provided by EAPP’s. Most operating costs are also arcade by sponsoring companies, which usually bear the plan administration cost and at the back where this does not occur, the rates are around 5% of the contribution.
Can be classified private pension plans in three types. In the Defined Benefit Plan (BD), the participant contributes today and is already knowing what value will receive in your retirement, then your monthly contribution is a function of how much you will receive in the future, that is, we have a priori calculation rule the value of the benefit. The Defined Contribution Plan (CD) is a capital accumulation plan, in which the contribution is established a priori and the benefit amount is directly proportional to what has been accumulated and capitalized over time. The plan has mixed CD features to the scheduled retirement and benefits for risk (disability retirement or death pension), it behaves as a BD.

Constituting a basic statute of the supplementary pension, Law No. 109  outlined the following objectives:
     1.formulate pension policy;
     2.discipline, coordinate and supervise the activities, making them compatible with the welfare policies and social and economic and financial development;
     3. determine minimum standards of economic and financial and actuarial security to preserve liquidity,   solvency and balance of each benefit plan and each pension entity;
     4. ensure that participants and beneficiaries access to their plans for management information;
     5. control entities, their operations and impose penalties;
     6.protect the interests of participants and beneficiaries of the plans.

Through various measures, the federal government has shown, with permission to cull contributions to the pension plan in the Statement of Income Tax (1996) and approval of PGBL and FAPI  (1998), which wishes to encourage private pension. Its expansion is sure to have the stable long-term savings and that will give dynamism to the economy and can generate benefits for all through increased participation in Gross Domestic Product (GDP).
In early 1999, the Executive sent to the National three projects complementary laws Congress (No. 8, No. 9 and No. 10) to regulate this pension scheme, proposing profound transformation, with more flexible and broad criteria and measures, in addition to encouraging the growth and democratization of its operation. According to Paul Kliass, Secretary of Pension Funds at the time, the most important aspects were:
     1. greater credibility, security, and transparency in management;
     2. institution of flexibility, organization and entities and plans of operation;
     3. strengthening the regulation and supervision capacity of the state by the system;
     4. institution of the pension also for federal civil servants, states, and municipalities.
     5. preservation of the optional nature of the pension, maintaining public security in mandatory and sympathetic character.
Among the planned innovations were:

     1. encouraging small businesses to the formation of pension funds and the creation of the settlor figure, allowing trade unions, trade associations and professional advice to create their own pension funds for their members before only optional to the sponsoring companies;
    2. of portability institute, which allows the amount of individual contributions transit between the different funds, each change of employment; this ensures the cumulative participant’s right for your retirement without becoming payment, as happens today, when he leaves employment; Moreover, it can take its share of the contributions plus the portion of the sponsor which is prohibited under the existing system ;
     3. the institute of deferred benefit (vesting), which allows the remaining capitalized amounts paid to the fund, even after the loss of employment; the amount to which the participant is entitled is only available at retirement, which improves the calculation of that value;
     4. regulation of multipatrocinadoras, a group of sponsors or instituting who come together to administer a fund, and the multiplane, a sponsor or settlor offering various pension plans with different benefits; the multipatrocinadoras allow smaller companies and experience have access to economies of scale and become more competitive, since security is an operation with high costs and low margins, it is not economically viable entity with low volumes; Furthermore, multiemployer funds are more competitive and the sponsoring companies can focus on their own;
     5. business, without having to worry about the management of a fund; for a given company adhere to a multi background, there is a legal and bureaucratic simplification; the multiple fund administrator is responsible for contact with the SPC, and the participating companies that contact exempt fund;
    6. the regulation of defined contribution and defined benefit, and provide for the regulation of other types of benefits that may arise with the technical development of the system;
     7. inclusion of the rule of minimum retirement age of 60 for DC plans and 65 for DB plans, it is possible to maintain early retirement proportional, since the plan has an actuarial balance;
     8. rules for capitalization of plan reserves in the case of benefits to be granted; the amortization periods should be married with the plans liability obligations, not being allowed the repayment of benefits granted reserves.
There is a huge number of companies interested in joining the regime of pension funds, which reinforces the urgency to be voted on bills that the more flexible pension system, adapting it to changes taking place in the market. Projects # 8 and # 10 were approved on 29/05/2001 (Complementary Laws 108 and 109) .
According to Kliass , the forecast is that the pension multiplies the number of participants and their assets in the near future. Having It will, therefore, as a consequence, increase in aggregate savings and medium and long-term investments, including reflecting the improvement in employment.