The Mexican government recently published a decree creating a Welfare Pension Fund (El Fondo de Pensiones para el Bienestar – “FPB”) to guarantee that lower-income pensioners receive 100% of their last salary, up to a cap.
The decree was published in the Mexican Official Journal on 1 May 2024, and the FPB began supplementing eligible pensioners’ benefits on 1 July 2024.
Background
Under the current defined contribution pension system employees, employers, and the Mexican government contribute to individual accounts managed by private pension fund administrators (Administradoras de Fondos para el Retiro - AFORE).
The FPB is a public trust fund financed by the federal government to provide the Mexican social security bodies with the resources necessary to pay for the guarantee. Employer or employee contributions are not being increased.
Key details
The most relevant details of the reform are as follows:
Supplement: Individuals with pensions that are less than their last salary will be paid a supplement, such that they receive a total monthly payout equal to 100% of their last salary. The total monthly payout, which comprises the existing pension and the supplement, is capped at MXN 16,777.68 for 2024, being the average monthly salary registered with the Mexican Social Security Institute in 2023, adjusted for estimated inflation for 2024. This amount will be updated on 1 January of each year. For 2024, this means that individuals with pensions higher than MXN 16,777.68 will not be entitled to the supplement.
Eligibility requirements:
Individuals must have started contributing to the current AFORE pension system only after 1 July 1997.
Individuals must be 65 years of age or older.
Impact on salary levels: The reform will benefit employees with lower salary levels, while those with higher salaries that exceed the applicable cap could receive a pension that is only a percentage of their last salary.
Funding: The FPB will fund the pension supplement, which will not be funded by any additional employer or employee contributions.
Lockton comments
Implications for employers:
Productivity and rotation: Employees may feel incentivized to continue working until age 65, which could affect natural rotation and workforce planning.
Review of labor liabilities: Companies should evaluate how the new pension reform could affect their financial obligations for employees approaching retirement. This includes analyzing whether they need to make changes to the retirement plans they offer to their employees to ensure that these plans remain beneficial and sustainable for both workers and the company.
Training and financial education: Companies may consider implementing financial education programs for their employees. This would not only improve employees' financial education for retirement, but could also reduce financial stress, which, in turn, could improve productivity.
Implications for employees:
Enhanced pension benefits: Employees who meet the eligibility requirements of the reform will receive higher monthly retirement benefits.
Incentive to delay retirement: The reform may motivate workers to delay retirement until age 65 to take advantage of enhanced pension benefits. This may change employees' retirement expectations and personal financial plans.
Importance of personal savings and financial education: For those employees who receive salaries above the applicable cap, their resulting pension could remain less than their last salary. This underscores the importance of encouraging personal savings and understanding the investment and savings options available to ensure a more comfortable retirement.
It is important to teach employees about managing their money, saving, and investing. This will reduce their stress and increase their confidence in their financial situation and lead to better retirement planning decisions. By better understanding how to manage their finances, employees can work toward a more comfortable retirement.
How Lockton can help
Lockton has served as an actuarial advisor to Mexico’s most significant Social Security Institutions for over 20 years and has developed tools to help human resources teams educate employees on the importance of financial planning, optimal investment strategies, fiscal management, and understanding the pensions they will receive through social security.
“We help people to improve their relationship with money, to learn about the conditions and benefits granted to them by Social Security, and to meet their savings expectations in the short, medium and long term," concluded Bernardo López, Subdirector of Actuarial Consulting.
Please contact your Lockton Consultant if you wish to discuss these changes or the potential impact on the retirement benefits, financial planning, and financial education currently offered to your employees.
TO INCLUDE
Law on Retirement Savings Systems (ordenjuridico.gob.mx) (opens a new window)
