Uruguay Passes Sweeping Pension Reforms with the Creation of a Common Pension System

The government of Uruguay has passed legislation (Law No. 20130) creating a new Common Pension System (Sistema Previsional Común) which modifies many aspects of the existing statutory pension arrangements, including increasing the state pension age, allowing retirees to continue working, and requiring greater participation in the mandatory individual account scheme. As with other countries around the world, Uruguay has recognized the rising pressure of an aging population on state-funded retirement benefits, and these modifications aim to encourage people to work longer and to reduce financial liabilities on the public system.

Background

Uruguay is known regionally for its relatively robust pension system, with a portion of contributions going into a pay-as-you-go defined benefit pension administered by Banco de Previsión Social – BPS, and the other portion funding individually-held defined contribution accounts, administered by private fund managers (Administradoras de Fondos de Ahorro Previsional – AFAP).

Key Changes

Many elements of the new reforms will go into effect from 1 August 2023, but some changes will be implemented over time.

Age-related implications

  • Increase to the state retirement age.

    • Effective 1 August 2023:

      • for individuals born between 1973 and 1976, the state pension eligibility age will increase from 61 to 65 by one year based on the person’s year of birth, i.e., 61 for individuals born in 1973, 62 for individuals born in 1974.

      • for individuals born in or after 1977, state pension age will increase from age 61 to age 65.

    • There is no change to the number of years of contributions for full retirement benefits (30 years).

  • New options for early retirement.

    • Effective 1 August 2023, individuals may opt for early retirement if they were born in or after 1976 and

      • attain age 63 with 38 years of contributions, or

      • attain age 64 with at least 35 years of contributions.

    • Additionally, individuals born in 1973, 1974, and in 1975, will be able to claim early retirement at ages 60, 61, and 62 (respectively), if they have attained 40 years of contributions.

  • The ability for retirees to continue working into retirement.

    • Effective 1 August 2023, current retirees may resume working while receiving retirement benefits. If a retiree elects to re-enter the workforce, they are unable to work for the employer from which they retired.

Contribution-related implications

  • Required participation in AFAP

    • Effective 1 August 2023, all covered workers will be required to participate in the AFAP, regardless of income. Previously, lower earners were not required to allocate a portion of their contributions to an AFAP fund.

  • Modification to the apportionment of contributions between BPS and AFAP.

    • Effective 1 December 2023, the current even division of an employee’s statutory contributions between the two plans will shift from 50% to each fund to 66.7% going to the BPS pension and the remainder being deposited in an AFAP fund.

    • 100% of contributions on monthly earnings from UYU 107,589 to UYU 215,179 will go to the AFAP account.

      • There are no contributions on earnings above UYU 215,179.

    • At this point, there is no change to the existing contribution rates.

Additionally, reductions will apply for persons retiring prior to their applicable full state pension age, and benefits will increase when a person postpones full retirement.

Next Steps

As many of these changes will only affect retiring employees and have not changed contribution rates for employers, there is no direct impact on employers. However, with the change to the retiree work rules, there will be additional experienced employees available. Considering that the median age of employees may shift upwards as the number of older employees in the workplace increases, employers should ensure that their local HR, perquisites, and benefits are inclusive and equitable.