REPRESENTATION (article 24) - CHILE - C035, C036, C037, C038 - 2000

National trade unions of workers of the Private Sector Pension Funds

Closed

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Report of the Committee set up to examine the representation alleging non-observance by Chile of the Old-Age Insurance (Industry, etc.) Convention, 1933 (No. 35), the Old-Age Insurance (Agriculture) Convention, 1933 (No. 36), the Invalidity Insurance (Industry, etc.) Convention, 1933 (No. 37) and the Invalidity Insurance (Agriculture) Convention, 1933 (No. 38), made under article 24 of the ILO Constitution by a number of national trade unions of workers of the Private Sector Pension Funds (AFPs)

Report of the Committee set up to examine the representation alleging non-observance by Chile of the Old-Age Insurance (Industry, etc.) Convention, 1933 (No. 35), the Old-Age Insurance (Agriculture) Convention, 1933 (No. 36), the Invalidity Insurance (Industry, etc.) Convention, 1933 (No. 37) and the Invalidity Insurance (Agriculture) Convention, 1933 (No. 38), made under article 24 of the ILO Constitution by a number of national trade unions of workers of the Private Sector Pension Funds (AFPs)

Decision

The Governing Body adopted the report of the tripartite committee. Procedure closed.

Complaint Procedure

I. Introduction
1. By a letter received on 17 April 1998 by the Director of the Southern Americas Multidisciplinary Advisory Team, the leaders of the National Workers' Union of the Provida Pension Fund, the National Workers' Union No. 2 of the Habitat Pension Fund, the National Workers' Union of the Fomenta Pension Fund, the National Workers' Union of the Proteccion Pension Fund, the National Workers' Union of the Santa Maria Pension Fund and the National Workers' Union of the Aporta Pension Fund, referring to article 24 of the Constitution of the International Labour Organization, sent the Office a representation alleging non-observance by Chile of the Old-Age Insurance (Industry, etc.) Convention, 1933 (No. 35), the Old-Age Insurance (Agriculture) Convention, 1933 (No. 36), the Invalidity Insurance (Industry, etc.) Convention, 1933 (No. 37) and the Invalidity Insurance (Agriculture) Convention, 1933 (No. 38).
2. The representation concerns four Conventions ratified by Chile and in force for that country. (Endnote_1)
3. The provisions of the ILO Constitution relating to the submission of representations are as follows:
Article 24
In the event of any representation being made to the International Labour Office by an industrial association of employers or of workers that any of the Members has failed to secure in any respect the effective observance within its jurisdiction of any Convention to which it is a party, the Governing Body may communicate this representation to the government against which it is made, and may invite that government to make such statement on the subject as it may think fit.
Article 25
If no statement is received within a reasonable time from the government in question, or if the statement when received is not deemed to be satisfactory by the Governing Body, the latter shall have the right to publish the representation and the statement, if any, made in reply to it.
4. The procedure to be followed in the case of representations is governed by the revised Standing Orders adopted by the Governing Body at its 212th Session (March 1980). (Endnote_2)
5. In accordance with articles 1 and 2, paragraph 1, of the Standing Orders, the Director-General informed the Government of Chile of the representation and brought it before the Officers of the Governing Body.
6. At its 273rd Session (November 1998), on the recommendation of its Officers, the Governing Body decided that the representation was receivable. (Endnote_3) It set up a committee to examine it, composed of Mr. A. Ducreux (Government member, Panama), Chairman; Mr. Daniel Carlos L. Funes de Rioja (Employer member, Argentina); and Mr. J. Olivio Miranda Oliveira (Worker member, Brazil).
7. In accordance with paragraph 1 of article 4 of the Standing Orders, the Committee invited the Government to send its observations on the representation by 30 March 1999.
8. The Government presented its observations in communications dated 9 April and 12 May 1999 and sent supplementary information by a letter dated 21 July 1999.
9. At its 276th Session (November 1999), the Governing Body designated Mr. Victor Rodriguez Cedeno (Government member, Venezuela) to replace Mr. Ducreux. (Endnote_4)
10. The Committee met in Geneva in March 2000 and adopted its report.
II. Examination of the representation
A. Allegations made by the complainant organizations
11. In their communication the leaders of the six abovementioned national trade unions of workers of private sector pension funds (Administradoras de Fondos de Pensiones-AFPs) allege that the basic rules of the privately administered social security scheme in Chile contravene ILO Conventions Nos. 35, 36, 37 and 38, in particular as they relate to the private management of workers' pension funds. The Chilean Government should consequently bring this system into line with the relevant provisions of these Conventions and should take urgent steps to ratify international labour Conventions Nos. 102 and 128.
Background to the new social security scheme
12. The complainant organizations briefly describe the evolution of the social security system since the 1920s. Prior to 1980 the pension system was based upon contributions shared between employers and workers, which helped cover old-age, disability and survivors' benefits. The system operated by means of a pay-as-you-go (PAYG) scheme with pensioners' benefits financed by contributors. There were 12. 2 contributing workers for each pensioner in 1955, but by 1980 there were only 2.5; the financial burden covered by contributors thus increased fivefold in just 25 years. Faced with this situation, beginning in 1979 the Government then in power turned to privatization of the social security system. Legislative Decrees Nos. 3500 and 3501, adopted on 13 November 1980, thus established a system of individual social benefits, with the State playing only a secondary role in its administration, and did away with the PAYG system which had operated for over five decades. Since then pensions have been administered by private sector pension funds (AFPs), private institutions set up as limited liability companies which are assigned the task of managing resources and benefits, and the Welfare Administration Institute (INP), which manages the resources of the old system. The old system, which operated for many years, had the advantage of ensuring that pensions were not subjected to financial market fluctuations and that there was solidarity between generations, since pensioners could benefit from increases in wages and productivity achieved by the contributing workers. Following the 1973 coup d'etat this system was replaced by an individual funding scheme f) in which workers deposited funds in individual accounts. Funds in these accounts are managed by the AFPs, which make investment decisions for them. According to the trade unions, the workers were not associated in the discussions which led to the establishment of the new social security system and, despite the advent of democracy, the workers and their main trade union organizations are still marginalized from the running of the system and the discussion of its imperfections, injustices and inefficiencies and possible ways of correcting its shortcomings.
Characteristics of the new system
13. The pension scheme imposed in Chile since 1980 is based on a system of individual funding managed by the AFPs, profit-making national or foreign limited-liability companies which manage pension funds and pay the benefits prescribed by law to their worker members. For managing the funds, the AFPs receive a fixed commission and a further charge proportional to contributions (Act No. 18646 of 1987). These commissions are paid by the workers and are charged directly to their individual accounts. Under the rules established by the law, the AFPs must ensure that the resources are profitable and secure by diversifying the types of investments made. The six complainant trade unions consider that the current system has a number of shortcomings and disadvantages:
(a) it is subject to market fluctuations and in particular to changes in share prices;
(b) the administrative costs are very high and are borne by the affiliates: the commission charged by the AFPs to individual accounts is 30 per cent of the workers' monthly contributions;
(c) a tendency to form holding companies or monopolies, as the contributed funds are concentrated in a handful of AFPs;
(d) inefficiency in the inspection and verification of compliance with social security rules and with legal mechanisms governing the recovery in court of workers' contributions, which allows employers not to pay over to the competent body the contributions they have declared (the debt for social security contributions is reportedly $300 million and there are currently 15,000 applications for payment of unpaid contributions pending before the country's labour courts); and
(e) workers and trade union organizations are involved neither in the management of the AFPs nor in the investment of the money deposited in the pension funds.
International Conventions whose implementation is affected by the privately administered social benefits scheme in Chile
14. According to the representation, the current social security system seriously infringes upon the principles set out in paragraphs 1, 2 and 4 of Article 10 of Conventions Nos. 35 and 36 and paragraphs 1, 2 and 4 of Article 11 of Conventions Nos. 37 and 38. In fact, the companies which manage the pension funds are private commercial companies which act according to Chilean commercial law and are profit-oriented. Furthermore, neither the insured workers nor their representatives are involved in the management of the AFPs.
The situation of sales agents employed by AFPs
15. The complainants describe the socio-economic situation in Chile by denouncing the trend toward deregulation and flexibilization of labour standards, a trend which is leading to increasingly precarious employment and working conditions. The governments formed by the Coalition of Parties for Democracy have refused to involve workers and their main trade union organization, the Single Central Organization of Chilean Workers (CUT), in discussions concerning macroeconomic policy. Furthermore, during large-scale labour disputes in recent years the Ministry of Labour has refused to intervene in the internal affairs of enterprises, arguing that such interference would be contrary to the policy of free competition and the principle whereby the parties to a conflict must be treated on an equal footing. What is more, the state Labour Office has very limited powers to ensure proper respect of the labour legislation at the national level. For many years the labour movement has been in crisis, with the percentage of unionized workers now reportedly no higher than 10 per cent of the active population. It is in this socio-economic context that since November 1997 some 13,000 sales agents for social benefits services out of a total of 22,000 have been dismissed from the various AFPs. In the opinion of the complainant organizations, these mass dismissals are a result of the adoption in November 1997 by the administrative authority (the AFP Superintendency) of circulars Nos. 998 and 999, which made the transfer operation (traspaso) subject to new administrative requirements. Transfer occurs when a worker affiliated to one AFP decides to move the administration of his pension fund to another AFP, which pays a commission to the sales agent responsible for the transfer. The new and more complex administrative requirements imposed by the circulars discouraged workers from carrying out such transfers. The considerable and widespread decline in the number of transfer orders had financial repercussions for sales agents, for whom commissions are the main element of their income. The AFPs have for their part dismissed thousands of sales agents, claiming that they have not met the objectives set out in their employment contracts. Most of these dismissals cited serious non-compliance with contractual obligations (paragraph 7 of section 160 of the Labour Code), a cause for termination of contract which deprives the employee of legal compensation in lieu of prior notice of dismissal and of an indemnity for length of service. The complainants consider that the failure to meet the objectives set in the contract of employment can be attributed not to negligence or professional fault by the dismissed workers, but rather to the change in the market situation for the sale of social benefits services, which itself resulted from the application of new rules for transfers imposed by the AFP Superintendency in circulars Nos. 998 and 999. The change in the market conditions for social benefits services constitutes, in the case of AFP workers, one of the grounds for termination of contract at the initiative of the employer, as stipulated in section 161 of the Labour Code. These grounds were not invoked by the AFPs because in so doing they would have been obliged to pay each dismissed worker compensation in lieu of prior notice of dismissal and a length-of-service indemnity. By issuing circulars Nos. 998 and 999 in exercise of its statutory authority, the administrative authority has deregulated and made more flexible the rules governing the sale of social benefits services. The AFPs used these circulars to carry out their own rationalization and modernization. They adapted their staffing levels to meet the market demand by dismissing thousands of workers, a dismissal they justified on contract termination grounds which deprived the dismissed workers of their entitlement to compensation in lieu of prior notice and the length-of-service indemnity. The labour courts now have before them thousands of complaints of unfair dismissal. For its part, the administrative authority has denied any responsibility in the affair, asserting that it acted in its area of competence and that the measures taken were indispensable given the high number of cases of fraud committed by AFP workers to receive commissions for the sale of social benefits services. Despite the dismissal of thousands of AFP workers, the fees charged by the AFPs for the management of workers' individual accounts have not dropped. The improprieties committed by AFP workers to which the administrative authority refers are isolated cases which have never been referred to a criminal court. Lastly, according to the representation, the Chilean Government should stop applying its policy of deregulation and labour market flexibility, which has led to widespread casualization of employment.
B. The Government's observations
16. In its first letter dated 9 April 1999 the Government sent a technical note from the AFP Superintendency in response to the representation. According to the Superintendency, the new pension system is based on the principle of individual funding and is basically different from the traditional distribution system. Private fund management companies participate directly in the system. They have the task of investing accumulated resources in the workers' pension funds: there is thus undeniably a profit motive for the companies. While it is based on principles which are different from those underpinning traditional distribution systems, the new pension system is designed to ensure for those who leave the active workforce pensions which are more fair and which are decent. As regards the allegations concerning the mass dismissal of 13,000 workers from AFPs as a result of the adoption of circulars Nos. 998 and 999, the Superintendency states that these two circulars do not deal with the same subject. Circular No. 998 defines the administrative formalities required for a transfer to be carried out, while circular No. 999 establishes a mandatory examination on the basic characteristics of the new pension system for any sales agents wishing to begin working for AFPs as from 1 August 1998. Beginning in November 1997 the number of AFP sales personnel began to decline. This personnel, which was too large for the needs of the market, contributed to making the system more costly and thereby to increasing commissions at the affiliates' expense. Furthermore, the sales agents were engaged in cut-throat competition which drove them to commit improprieties to secure transfer orders. For all these reasons the management companies restructured, and some sought to merge so as to cut back certain costs and reduce their sales personnel to the bare minimum. The institution of new administrative formalities for transfer operations clearly led to a considerable drop in the number of transfer orders and consequently to a decline in the income of the sales agents, but the situation has since stabilized and the sales agents who remained in the system now are benefiting from an increase in their productivity.
17. In another communication dated 12 May 1999 the Government presents its observations on the following points:
(a) Employers' contributions to insurance funding: In the new pension system wage-earners themselves finance the benefits they will receive once they are no longer contributors. Nonetheless, employers take part in the funding, on the one hand, through a percentage increase in wages which they granted in 1980 and which was equivalent to the amount of contributions and, on the other, through agreed deposits (depositos convenidos). These deposits are amounts which may be negotiated individually or collectively by the wage-earner(s) and the employer and which are deposited by the employer in the worker's account (since 1992 the amount of such deposits has been constantly on the rise).
(b) Participation by the public authorities in funding: Faced with the crisis plaguing the former pension system, the State delegated the administration of the old-age insurance branch to private companies (the AFPs) while maintaining a good deal of control over these companies through the AFP Superintendency. Legislative Decree No. 3500 also provides for state participation in resource capitalization, in so far as the State on the one hand guarantees a minimum pension for members when they have not accumulated the required amounts in their individual accounts to receive a pension or when an AFP goes bankrupt, and on the other issues and ensures the payment of accrued benefit bonds (bonos de reconocimiento), which correspond to the contributions made by the workers under the former pension system, plus an annual interest of 4 per cent.
(c) Management of the insurance: The individual funding scheme set up in 1980 assigns the management of the pension funds to the AFPs which, in exchange for efficient management, receive a commission paid by the affiliates. The profit-making nature of this private management encouraged competition between the various AFPs, which sought to attract members by offering better service, greater yield on investment and lower operating costs. In recent years measures have been taken to strengthen the transparency of the information provided to members concerning the profitability of each pension fund and the commissions charged by each AFP, so that the members are properly informed and are able to choose the one which will best manage their accounts. Workers or their representative organizations may legally set up their own AFPs (section 220 of the Labour Code) so as to have direct control over the management of their accumulated funds, and may provide in the internal regulations of their AFPs that the fund's profits shall be redistributed to the workers who are shareholders, in the form of social benefits. Under this provision, trade unions and occupational organizations have established five AFPs (Aporta SA, Future SA, Magister SA, Previpan SA and Fomenta SA). The equity of two (Aporta SA and Fomenta SA) is still entirely held by workers' organizations. Thus, even if the AFPs pursue the profit motive in their capacity as limited-liability companies, some AFPs have a great deal of participation on the part of workers or their representative organizations.
(d) Participation by insured members in the administration of the insurance institutions: Legislative Decree No. 3500 does not provide for any mandatory mechanism for the direct participation of workers in the management of the funds administered by the AFPs to which they are affiliated. However, it does provide for the right of each worker to become an affiliate of the AFP whose management suits him or her best, and to transfer from one AFP to another as often as he or she sees fit. Faced with the financial and administrative problems which beset the traditional distribution system, and in order to protect the workers' pension funds and offer them decent pensions, the Government of Chile set up a private pension administration system financed through an individual funding scheme, supervised by the State. There are currently eight AFPs with a total, as at 28 February 1999, of $31,029,000,000 in their pension funds.
(e) The situation of AFP sales agents: The AFPs found out that the cut-throat competition to attract new members had not made it possible to reduce the amount of the commissions charged to their members, but it had increased their operating costs. Those costs stemmed to a large extent from the excessively high number of transfer orders registered (1,574,189 transfers for 3,296,361 contributing members), which itself resulted from the improper practices used by the sales agents. The system thus had to be restructured. The restructuring was carried out through sales staff cutbacks and mergers between AFPs. These mergers and their repercussions on the labour market have no direct link with circulars Nos. 998 and 999 adopted by the AFP Superintendency.
(f) Other information: The Government notes that the complainants neglected to mention the advantages of the new system. Pensions accorded to workers under the new system are on average 40 per cent higher than those given under the previous one. What is more, while the funds managed by the AFPs and invested in the financial market are subject to market fluctuations, by law they must be invested according to certain profitability and security criteria so as to minimize the risk of fluctuations. In actual fact, since the system was set up the funds' rate of return has exceeded 11 per cent per year. Taking into consideration the negative repercussions of the 1998 stock market slump on pension funds, the Government proposed a Bill aimed at establishing a second fund, the resources of which would be placed exclusively in fixed-rate investments. This second fund would reduce the fluctuation risks of the investment portfolio. As regards the high administrative costs of the system, the Government states that, contrary to the trade unions' allegations, such costs do not represent 30 per cent of the workers' contributions, as that percentage includes the cost of invalidity and survivors' insurance as well. The average commission charged by AFPs is 2.7 per cent, and another 1 per cent must be subtracted for the cost of the insurance. Lastly, the debt for social security contributions is not $300 million, as asserted by the trade unions, but $171,956,000, and the creditor AFPs have already instigated legal action for recovery.
18. In a new communication dated 21 July 1999 the Government sent the reply of the heads of the Aporta-Fomenta, Habitat, Santa Maria and Provida AFPs to the allegations submitted by the trade unions. According to them, the imperfections of the old social security system led to its being radically overhauled. The system was costly. It did not fulfil its objectives, especially considreing the significant portion of national income that was allocated to it. It was discriminatory and unfair in redistributing this income among the population covered. And it was inadequate and inappropriate in the protection it afforded much of the population. The system had also run into a serious financial crisis which made a complete overhaul necessary. The pension scheme had undergone a serious deterioration in the contributor-beneficiary ratio owing to demographics, an increase in life expectancy and worker fraud in the payment of contributions. All of this led to a reform of the social security system which has taken it further away from conventional social security criteria and thus also from the early and still relevant ILO Conventions. The main difference between the Chilean legislation (Legislative Decree No. 3500) and the relevant ILO Conventions resides in the legal nature of the entities assigned the task of managing the pension funds and the contributors' participation in the administration of the funds. As regards the legal nature of the entities assigned the task of managing the system's resources, only operational management is carried out by the private entities (AFPs). The new pension scheme is still a mandatory public system established by law. The administration of this system is the responsibility of the State, which has reserved to itself three basic functions: a standard-setting role, supervision and control of those involved in the system (mainly the AFPs), and responsibility for ensuring the effective operation of the new system for the affiliates. The effective operation and transparency of the current system are a result of the private management of resources and the workers' freedom to choose, which are basic elements in a competitive model which strives to be efficient. As regards the absence of solidarity in the system to which the complainant organizations refer, while the system is based on individual funding it still has certain elements of solidarity in it. For example, the invalidity and survivors' insurance operates on the basis of a distribution system financed by the contributions of all affiliates of a given AFP; their contributions finance the invalidity and survivors' pensions of claimants. The State also finances minimum pensions by using resources from tax revenues. A third element of solidarity in the system is that the commissions charged by AFPs are proportional to the remuneration of the contributors. As regards the absence of participation by those insured in the administration of the funds, the AFP directors mentioned above consider that the new pension system includes no requirement for workers to have representatives, in so far as the law permits them to exercise a number of prerogatives directly, the most important of which is to change their AFPs. Workers who are not content with the administration of their AFP may transfer their accounts and become members of another whose administration suits them better. It is particularly easy to accept private management within the pension system at this point, as the traditional pension model is currently undergoing a crisis throughout the world, regardless of who runs it. In the system of individual funding, private management and freedom of choice are elements which make it possible for the system as a whole to be efficient. The problem is not so much one of determining who administers the system as it is one of determining who administers it best. As regards the other disadvantages of the system denounced by the trade unions (vulnerability to market fluctuations, high administrative costs, tendency to form monopolies and an insufficient supervisory system) and the situation of AFP sales agents, the observations presented by the AFP directors mentioned above are the same as those presented by the Government and the AFP Superintendency in the first two communications. In conclusion, the directors of the Aporta-Fomenta, Habitat, Santa Maria and Provida AFPs recognize that Legislative Decree No. 3500 does not make it possible to give effect to certain provisions of the relevant ILO Conventions. That should not be a cause of concern, however; rather, it should lead to some thought being given to the need, 60 years after their adoption, to revise certain postulates of these Conventions which would appear to have been made into inviolable principles. After some initial hesitation, Chilean workers, for their part, have subscribed to the new pension scheme, as can be seen from the establishment of AFPs which they themselves own.
C. The Committee's conclusions
Prior examination of the application of Conventions Nos. 35 to 38 by ILO supervisory bodies
19. The Committee notes that since the establishment of the new pension system in 1980, the application by Chile of Conventions Nos. 35 to 38 has been the subject of numerous commentaries on the part of ILO supervisory bodies. At its November 1986 session the Governing Body examined a representation presented by the National Trade Union Coordination Council alleging that the Government of Chile had failed to give effect, inter alia, to Conventions Nos. 35, 37 and 38. In its conclusions (Endnote_5) the Committee which was assigned the task of examining that representation requested the Government to take the measures necessary to implement its recommendations and to keep the Committee of Experts on the Application of Conventions and Recommendations informed by means of the reports communicated under article 22 of the ILO Constitution. Subsequently, the Committee of Experts in numerous observations raised several points regarding the private pension system introduced by the Government in 1980 which, in the Committee's view, were seen to be incompatible with some of the provisions of Conventions Nos. 35 to 38. In addition, the Conference Committee on the Application of Standards also examined the application of the abovementioned Conventions in 1987, 1992, 1993 and 1995. In 1995 it recommended that the Government attentively examine the recommendations of the Committee of Experts for the purpose of bringing the new pension system into line with the Conventions. Lastly, at its March 1999 session the Governing Body examined a representation presented by the College of Teachers of Chile A.G. alleging non-observance by the Government of Chile of Conventions Nos. 35 and 37. In its conclusions (Endnote_6) the Committee which was assigned the task of examining that representation stated that it was concerned about the grave consequences that non-payment of social security contributions has on workers' rights, especially with respect to pensions, and insisted that the competent services carry out their functions, strengthen their supervisory activities and impose and strictly apply appropriate sanctions so as to avoid the non-payment of contributions in the future.
20. The Committee notes that the present representation addresses the principle of conformity of the private social security administration scheme, instituted in 1980 by Legislative Decree No. 3500, and more specifically the private management of pension funds, with Conventions Nos. 35 to 38. The Committee has taken note of the detailed information provided on the questions raised by the representation and proposes to deal solely with the aspects covered by the application of the provisions of the Conventions in question. The general comments made by the trade unions and the Government will be taken into consideration only in so far as they concern the application of a specific provision of one of these Conventions.
21. The Committee also notes that the Government provides information on the nature of the system as well as on employers' contributions to insurance funding and on the participation of the public authorities in the formation of insurance resources. In so far as the complainant organizations refer in their allegations neither to these points nor to the provisions of the Conventions which deal with them, this information will not be taken into account in the present report. On the other hand, the Committee considers it necessary for the Committee of Experts on the Application of Conventions and Recommendations to examine it, as it has already raised these points in numerous observations.
22. As regards the situation of AFP sales agents, the complainant trade unions contest the grounds invoked by the AFPs to carry out the mass dismissal of 13,000 social benefits sales agents, which grounds deprived these workers of certain indemnities. The Government for its part states that these dismissals result from the restructuring of the system. This restructuring, which was necessary to stop certain improper practices used by the abovementioned sales agents and to reduce the system's operating costs, involved a reduction of staff. The Committee considers that it is not in a position to examine the situation of these workers, as the situation does not concern the application of the Conventions of which non-observance is alleged, nor does it appear to concern the application of any other Convention ratified by Chile.
23. The other allegations of the complainants mainly concern the following questions: (a) management of the pension funds; (b) participation by insured persons in the administration of the system; and (c) the system for the supervision of social security payments.
(a) Private management of pension funds
24. The Committee recalls that under Article 10, paragraph 1, of Conventions Nos. 35 and 36 and Article 11, paragraph 1, of Conventions Nos. 37 and 38, "the insurance scheme shall be administered by institutions founded by the public authorities and not conducted with a view to profit, or by state insurance funds".
25. The Committee observes that the pension system set up in 1980 by Legislative Decree No. 3500 is based on an individual funding scheme, with the management entrusted to pension fund management companies (AFPs). These are set up as profit-making, private, limited-liability companies which is not contemplated in the abovementioned provisions of the Conventions. The AFPs receive their members' contributions, which they transfer into their individual funding accounts, and invest the accumulated total in their pension funds according to profitability and security criteria which are established by law. In exchange for this management, the AFPs receive a commission which is charged directly to the individual account of each member. The State supervises the AFPs through a public authority, the AFP Superintendency, which guarantees for affiliates the effective operation of the system.
26. The Committee considers that, in order to give effect to the provisions of Article 10, paragraph 1, of Conventions Nos. 35 and 36 and of Article 11, paragraph 1, of Conventions Nos. 37 and 38, the system would have to be managed non-profit-making entities.
27. The Committee notes, however, that according to the information provided by the Government trade unions and occupational organizations are legally authorized to establish AFPs, with all or part of their equity held by them. When, through their occupational organizations, workers are the sole owners of an AFP, the profits from the management of the fund are wholly redistributed to them. The Committee notes that according to paragraph 2 of Article 10 of Conventions Nos. 35 and 36 and to paragraph 2 of Article 11 of Conventions Nos. 37 and 38, which specify that "national laws or regulations may also entrust (the fund's) administration to institutions founded on the initiative of the parties concerned or of their organizations and duly approved by the public authorities", the occupational organizations took part in the establishment of AFPs (see the information sent by the Government, paragraph 17(c), above). The Committee further considers that the Government should be requested in its next report on the application of Conventions to provide detailed information on: the number of AFPs whose equity is owned in part or wholly by trade unions or workers' organizations in relation to the overall number of AFPs; the percentage of the capital held by such organizations; the number of workers concerned in relation to the overall number of workers covered by the new pension system; the establishment of new AFPs; and, if applicable, any new measure taken to encourage the establishment by workers or their occupational organizations of new AFPs.
(b) Participation of insured persons in the administration of AFPs
28. The Committee recalls that according to Article 10, paragraph 4, of Conventions Nos. 35 and 36 arid Article 11, paragraph 4, of Conventions Nos. 37 and 38, "representatives of the insured persons shall participate in the management of insurance institutions under conditions to be determined by national laws or regulations".
29. The Committee notes that the Government does not contest the allegations of the complainant trade unions according to which neither workers nor their trade union organizations are associated in the management of the AFPs system. The Government confirms that there is no mandatory mechanism providing for the involvement of members in the administration and management of the pension funds administered by their AFPs. The private system makes it possible for workers to participate in the management of AFPs when they acquire a percentage of the companies' equity, which allows them to exercise all the rights conferred by law to shareholders. Furthermore, the legislation gives the fund members the right to transfer from one AFP to another. Members who disagree with the management of their AFPs may become members of other AFPs whose management suits them better.
30. The Committee notes that workers or their occupational organizations have the possibility of establishing AFPs or of acquiring part of their equity. However, it notes that in either case their participation in the management of the insurance institution derives not from their status as insured persons or representatives thereof but from their quality as shareholders. The question remains of participation of insured persons of other AFPs in the management of the system, in so far as such participation is not mentioned in the legislation in force. The Committee points out that workers or their representatives hold equity in a limited number of AFPs (see paragraph 17(c), above), although according to the information provided by the Government the tendency is not to establish new AFPs but rather to reduce their number as a result of mergers. The Committee considers furthermore that the possibility offered to affiliates to transfer and thus sanction the fund's management cannot be considered as participation by insured persons in the management of their insurance institution in the meaning of the Convention. In these circumstances, the Committee considers that the national law and practice do not guarantee the participation of insured persons in the management of the system.
(c) Control of the system: Problem of arrears in social security contributions
31. In their communication, the complainant trade unions refer to the inefficiency of the system in verifying compliance with social security standards and with the legal mechanisms for the recovery of workers' contributions in the courts. The employers declare the contributions of their workers without paying them over to the competent management body, and this has resulted in a social security contributions debt which, according to the complainants, has reached $300 million. The Government for its part states that this debt amounts to $171,956,000 and that the AFPs to which it is owed have already begun legal action for its recovery.
32. The Committee considers that the effective payment of social security contributions is fundamental to the effective operation of the pension system. It recalls that the problem of effective payment of social security contributions by the employers to the competent pension bodies was already examined in 1999 during consideration of the representation submitted by the College of Teachers of Chile A.G. Although the situation concerned specifically the contributions of teaching staff, the Committee considers it useful to recall some of the conclusions reached by the Committee appointed to consider that representation,(Endnote_7) in particular as it relates to the responsibility of the State in the administrative and financial supervision of insurance management stemming from Article 10, paragraph 5, of Conventions Nos. 35 and 36 and Article 11, paragraph 5, of Conventions Nos. 37 and 38. (Endnote_8) The State cannot dissociate itself from the results of the management of insurance which it entrusts to independent institutions, and must reserve the right to supervise them. The State is responsible for full compliance, in conformity with the laWi with the provisions governing the insurance system, including those relating to the payment of contributions.
33. The Committee considers that the amount of unpaid social security contributions reported by the Government must not be underestimated. Consequently, it insists that the competent A services should exercise and strengthen their supervisory activities over employers and that dissuasive penalties should be imposed so as to avoid new cases of non-payment of social security contributions which, by increasing the associated debt, could have repercussions on the viability and credibility of the system. The Government should be invited to specify in its next reports on the application of the Conventions the amount of contributions still due and to provide information on the outcome of the recovery procedures initiated in the courts. (Endnote_9)
34. In conclusion, the Committee notes that, since the establishment of the new pension system in 1980 by Legislative Decree No. 3500, a number of provisions of Conventions Nos. 35 to 38 have not been applied. The ILO supervisory bodies have for many years requested the Government to take the appropriate measures to modify the abovementioned Legislative Decree. In this connection, the Committee suggests that the Government consider the possibility of requesting the technical assistance of the Office, as already suggested by the Committee of Experts on the Application of Conventions and Recommendations and the Committee on Standards of the International Labour Conference, so as to examine in what way the national legislation and practice can give effect to these Conventions.
35. The Committee also wishes to recall the decision taken by the Governing Body at its 265th Session (March 1996) in which it invited States Parties to Conventions Nos. 35 to 40 to consider the possibility of ratifying the Invalidity, Old-Age and Survivors' Benefits Convention, 1967 (No. 128) and, if applicable, at the same time to denounce Conventions Nos. 35 to 40, considering that the Governing Body decided to shelve with immediate effect these last Conventions. The Committee considers that the Government should be invited to provide information on measures taken to follow up on this decision by the Governing Body.
The Committee's recommendations
36. The Committee recommends that the Governing Body -
(a) adopt the present report;
(b) request the Government of Chile, in the light of the conclusions in paragraphs 18 to 35 of the report and the observations made for many years by the Committee of Experts, to take the measures necessary so that:
(i) pension insurance is managed by non-profit institutions, in accordance with the provisions of Conventions Nos. 35 and 36 (Article 10, paragraph 1) and Conventions Nos. 37 and 38 (Article 11, paragraph 1), except for cases in which the administration is entrusted to institutions founded on the initiative of the parties concerned or their organizations and duly approved by the public authorities, in accordance with Conventions Nos. 35 and 36 (Article 10, paragraph 2) and Conventions Nos. 37 and 38 (Article 11, paragraph 2);
(ii) representatives of the insured persons participate in the management of the system under conditions laid down by the national legislation, in accordance with the provisions of Conventions Nos. 35 and 36 (Article 10, paragraph 4) and Conventions Nos. 37 and 38 (Article 11, paragraph 4);
(iii) the competent services carry out and strengthen their supervision of employers and that appropriate sanctions are imposed so as to avoid new cases of non-payment of social security contributions;
(c) invite the Government in the next reports that it is due to present under article 22 of the ILO Constitution to provide complete information on the measures taken to give effect to the recommendations made in the paragraphs above, and the information requested in paragraphs 27, 33 and in particular in paragraph 35 of the conclusions of the present report, so as to permit the Committee of Experts on the Application of Conventions and Recommendations to continue considering the problems raised by the application of the Conventions;
(d) declare closed the procedure initiated before the Governing Body as a result of the representation made by the above national trade unions of workers of pension fund management companies concerning the application by Chile of Conventions Nos. 35 to 38.
Geneva, 28 March 2000.
(Signed)
Mr. V. Rodriguez Cedeno, Chairperson.
Mr. D. C. L. Funes de Rioja.
Mr. J. O. Miranda Oliveira.
Point for decision: Paragraph 36.
Endnote 1
Conventions Nos. 35, 36, 37 and 38, ratified on 18 October 1935.
Endnote 2
See Official Bulletin, Vol. LXIV, 1981, Series A, No. 1, pp. 93-95.
Endnote 3
Document GB.273/15/4 and minutes of the 273rd Session, document GB.273/PV(Rev.), p. VI/I.
Endnote 4
Document GB.276/16/2 and minutes of the 276th Session, document GB.276/PV(Rev.).
Endnote 5
Document GB.234/23/28.
Endnote 6
Document GB.274/16/4.
Endnote 7
Document GB.274/16/4, para. 26.
Endnote 8
According to these provisions, "self-governing insurance institutions shall be under the administrative and financial supervision of the public authorities".
Endnote 9
See the observation concerning the application of Convention No. 35 made in 1999 by the Committee of Experts on the Application of Conventions and Recommendations.