In 1997, Mexican social security
migrated from being a DB scheme to a
DC one. While in Chile the social
security change was structured by
providing a past service contribution
equivalent to the DB's liability as initial
balance, for historical and legal reasons
Mexico followed a different path. It
was decided to retain both schemes in
order to allow employees to choose
which plan would be best for them at
retirement.
Under the old system, the benefit
depends on the contribution record,
the retirement age and average salary
in the five years prior to retirement.
Contributions and benefits were
capped at ten times the minimum
wage average of five years prior to
retirement. Nevertheless, since
July 1997 this cap has been increased
to 15 times the minimum wage with
an additional annual increase of one
minimum wage until year 2007 when
the final cap will be 25.
At that time, it was believed that
the determination of the pension
benefit under the old law was still
going to consider the 10 times
minimum wage cap. It subsequently
became clear that the change in the
law would include the cap increase on
the salary considered for social security
purposes, irrespective of whether it
was going to be applied for benefits granted under the old law. The
resulting maximum pension is
significantly greater, a fact that has
several consequences on the actuarial
valuation process of private pension
plans:
Should the additional pension
formulas be modified to reflect the
mentioned increase on the salary cap
for social security purposes?
Should actuarial valuations
consider the cap increase over plans
whose benefit formula incorporate the
social security pension in any way?
Should companies in transition
from DB Plans to DC Plans reduce
their initial balance contribution?
The news contained in the
Newsbriefs section of The
Multinational is drawn from the News and Issues section of the Watson Wyatt website.
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