Pension systems

There are two general pension systems in Chile. The older system is administrated by an entity which has grouped the numerous Government pension funds and provides health, pension and certain other social security benefits. Employers must withhold and pay into the fund the employees’ contributions that are a fixed percentage of total remuneration. The pensions payable are set by the Government.

In 1980, a new system of private pension funds was established. From that date, employees who join the labor force are required to contribute to the private system. Other employees could elect to change to the private system before May 1, 1986.


Employees’ contributions to the private pension funds are also withheld from the monthly remunerations at a fixed percentage on remuneration up to 60 UF, readjusted according to the variation of the index of real remunerations determined by the National Statistic Institute between November of the penultimate year and November of the last year, for the year that will begin. The taxable cap readjusted as abovementioned, will be in force as from the first day of each year and will be determined by a resolution of the Superintendence of Pensions. As from January 1, 2011, the taxable cap for calculating the pension contributions will be of 66 UF (the UF is an index-linked unit that is equivalent to approximately US$45). The employee can elect to make additional contributions to the fund up to an amount equal to 66 UF a month. In addition, employers can make voluntary tax-free contributions to their employees' accounts.


Upon retirement, the employee can opt for a lump-sum payment, a pension or an interim combination of the two, all of which are based on the amounts the employee has contributed to the fund. The lump sum can only be used to purchase an annuity from an insurance company.


Contributions to pension plans

Contributions to either the Government or the private pension plans are made only by employees and self-employed individuals. Employee contributions are deductible from taxable income in computing personal income taxes due. Contributions to a pension plan are based on monthly as the indicated above.

Employers have no responsibility for pensions other than withholding and paying employees’ contributions.

Contributions to a Government plan depend on the activity; for example, the pension contributions rate of most employees in the private sector is about 22%.

Contributions to the private pension plans are at the rate of 10%, plus a variable commission established by each fund (currently about 3.5%). The pension fund must purchase disability and survivors' pension insurance from an insurance company. In addition, the employee can make voluntary contributions up to a total, as from January 1of 2011, of 66 UF a month, readjustable as indicated in the previous paragraphs and employers can make voluntary tax-free contributions.


Cost of health care benefits

Employees and self-employed individuals pay 7% on monthly remunerations up to a cap of 66 UF, as from January 1 of 2011, readjusted as indicated in the previous paragraphs, for health insurance. Employers are only required to withhold and pay the insurance.

If the employee is affiliated with one of the Government pension plans, the health insurance premium is collected by the pension plan and paid to the State Health Fund (Fondo Nacional de Salud - FONASA).

Employees affiliated with one of the private pension plans can elect to make their contributions either to FONASA or to a private health insurance company (Institución de Salud Previsional or ISAPRE). Most health plans cover up to 80% of medical and hospital costs.


Labor-related accident insurance

All employers must pay a 0.95% premium on remunerations capped, as from January 1 of 2011, at 66 UF a month, readjusted as indicated in the previous paragraphs, for labor-related accident insurance, (workmen’s compensation). According to the risk of the employer's activity, additional contributions at varying rates may be required up to a maximum of 3.4%. The rate can also decrease based on the employer’s track record.


Unemployment insurance.

As of October 1, 2002 a mandatory unemployment insurance has been established in favor of employees governed by the Labor Code. This insurance is financed with an obligatory contribution by the employee of 0.6% plus a mandatory contribution of the employer of 2.4%, both calculated on the base of the employee’s taxable income capped at 99 UF. This cap will be annually readjusted according to the index of real remunerations determined by the National Statistic Institute or by the index that substitutes it, between November of the penultimate year and November of the last year, for the year that will begin. The taxable cap readjusted as abovementioned, will be in force as from the first day of each year


Severance indemnity payments

Labor law provides for a severance indemnity payable to employees if they are dismissed for reasons other than serious misconduct. The benefit is equivalent to one month’s salary for each year of service, with a maximum of eleven months, and is based on the employee's most recent salary level up to a maximum of 90 UF a month (approximately US$4,110). However, individual or collective work contracts may provide for the payment of a higher amount. The employer must give the employee a justified reason for the dismissal. If the reason given is not satisfactorily proven before the Courts, depending on the circumstances, the severance payment may increase by 30% to 100%, depending on the reason given for the dismissal. The severance indemnity payment must be performed at the end of the labor relationship. Notwithstanding the above, the parties can agree to advance payments of amounts accrued. If the indemnity is not paid, employees can recourse to the Labor Courts, who can impose fines on the employer. The employee can also demand that the amounts due be increased up to 150%, when the employer does not pay the indemnity payment agreed in the termination of the working contract.

In the case of executives or people that are in sensitive positions, it is not necessary invoke a specific legal cause in order to terminate the work contract.

Additionally, the employee has the right to be informed at least thirty days in advance of the discharging or to receive a payment equivalent to one month´s salary.

In general, the severance payments are tax exempt for the employee and are deductible for the company.

Currently, the Labor Court can order the General Treasury to withhold from the employer’s tax returns an amount equivalent to the one due to the employee in a trial, to assure that the employee will receive the amounts determined in said trial.


Profit-sharing payments are required by law, unless the employee's labor contract specifically includes a different arrangement. If the contract is silent, the employer must pay the legally established profit sharing and can choose annually either of the following bases:

•               30% of taxable profits after deducting a 10% return on equity, allocated in proportion to the annual remuneration of each employee.

•               25% of each employee's annual remuneration, with a maximum mandatory profit sharing of 4.75 monthly minimum salaries for each employee, whether or not the employer has a profit and whatever its amount. The maximum amount payable to each employee under this alternative is approximately USD1,721 a year.

Mutually agreed profit sharing cannot be less favorable for the employee than the above alternatives.

Profit sharing is taxable to the employee and deductible for the employer.


Disability and survivor insurance 

As from July 2009, companies with more than 100 employees have begun to pay the cost of the disability and survivor insurance. Before the Pension Reform, this insurance was paid by the employees.

The companies that currently have less than 100 employees will have to pay this cost as from June 2011.