What is private pension?
Private pension , also known as supplementary pension, is a type of investment suitable for those with medium and long-term goals.
It receives this name because it works as an interesting alternative for those who want to complement the retirement they receive from the government, paid by the National Institute of Social Security ( INSS ) , or who want to guarantee a comfortable financial future without depending on public pensions.
This type of investment became even more interesting after the Social Security Reform, which changed the benefit rules and made it more difficult for Brazilians to retire.
Many people have already realized that they will not be able to count only on the income paid by the government, especially since the population is aging and there are fewer active formal workers contributing to pay the benefit of those who are retired today. Economists already warn that the new rules will not be enough to balance the government’s accounts and reduce the Social Security gap, which should lead us to a new reform in a few years.
Due to the atmosphere of uncertainty, the consultancy Mercer estimated in 2019 that there will be a 25% jump in the number of Brazilians who invest in supplementary retirement in the next 5 years – an increase from 16 to 20 million people.
And this market growth can already be observed. In the 2nd half of that year, the open complementary pension plan had 11.2 million contributors. In the first half of 2020, there were already 13.5 million: 2.3 million more people.
Open and closed pension
Although the private pension plan is not managed by the government, it is regulated and supervised by the Superintendence of Private Insurance ( Susep ) , a federal body that ends up giving more security to Brazilians who want to have a plan.
Closed supplementary pension , also known as pension fund, is offered exclusively by some companies to their employees and also by professional associations to their associates, as is the case of lawyers, for example.
Open pension , or individual pension , is available to anyone who wants to get a plan or any company that wants to offer pension as a benefit to employees. To hire, you need to look for specific financial institutions such as banks, investment brokers and independent pension fund managers, such as Onze .
Pension funds in 2020 accounted for 13% of GDP – around BRL 1 trillion, according to data from the Brazilian Association of Closed Pension Entities ( Abrapp ) . The reserves of participants in open private pension plans also reached BRL 1 trillion in 2020, according to data from FenaPrevi (National Federation of Private Pension and Life).
How does open pension work?
Anyone can make a pension plan and invest in it over the years to redeem it later on and have a more comfortable financial life. There is no mandatory frequency of contributions, that is, the investor can put as much money as he wants and whenever he wants. Some institutions ask for a minimum entry fee into the plan, but there are also those that do not make this type of requirement.
Basically, the investor hires a private pension plan on an investment platform, or directly with banks, brokerages and managers, and starts making contributions. That money goes into a fund where it will earn interest over time .
Investment in private pension plans is divided into two stages: accumulation and redemption. In the first, the plan holder makes contributions and has the money capitalized. In the second step, he decides how to redeem the amount and supplement his income.
Despite the name, private pension money does not necessarily need to be redeemed only when you retire. It is possible to use it to carry out short and medium term plans, such as buying your own house, saving money for your child or planning a trip.
However, it is good to keep in mind that leaving the money yielding for a longer time is a more advantageous decision: in addition to the plan holder earning more with the power of compound interest, he has the chance to pay less taxes, if he chooses the regressive regime.
When to invest in pensions
The Brazilians Financial Stress survey, conducted by Onze with 5,000 people, revealed that most Brazilians are pessimistic about public retirement. About 61% disagree that they will have a comfortable retirement and 54% totally or partially agree that there will be a new pension reform before they retire.
And yet, 43% of people are doing nothing to prepare for retirement and 28% are relying on Social Security alone.
Therefore, answering the question in this topic, there are no rules about the right age to start investing in private pensions, but the sooner the better.
If you want to ensure your children’s financial security, for example, know that it is possible to make a child welfare plan . In this case, time will count a lot in your favor: imagine that you close the plan when your child is only 5 years old and make monthly contributions until he turns 18.
In addition to having 13 years of income, with the advantage of interest on interest, you may have a tax advantage there. If you choose the regressive taxation regime, when your child reaches the age of majority, the Income Tax rate to be paid will be only 10% – the lowest in this type of regime.
With that money, he will be able to do an exchange program, pay for college, buy his own car, down payment on an apartment or continue investing in private pension to get more income in the future.
Remembering that, despite the fact that time plays in favor of investments, private pension is also an investment for adults or elderly people who intend to increase their reserves later on or make a short or medium term dream come true. After all, the best time to start planning for the future is now. The important thing is to start.
Is it worth closing a private pension plan?
If this question were asked a few years ago, most investment specialists would probably say that it is not worth closing a private pension plan, as the rates would be high, the investments too rigid and the yields not very interesting.
But let’s start at the beginning. There are some rules for the composition of pension funds. One of them is the impediment of investing 100% of the resources in variable income assets, such as shares, when the target audience is made up of investors in general (non-qualified or professional).
For a long time, these norms were a barrier for pension fund managers, who found it difficult to diversify their portfolios and outline good long-term return strategies, especially in times of low Selic rates, as is the case today.
In recent years, however, the rules have become more flexible. Resolution No. 4,769/2019 , for example, authorizes the investment of up to 20% of the pension fund’s resources in foreign investment funds – a way to further diversify assets, dilute risks and boost returns.
This flexibility made private pensions a more attractive product and drew the attention of managers and investors. With the growth of the pension market, Brazilians now have access to funds with lower rates and more robust strategies.
In any case, it is good to keep in mind that it is necessary to research the best options for private pension plans and always look for qualified managers. At these times, a good background will make all the difference in your future.
Proof of this are the numbers found in Ranking Eleven of the Largest Provident Funds. In the accumulated of 2020, only 3 of the 10 largest fixed income pension funds in the country surpassed the CDI for the year, which was 2.77%. Among the 10 largest multimarket funds, 6 beat the CDI, but only 1 surpassed the IHFA (5.51%), the market benchmark for multimarket investment funds (including non-pension funds).
Advantages of private pension
You will better understand the advantages below throughout the text. But it is good to keep in mind the positive aspects of this type of investment.
flexible taxation
In private pension, it is possible to choose the best form of taxation of the plan. The progressive insurance, which uses the same table used for salaries, is interesting for those who want short-term investments or fit into a minimum income tax rate.
The regressive regime, which implies lower income tax rates over the years, is good for long-term investments – as the tax decreases over time.
Tax benefits
With social security, it is possible to reach an income tax rate of only 10%, while in non-pension funds and other investments the lowest possible rate is 15%. For this, the investor must, when defining his plan, choose the IR regressive table and keep the investments for at least 10 years before redeeming them.
In addition, holders of a PGBL plan can deduct up to 12% of gross annual income in the form of complete income tax return, which also allows the deferral of tax payment.
Does not have the incidence of eat-quotas
The quota-eater is a semiannual anticipation of the Income Tax charged on non-pension investment funds. In pension plans, the tax is paid only on redemption , which allows the deferral of this payment for many years, generating a very positive effect on the net return on income tax, which is what really matters.
Good investment for estate succession
In the event of the death of a VGBL plan holder, the money is transferred to the plan beneficiaries or legal heirs without going through probate.
Free and immediate portability
If the investor is dissatisfied with the fund’s performance or with the fees charged, or even wants to migrate to a fund that is more suited to his profile and objectives, he can request plan portability and migrate the resources to another pension fund without having to ask for redemption. The change is usually free.
Liquidity
Contrary to what one imagines, in private pension the money invested is not trapped. That is, the withdrawal request can be made whenever the taxpayer wishes, after the grace period has passed, which is normally 60 days between one redemption and another.
Remembering that you need to be aware of the chosen tax regime. If it’s the regressive table, the less time the money stays in the fund, the higher the applicable income tax rate.
Flexibility between redemption or income
When the accumulation phase ends and the redemption phase begins, it is possible to withdraw the money at once, in parts or choose to receive an income over the years, as a form of insurance.
It’s a democratic investment
There is no minimum or maximum age to invest in private pension plans – both children and the elderly are accepted in the plans. In addition, it is possible to find plans without rules for minimum contribution amounts or frequency of contributions.
Investment for every investor profile
In the private pension market, there are funds that cater to all investor profiles: conservative, moderate and aggressive. Each with their own risk tolerance.
direct debit
In general, plan holders can define a monthly amount to be automatically debited from the private pension account. The option is interesting for those who have difficulty saving every month or end up forgetting to invest part of their salary.
In the case of corporate pension plans, the contribution is automatically deducted from the salary of the employee who joined the plan.
Has the security of a manager
Those who invest in private pensions do not need to spend their time monitoring the market and investments on a daily basis, nor deciding which assets to allocate their money to, as this is the main role of the fund manager.
The format is very suitable for those who do not yet have much experience with investments and/or do not have or do not want to spend time with this purpose. Through pension funds, it is possible to invest, for example, in public and private securities, in shares of large Brazilian and international companies, currencies and other more complex investments.
Remembering, however, that it is necessary to look for a fund that has a profile and strategy compatible with its objectives.
Is pension risky?
This is a question that crosses the mind of any investor who intends to enter into a private retirement plan. The doubt arises especially because the pension plan is not guaranteed by the FGC – a credit guarantee fund that reimburses investors in the event of bankruptcy of financial institutions.
Like any investment, private pensions have some risks , as funds invest in products that can appreciate or devalue over time, such as stocks. However, in general, the risks are lower than those found in common investment funds. There are some reasons.
Pension funds are offered by consolidated financial institutions in the market and authorized to operate by the CVM (Securities Commission) and Anbima (Brazilian Association of Financial Market Entities). In addition, private pension plans have operating rules that end up protecting investors. Behind the plans there is always a manager, an administrator, an insurance company and a custodian, which is the bank where the money is allocated.
What is a provident fund?
A survey conducted by Onze with more than 5,000 pension plan holders showed that 36% of respondents do not know what type of pension fund they invest in, 55% do not know how much they pay in management fees and 56.3% do not know whether they are earning or losing money.
This information is quite alarming because it shows that many people may be investing their money badly and putting their dreamed of comfortable retirement at risk. Therefore, first of all, it is important to know how pension funds work, what their fees are and what income to expect from them.
Basically, we can say that resources contributed to social security by plan holders are pooled and invested through investment funds, which, in this case, are called pension funds.
The fund manager is responsible for deciding which assets the resources will be invested in, seeking the best risk-return ratio for clients. There are funds with different profiles, ranging from the most to the least aggressive.
Fixed income funds , for example, are considered conservative and recommended for those who don’t want to take too many risks. Multimarket funds, on the other hand, vary between moderate and aggressive, being indicated for those who are willing to take a greater risk in exchange for a greater possibility of earnings.
Equity funds are the most aggressive in this market. In them, investors agree to take even more risk in exchange for a higher possibility of earnings. Some examples of assets in which the funds mentioned above invest are:
Most pension funds have the CDI ( Interbank Deposit Certificate ) as their reference rate, which is always very close to the Selic.
Pension fund fees
Any pension fund charges some fees for managing resources, but you must be very careful not to close plans with undue or excessively high rates.
- Administration fee
As the name implies, it is a fee paid to the fund manager for portfolio management work. It is a fee reported on an annual basis that is levied on the fund’s equity, but is charged daily to investors. With very few exceptions, every fund will charge a management fee, but that doesn’t mean you should accept any amount.
In the case of fixed income funds, the management fee usually varies between 0.8% and 1.5% per year, and it is already quite difficult for a manager to justify charging close to the top of this range.
In multimarket funds, the rate is usually between 1% and 2% per year. Equity funds are more expensive and usually charge between 2% and 3% per year in management fees.
- loading rate
The loading fee, also known as the entry fee, is a discounted percentage of all contributions made by the investor – a charge that can reach 6% in some cases. Currently, this fee is considered abusive and, therefore, is only charged in some older pension plans. With so many options on the market, it makes no sense to invest in a fund that charges a loading fee ..
- Exit fee
Exit fee is also common only in old plans. Basically, the investor pays when he decides to redeem all the money in the fund before retirement or requests the portability of the plan to another institution . As with the loading fee, it is not recommended to invest in funds with an exit fee.
- performance fee
Mostly charged in multimarket and stock funds and, in some cases, also in fixed income funds. The performance fee applies only to the fund’s return that exceeds the reference indicator – which is usually the CDI or Ibovespa.
What does a private pension fund manager do?
We call independent managers institutions that manage pension funds autonomously, without interference from large banks or other financial institutions. Simply put, we can say that they have specialists dedicated to ensuring that the shareholders’ money is allocated to the most interesting and profitable investments on the market.
Today, around 90% of private pension money in Brazil is still allocated in large banks, but independent institutions have gained space in the market. According to Economática consultancy, in 2007 there were only 45 independent fund managers in Brazil. In 2020 there were already more than 120.
It is worth remembering that hiring a pension plan with a manager is not always a guarantee of good returns and security. It is necessary to be very attentive to the credibility of the work offered, the experience of the specialists and the performance of the managed retirement funds before choosing with whom to close the investment.
Ever heard of corporate private pension?
Private corporate pension , or business, is offered by the companies themselves to their employees as a form of corporate benefit . Basically, the employee who wants to join the plan defines a percentage of the salary that will be allocated monthly to the pension plan. The money is deducted directly from the payroll and goes into a fund where it earns interest over time.
This is a way of helping workers to guarantee a more comfortable retirement, especially when the country’s public pension system is in crisis or is inefficient in meeting the needs of the population.
In the United States, where the private corporate pension, called 401 (k) , is very popular, more than half of the companies offer this benefit to employees. In total, more than 55 million workers enjoy this advantage.
In Brazil, this market is still not that big, but it is growing fast. The two types of corporate pension plans available to companies are:
Instituted plan
The company sponsors the employee’s plan by giving what we call a match . In other words, the employer contributes to the employee’s pension together with him. With a 100% match , for example, for every R$1 contributed by the employee to social security, the company contributes another R$1. It is possible to define the percentage of the match and which employees will be entitled to it.
Employees can withdraw money from the match when they leave the company or retire, as long as they meet the criteria established in the contract. Each employer decides its own vesting rules – which define how much time the employee must have in the plan to partially or fully withdraw the company’s contribution.
endorsed plan
The company offers the benefit to employees, but it does not match . Even so, the benefit is advantageous to the employee, as he is encouraged to save, thanks to the payroll deduction, and invest efficiently. In this case, the employer has no cost to offer private pension.
The Most Desired Benefits survey for 2021, carried out by Onze with more than 2,000 workers, showed that social security is a desired benefit for strategic positions. In the group of people earning more than R$3,000, social security appears as the third benefit that respondents do not receive, but want to receive. In the group of people who earn more than R$ 6 thousand, she is in second place.