Occupational pension schemes
What are the main types of private pensions and retirement plans that are provided to a broad base of employees?
There are several types of private pensions and retirement plans for the employees, the most common type in Mexico is defined benefit, which is a pension plan where the company defines the remuneration that the employee will receive once he or she has retired, but in recent years, the use of hybrid or mixed plans has become more common.
A second type of private pension plan is defined contribution, where the employee has an individual account, and the contribution is free and according to what the employee accumulates, plus the contribution of the company, before he or she retires.
A third type of private plan pension are hybrid or mixed plans. These take into consideration the amount of the contributions made in the name of each employee, as well as the amount that the company defines as the remuneration that the employee will receive.
Are employers required to arrange or contribute to supplementary pension schemes for employees? What restrictions or prohibitions limit an employer’s ability to exclude certain employees from participation in broad-based retirement plans?
If the employer wants to keep all the tax benefits given for applying a private pension plan, it must offer the plan to all its employees, whether unionised or non-unionised; however, the employer can define general rules or conditions, such as the amount of the contributions made by each employee or the seniority in the employment.
Can plans require employees to work for a specified period to participate in the plan or become vested in benefits they have accrued?
Yes. In certain plans, the employer can impose certain conditions, such as the employee’s seniority in his or her job. In the event of an early withdrawal, the employee may not withdraw all of the amounts – only the part determined by the employer. The parties can freely agree to the rules of the plan; however, the only amounts that will always be respected or returned to the employee are those that are invested with money contributed by him or her.
What are the considerations regarding employees working permanently and temporarily overseas? Are they eligible to join or remain in a plan regulated in your jurisdiction?
Given that the employer sets the terms and conditions of the private pension plan, employees that work permanently or temporarily overseas may be able to participate. However, this may eventually cause tax problems as the benefits of the plan are not derived from the direct employment relationship; therefore, it may be considered as a taxable income.
Do employers and employees share in the financing of the benefits and are the benefits funded in a trust or other secure vehicle?
It depends on the type of plan. In a defined benefit plan, the company assumes the investment risks and the cost of the plan. In a defined contribution plan, the benefits for the employees will be the difference between the sum of the contributions and the diminished profits of the losses and the expenses of administration of the fund.
These plans are usually administered through trusts or open contracts in investment fund operators or brokerage firms. Usually, they invest in public debt or variable national income.
What rules apply to the level at which benefits are funded and what is the process for an employer to determine how much to fund a defined benefit pension plan annually?
The rules according to the plans are as follows.
- Defined contribution: the company delivers pre-established amounts or percentages to a determined investment fund. The benefits for the employees will be the difference between the sum of the contributions and the diminished profits of the losses and the administration expenses of the fund. The benefits depend on the accumulated balance in the individual account of each worker and can provide both.
- Defined benefit: the responsibility of the company ends with the liquidation of the benefits, and the retirement amounts are determined based on a structure established in the private pension plan. The investment risks and the cost of the plan are assumed by the company. The benefits are based on salary or years of service, or both.
- Hybrid or mixed: these involve a combination of variables of the two previous ones. The obligations of the company are not limited by the amount that it agrees to contribute to the fund; as it contracted a legal obligation, the company can make additional contributions if the assets are insufficient to cover its obligations. The benefits depend on the accumulated balance in the individual account of each worker and have a minimum retirement benefit guarantee.
Level of benefits
What are customary levels of benefits provided to employees participating in private plans?
They are gains of the contributed amounts and amounts that are not considered as taxable income. There are other private pension plans that allow for voluntary contributions.
Are there statutory provisions for the increase of pensions in payment and the revaluation of deferred pensions?
What pre-retirement death benefits are customarily provided to employees’ beneficiaries and are there any mandatory rules with respect to death benefits?
There are no pre-retirement benefits provided by law.
Mandatory pensions and benefits commonly comprise:
- funerary expenses;
- money pension plans for widows and widowers and orphans, with the following exceptions:
- if the insured died before six months of marriage;
- if the insured is 55 years old or older and before one year of marriage; or
- if at the time of marriage, the insured had an old age retirement pension, unless he or she was married with the spouse for at least one year; and
- a Christmas bonus of 15 days of salary, in relation with the amount of the pension received.
Employees or voluntarily insured people must comply with several rules depending on the pension structure, the cause of death and the amount of social weekly contributions recognised by the Mexican Social Security Institute.
The most common requirements are:
- a recognition of payment by the Mexican Social Security Institute of at least 150 weekly contributions of the deceased;
- to be pensioned by means of a disability;
- to be able to evidence the relationship with the deceased; and
- that the death was not derived from a work-related accident.
Mandatory rules also determined that the beneficiaries have to choose an insurance company to arrange the pension guidelines regarding the contributions accrued by the deceased.
When can employees retire and receive their full plan benefits? How does early retirement affect benefit calculations?
For public pensions, an employee can retire and receive their full plan benefits once he or she is between 60 (early retirement) and 65 (full retirement) years old, his or her register before the Mexican Social Security Institute has been cancelled, and he or she has made a minimum payment of 1,250 weeks of recognised contributions. This is applicable to those that started their employment relationship after 1997. For those that started before, the age is the same, but the minimum weeks of recognised contributions is 500 weeks.
Commonly, plan benefits are given to the employees once they retire or on termination of their employment.
Early retirement affects benefit calculations regarding its tax treatment. If the contributions are withdrawn before the agreed term of the private plan, its burden tax will be increased, affecting the retentions the employee is obliged to pay.
Early distribution and loans
Are plans permitted to allow distributions or loans of all or some of the plan benefits to members that are still employed?
There are some private plans that allow loan or distributions of the plan benefits, but it is not common given that such withdrawals may affect the deductibility of the benefit.
Change of employer or pension scheme
Is the sufficiency of retirement benefits affected greatly if employees change employer while they are accruing benefits?
Private plans are used as collective plans for all employees, considering that this is a requirement for tax deductibility.
Therefore, if an employee changes his or her employer, they may have the following options: transfer his or her benefits to his or her AFORE; use an individual private pension plan and continue with his or her voluntarily contributions; or, if the new employer has a private pension plan with the same financial institution, then his or her benefits can be transferred to the new pension plan. However, this would be determined by the private pension plan.
With respect to the mandatory retirement plan, a change of employer does not affect it.
In what circumstances may members transfer their benefits to another pension scheme?
If the private plan establishes the possibility, then an employee can transfer their benefits to another pension scheme; however, he or she would have to consider that a tax burden can be imposed to his or her benefits, and he or she will have to comply with the requirements of the new scheme. It is not customary in Mexico to change funds from one benefit plan to another. Commonly, employees lose the right upon termination of employment.
Who is responsible for the investment of plan funds and the sufficiency of investment returns?
Financial institutions registered under the National Savings System for Retirement Commission (CONSAR) are considered as funds administrators.
Those financial institutions enter into agreements with the employers to execute a collective private pension plan in favour of their employees.
Reduction in force
Can plan benefits be enhanced for certain groups of employees in connection with a voluntary or involuntary reduction in workforce programme?
Are non-broad-based (eg, executive-only) plans permitted and what types of benefits do they typically provide?
Executive-only plans are permitted; however, the law provides that for a benefit to be tax deductible, it must be offered to all its employees, whether unionised or non-unionised. Therefore, if the benefit is only granted to executives, the company would lose the benefit. The law also provides that if the benefit does not qualify as deductible, then it would be a taxable income for the employee.
How do the legal requirements for non-broad-based plans differ from the requirements that apply to broad-based plans?
The legal requirements are the same, except for its tax effects.
How do retirement benefits provided to employees in a trade union differ from those provided to non-unionised employees?
No difference, except that retirement benefits to employees in a trade union will normally document the plan within the collective bargaining agreement.
How do the legal requirements for trade-union-sponsored arrangements differ from the requirements that apply to other broad-based arrangements?
Mexican law recognises the same benefits and prerogatives for union and non-union employees; therefore, retirement plans will generally have the same terms and conditions for every participant. Although some plans may be restricted for non-union employees, if the plan allows the participation of any employee, it will not establish different requirements for access to retirement benefits.
Law stated date
Give the date on which the above information is accurate.
28 February 2020.
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