Trench warfare between the government and the legislature over the future of Peru’s pension system persisted over the last week, with the executive producing proposals which it hopes will give rise to a compromise solution. The Congress will respond over the next few days; its response will show whether it wants to prolong a conflict that has set the two powers of the state against each other ever since the moment the new Congress assembled following last January’s elections.

The skirmishing has focused on how Congress has used its law-making functions to cut across the agenda of the executive, asserting its own powers. Taking part in the build-up to next year’s presidential and legislative elections, it is also about how individual parties and their leaders are trying to gain visibility, taking advantage of the difficulties facing government in handling the Covid-19 crisis.

The pension system has become the latest focus of this feud.

Peru’s contributory pension system divides in two: a private-sector system that dates from the Fujimori period in the 1990s and a state-based system first established in the 1970s. The Congress has sought to force both systems to disgorge the accumulated savings of contributors, ostensibly in order to alleviate the plight these face from of the Covid-19 pandemic and its economic consequences.

Back in June, the Congress successfully forced the administrators of the private system (AFPs) to return to contributors up to 25% of their accumulated savings. The executive vigorously opposed this but stopped short of vetoing the legislation that Congress had approved.

Under the private system, AFPs administer pension funds on behalf of contributors, but they tend only to provide a small income when compared to the contributions paid.

Since June, Congress has turned its attention to the state system, the Sistema Nacional de Pensiones (SNP). This is operated by the Oficina Nacional Previsional (ONP). The ONP uses the contributions of younger affiliates to provide pensions for those who retire.

A law overwhelmingly approved in Congress on 24 August would enable up to 4.7 million affiliates (under the age of 65 and so not eligible for a pension) to withdraw up to 4,300 soles each (US$1=3.56 soles), over and above 560,000 pensioners who would receive a payment of 930 soles. This was reckoned likely to cost around 15 billion soles.

The government argued that this would fatally weaken the SNP, already suffering from grave difficulties in meeting pension payments from a diminishing pool of contributors. President Martín Vizcarra said that he would reject (observar) the legislation and return it to Congress for further consideration.

Last week, Finance Minister María Antonieta Alva came up with a counter-proposal which would involve the state making a one-off payment (bono) of 500 soles to those who have retired under the SNP and almost 800 soles to those contributors without any separate income. The government also promised legislation that would reform aspects of the SNP which prevent those with less than 20 years contributions receiving a pension.

Under the state system, contributors pay 13% of their wages into the SPN, but do not qualify for a pension unless they have paid into the fund for a minimum of 20 years. This stipulation was a change to the original system introduced by then president Alberto Fujimori in 1992, who also extended the pension age to 65, both moves intended to persuade employees to switch to the private system. Unlike the private system, contributors to the SNP receive a guaranteed minimum sum.

A thorough reform of the pension system had earlier been promised by Vizcarra. The privatised system is good business for the AFPs which live from generous commissions, but much less so for pensioners except those on previously high incomes. When they reach 65, most contributors are left with a wholly inadequate pension. The state system at least provides that guaranteed minimum.

The decapitalisation of the state system can only benefit the AFPs. This is somewhat paradoxical as many of those in Congress promoting this measure profess to be enemies of the private pension scheme.

If the Congress rejects Alva’s compromise scheme and insists on the law it has passed, the government has threatened to take the matter to the Constitutional Tribunal. Not only would the new law put the future of the state system at risk, but Congress is constitutionally barred from legislating on matters that involve state spending. Referral to the TC would probably delay the matter for several months.

However, the Congress in turn may threaten to bring forward the date for its election of new members of the TC. Most of the current members should have retired some time ago and need to be replaced. This could set the scene for an even more damaging showdown between the executive and Congress. Readers will recall that it was the row over the appointment of new members to the TC that led to Vizcarra’s dissolution of Congress last September.

The TC plays a key role in the Peruvian political system in deciding what is constitutional and what is not. It has recently declared unconstitutional a number of laws passed by Congress. This has increased Congress’s appetite to have a TC more to its liking. The manner of its election – the subject of prolonged controversy – is therefore a question of strategic concern to members of Congress. A TC packed with sympathetic members would significantly load the constitutional dice in Congress’s favour going forward.