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New structure of the IESS Board of Directors does not solve IESS problems

Published on May 05, 2021

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The legal reform approved by the National Assembly last week, on the structure of the IESS Board of Directors, has not convinced experts and union representatives that changes will be made. The main criticism is that the structure approved in the Law is practically the same that already existed, and the instruction of the Constitutional Court is not specific enough in the sense that there is a greater representation in the nomination of representatives.

Henry Llanes, Vice President of the Association of Retirees of the IESS of Pichincha, said that the reform of the Law does not comply with the position of the Constitutional Court that had established in March 2016, that “the Assembly urgently issue a legal reform to regulate the integration of the Board of Directors, guaranteeing the participation and inclusion of all insured persons and employers.” The reform, instead, returns to the tripartite structure and with electoral colleges that does not appear in the Constitution.

Additionally, according to Llanes, the reform violates article 29 of the IESS Law, which indicates that no defaulter can be a member of the Board of Directors. In his opinion, both the employer and the government sectors are the largest debtors of the IESS.

Llanes recalled that in 2015, the citizen Silvia Carolina Vásquez Villarreal denounced that as an employer she did not feel represented by the Chambers of Production, which only bring together a few employers. She had mentioned that, for example, the Quito Chamber of Commerce comprised only 16% of the city’s employers, and in the case of the Guayaquil Chamber of Commerce covered 18% of total employers. At the same time, the Court considered that a similar flaw occurred with respect to the workers’ representative, who came from the trade union centrals and who also had a restricted number of union members, when the majority of workers did not belong to any organization.

However, he says, with the reform, which took six years to deal with, the structure has remained as before. The rotating presidency, on the other hand, in his opinion, is a secondary issue. Llanes explained that they, as affiliates, had proposed that the Board of Directors be made up of five members, two from affiliates, one from retirees, one from the Government and one from employers.

Manuel Vivanco, a former member of the IESS Board of Directors representing employers, says the last two governments took over the management of the IESS and the Bank of the IESS (Biess) thanks to this vacuum that was generated with the resolution of the Constitutional Court several years ago. Now, with the decision, the problem is somehow overcome, but it is a cosmetic issue, given the serious complications that the IESS must face.

In any case, he considered that a sector that should be represented is also that of citizens in general, who without being affiliated, finance the 40% that the Government gives to the IESS with their taxes. On the other hand, regarding a rotating presidency, he said that it is illogical, since what is going to generate is a lack of continuity and agenda. Priorities will change depending on who is presiding.

For Vivanco, the structure of the Board of Directors does not solve the problems that the IESS will have to face in the very near future, on the issue of its sustainability. The question, he said, must be whether these representatives are going to be the ones promoting the reform of the IESS, and the answer would be no. Then, the most important thing will be to give a path to the urgent reform that must be given to the Law.

Meanwhile, Pablo Casalí, a specialist in social protection at the ILO, mentioned that the approval of this reform fills the void that remained after the ruling of the Constitutional Court. “Definitely, the governance of the Board of Directors has been one of the main concerns of policyholders, retirees and employers. Almost seven out of ten surveyed stated that the formation of the IESS Board of Directors has not been beneficial for the Institute,” he said.

He explained that since 2018, the ILO has been carrying out a process of technical assistance to the IESS in which several tools have been developed that have measured the perception and opinion of the beneficiaries of the IESS on issues of governance, sustainability, quality of services and strengthening of the institution.

The President will have to pronounce in the next few days on the reform. However, from now on Llanes says that if there is no veto to the law, from his sector they will present a lawsuit of unconstitutionality.

IESS pension problems due to withdrawal of 40%, change in contributions and pandemic

Regardless of whether President Moreno approves or vetoes the change to the Law, the IESS pension fund, also known as Disability, Old Age and Death (IVM), received several blows that ended its liquidity. These have occurred throughout history, but the most complicated occurred in the last two governments. These have to do with the lack of payment of 40% from the State or its payment on paper (not liquid), the drop in the contribution rate for the pension fund (it was raised to the health fund), and the drop in the number of affiliates due to the pandemic.

Last week the World Bank gave its diagnosis and considered that the IESS will have problems meeting its pension payments in 2022. This diagnosis is a starting point for debating the future of social security.

Andrés Soria, actuary and manager of Volrisk, an entity that made several studies delivered to the former president of the IESS Richard Espinosa (in the government of Rafael Correa), says that the past government was warned in pessimistic scenarios, that problems could arise for the payment of pensions in 2022. He explained that the IVM fund may have many assets, but not liquid ones. For example, the 40% contribution that the State gives, on many occasions has been in State bonds.

Soria also reflected on how the change in the contribution table for the various funds in March 2016 had an influence. The percentage for the pension fund fell from 9.44% to 5.76% (the reduced percentage would go to health); and the idea was to increase the contribution in the future, until reaching an amount of 10.36% in 2022. However, the fund did not recover, since the affiliations in the IESS fell significantly due to COVID -19 and have not been able to recover.

Previously, in April 2015, the Labor Justice Law had been approved, which eliminated the IESS contribution. At that time, all government authorities, including Richard Espinosa, assured that the change to the regulations did not eliminate the 40% that the State gave to the IESS and insisted that it was a substitution, because “the State will deliver the necessary amount and in the time that the IESS requires,” which could be not only 40%, but even higher percentages, he said at the time.

Llanes, vice president of the Association of Affiliates, says that there are two causes that have the IESS on the edge of the abyss. The first is state delinquency, which began in 1951 and continues to this day in a maze of debt consolidations. Due to this, the IESS has had to divest its fund to make payments to its beneficiaries.

He said that in the Moreno government, despite having agreed to resume the payment of 40%, $600 million were paid in cash at the end of 2020 and $927 million in bonds for five, ten and fifteen years. As of January 2021, the State was in default again.

He also complained that “demagogic management” has been given by reforms to the Social Security Law without actuarial studies and without due financing. He gave as an example the Organic Law of Intercultural Education, that allowed national teachers to retire voluntarily when they have completed a minimum of three hundred monthly payments (25 years) with age limit and for those who certify three hundred and sixty monthly payments (30 years) without age limit receive a retirement pension. The government did not veto the law, despite considering it unconstitutional.

When consulting on what would be the options to improve the outlook for this fund, Soria said that analyzes were made at the request of the IESS in the previous government, and he felt that changes in the retirement age can help in the long term. There has also been talk of limiting the percentage of retirement that is received. Another measure would be to extend the years for calculating the average pension.

For Llanes, it is unethical to carry out a reform proposal to the Social Security Law to increase the retirement years and the contributions of the affiliates, when there is a whole network of corruption and inefficiency in the management of the resources and benefits of the compulsory social insurance. “The resources of this insurance have been shamelessly drained. The reform proposal of the Social Security Law must be comprehensive, starting with a legal, administrative, financial and health management reengineering of the mandatory social security,” he said.

Current government has deepened IEES debt

In this context, last week the Minister of Economy, Mauricio Pozo, said that an urgent reform is necessary. He emphasized that the population growth rate has fallen in Ecuador, thus contributors are less than those who retire because life expectancy has risen.

For Pozo, it is necessary to discuss how the State’s legal obligation to contribute 40% to the pension fund can be covered.  IESS authorities themselves warned of the liquidity problems that will arise if payments are not made.

The government of Lenín Moreno owes IESS approximately $806 million, for the 40% contribution to both pensions, Labor risks and Rural Social Security. The figures were obtained from the 2020 budget execution, in which $1.567 billion were effectively accrued (invoiced), but only $1.268 billion were paid.

That is, there was a delay of $299.93 million. In addition, the budget execution from January to April 2021, although with an incomplete budget calculation, establishes that the IESS is owed $506 million, of which $0 has been paid.

Marco Proaño Maya, an expert on Social Security and labor issues, says that last year President Lenín Moreno swore in a public speech that he was going to honor the debt with the IESS. “We are already in May and he has not paid a single dollar this year over 40%,” he claims. He warns that if the Government does not comply with the 40% that is in the Law, then there will be no sustainability in the pension fund.

Minister Pozo insists that the IESS will be paid, but at the moment they are in the process of agreeing on the form of payment, the amounts, and when.

However, the immediate problem is that the government does not have liquidity to pay off that debt in hard cash. It may have to resort to operations as they have been done in the past: payment with bonds, payment with commitment to invest in bonds, and only a part in cash.

Faced with this reality, Pozo does not rule out that the Biess should resort to making liquidity loans abroad. That was one of the plans that the Biess manager, Diego Burneo, came up with several months ago. For the Minister, Biess no longer has the capacity to continue investing in bonds, and rather at any moment will have to seek resources abroad, he says. For the minister, it is not a good idea to start divesting the illiquid assets that it has: “it cannot start selling the assets to pay pensions,” he adds.

When asked where the Social Security reform should go in order to make the IESS sustainable, he explained that it “should be moving gradually, but constantly.” He adds that it is a problem that has accumulated over several years, which requires strong legal changes, which cannot be taken from one moment to another, as they are very sensitive issues.

The idea is that the fund is sustainable on its own and is not just waiting for the government to pay the interest on the bonds or that 40%, he says. In any case, he confirms that these pending payments will be made.

For Proaño Maya, it is important that the next government takes its commitments to Social Security very seriously and estimates that the State has a legal obligation of 40%, but also assumes the health care of retirees and people with catastrophic illnesses.

He adds that since 2001 the State has not paid the health obligation and that the Rafael Correa government tried to ignore the debt, erasing said obligation from the accounting entry. He said that the best way to humanize a government is for it to guarantee the well-being of children and the elderly.

“We all get old, it is only a matter of time,” he said.

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