--Peru ratified legislation last week to reform the private-pension-fund system

--The government aims to increase coverage and lower commissions

--Private-sector group and opposition lawmakers question constitutionality of reforms

 
   By Ryan Dube 
 

LIMA, Peru--Peru's association of private pension funds is questioning the constitutionality of government-approved legislation to reform the country's private pension fund system.

The executive branch last week gave its nod to the legislation following a narrow approval in Congress earlier this month. The legislation includes a number of reforms that are intended to expand coverage and lower commissions by attracting competition.

Among the reforms, the law will require workers under 40 years old to sign up with a pension fund, while also requiring independent workers who make more than 1.5 times the minimum wage to make contributions. The law is expected to go into effect 120 days after the publication of regulations outlining how the reforms will be implemented.

"The central objective that we have with this law is to improve the capacity to have a pension when you retire," said Finance Minister Luis Miguel Castilla.

However, in a statement Sunday, the association of private pension funds, known as AFPs, said some of the reforms in the legislation are unconstitutional.

The private-sector group said one of its concerns is that commissions will be charged on the assets, as opposed to the current system, where fees are charged on the contributions. Other criticisms were that Peru's tax agency will have a role in charging commissions from pension fund holders and that pension funds will have to bid for new contributions.

The association said the complexity of implementing some of the reforms could affect the government's short-term goal of centralizing operational aspects.

"We reiterate our concern that the law is vulnerable to some constitutional questions affecting the stability of the (private pension system)," the association said.

The association added that it does support some of the reforms, including changes to increase the number of people covered.

Opposition lawmakers have also criticized the reforms. Legislators from the opposition Fuerza 2011 party say they will challenge the constitutionality of the reforms in Peru's highest court, the Constitutional Tribunal.

Justice Minister Juan Jimenez said the government will defend the changes. "From the executive, we understand that the legislation is absolutely constitutional and that is going to be our defense," Mr. Jimenez said.

The private pension system, which includes four private pension funds, was established in 1993 and has registered about 5 million people.

The pension funds are AFP Horizonte SA (HORIZC1.VL), which is owned mainly by Holding Continental and Spain's Banco Bilbao Vizcaya Argentaria SA (BBVA, BBVA.MC); AFP Integra SA (INTEGRC1.VL), which is owned by Colombia's Grupo de Inversiones Suramericana SA (GIVSY, GRUPOSURA.BO); AFP Profuturo, whose main shareholder is a unit of Bank of Nova Scotia (BNS, BNS.T); and Prima AFP (PRIMAC1.VL), which is controlled by Peru's Credicorp Ltd. (BAP, BAP.VL).

Write to Ryan Dube at ryan.dube@dowjones.com

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