Faculty of law blogs / UNIVERSITY OF OXFORD

Property without trust: rise and fall of the Chilean pension system?


Ernesto Vargas Weil
Professor of Private Law, University of Chile; Teaching Fellow (Property), UCL.


Time to read

6 Minutes

Since Pierre-Joseph Proudhon stated in 1840 that 'Property is robbery', the abolition of private property has been a war cry of revolution. By the same token, the recognition and enforcement of strong property rights is normally deemed to have a central role in achieving legal stability and promoting market-oriented policies. However, contrary to these well-established intuitions, in Chile, fuelled by the largest social protests since the return of democracy and the impact of the Corona-crisis, the right to private property has become a key part of  an ongoing attempt to dismantle one of the oldest private pension systems in the world. As will be discussed in this post, this attempt has led to two cases pending before the Supreme Court, and to controversial legislation enacted on July 30, 2020.

The Chilean pension system was created in 1980 by Legislative Decree 3.500 (Decreto Ley 3.500, DL 3.500) as part of a major institutional and economic market-oriented reform led by Pinochet’s military dictatorship. Prior to this reform, Chile had a fragmented ‘pay as you go’ scheme. Under this system, employees were affiliated to different social security entities, which paid pensions to their retired members based on the incoming contributions.

DL 3.500 replaced this scheme with a single ‘individual capitalization system’, in which each employee contributes into a personal capital account, with the State assuming a limited subsidiary role. These funds are managed by for-profit private ‘Pension Funds Managers’ (Administradoras de Fondos de Pensiones, AFPs) which can be freely chosen and changed by the employees affiliated to the system. Over the last 40 years this system has been subject to a number of legal reforms, but none has changed its basic design.



A core element of such design is that affiliates retain ownership (propiedad) over the funds in their individual account, despite being (normally) only able to access them after reaching retirement age and in the restricted modalities set forth by DL 3.500. This has two key implications for the legal structure of the system: first, the pension funds do not enter into the patrimony of the AFPs and, second, the affiliate’s proprietary interest in the fund is protected by the constitutional right to private property.


The acknowledgment of the affiliate’s private property over the fund was part of a wider entrenchment of the pension system by the 1980 Constitution, including the restriction of the power to present bills in social security matters to the President of the Republic  and the requirement of a special quorum for their approval. For a long time, this institutional scheme, especially the constitutional right to private property, protected the Chilean pension system from political pressures for reform. In 2001, in the first case in which the Chilean Constitutional Court (Tribunal Constitucional) had to address the issue of the affiliate’s property right over the fund, the court invalidated as unconstitutional a bill aiming to regulate the right of the affiliates to exchange their fund for an annuity after retiring (renta vitalicia), arguing that such reform undermined the affiliates’ property rights over the fund.

However, despite an important reform expanding the contributions of the State to the system passed in 2008, discontent with the low income provided by the AFPs has led to increasing social pressure for its structural reform. It most salient feature is the emergence of the ‘NO+APF’ movement, which openly promotes the derogation of the individual account scheme and its replacement by a state-managed pay as you go system. Since 2019 this movement has been coordinating a public interest litigation campaign, encouraging affiliates to file a special constitutional protection action (Recurso de Protección) against their AFPs before different Court of Appeals, requesting the handover of the funds to the claimants.



Last September, two of these constitutional actions found their way to the Constitutional Court, which has jurisdiction only to assess the constitutionality of the statute, but not the substance of the claim. In Ojeda c. AFP Cuprum S.A. the claimant was a retired teacher whose pension was not enough to pay her mortgage, while in Valenzuela c. AFP Habitat S.A. the claimant was a technical nursing assistant in her sixties unable to pay her debts. After their AFPs refused to hand over to them the amount in their individual accounts, both filed constitutional protection actions, arguing that the AFPs were violating their constitutional right to private property. Both tribunals requested a holding of the Constitutional Court regarding the rules of DL 3.500 upon which the AFPs relied to deny the handover of the fund. In simple terms, the issue was whether the essence of the constitutionally protected ownership —that is, the freedom to use and dispose of an asset— is compatible with the restriction on the free withdrawal of the funds. For the claimants, the argument was that either DL 3.500 is unconstitutional because it violates the rights to private property, or it is not true that the affiliates have property rights over their pension fund. The Constitutional Court was not convinced by this argument and upheld the constitutionality of DL 3.500, arguing that restrictions to the free withdrawal of the funds were justified by the social function of property, also acknowledged by the Constitution.


Despite this ruling, in Ojeda the Antofagasta Court still allowed the claim. The court argued that denying the funds to the claimant would be unjust, as a pension system that does not grant a pension high enough to cover a mortgage of an affiliate who had contributed with 10% of her wage for more than 18 years, but still allows the AFP to make a profit, is ill-designed. By contrast, in Valenzuela the Punta Arenas Court denied the claim. Both cases are still pending before the Supreme Court. This is not the first case in which this court has been faced with this issue: taking a line close to that of the Constitutional Court, it has previously denied similar claims. Nonetheless, in a recent case, this court also mentioned that the early withdrawal of the funds is not totally alien to DL 3.500, insinuating that, under other circumstances, it might allow such a claim.


With these cases being subject to massive media coverage and public debate, the constitutional entrenchment protecting the AFPs system was finally broken by the Covid-crisis. In order to provide financial relief for people hit by the slowdown of the economy, opposition parties, with open support of the NO+AFP movement, sponsored a bill to allow affiliates to withdraw 10% of their pension fund, once again, based on the argument that such funds are their property. The bill, which was presented as a transitory constitutional amendment to by-pass the President’s exclusive power to reform the social security systems, was fiercely opposed by the Government and many economics experts, and even labeled as a ‘constitutional scam’. Nonetheless, the bill was enacted on July 30, 2020, with the approval of many members of the political parties supporting the Government.


The key motivation behind the public litigation against the AFPs and the so called ‘10% Act’ seems to be a widespread lack of trust in the AFPs. Whether this is justified or not, it is mirrored by the absence of the ‘the trust’ as a legal institution in Chilean private law. In common law jurisdictions, property rights can be held not only outright but also ‘on trust’ for someone else. In this scheme, despite normally having a right of a proprietary nature, the beneficiary is frequently excluded from managing the assets held in trust, being able to benefit from them only in the manner set forth by the settlor of such trust. Thus, in Anglo-American legal systems, the trust normally provides the basic legal machinery allowing direct wealth management by third parties, including pension funds.

However, the ‘trust’ seems to run against one of central tenets of civilian property system: the unitary notion of ownership. Indeed, the central argument behind the campaign against the AFPs is precisely that ownership, understood as the discretionary right to use and dispose of an asset, is incompatible with excluding the affiliates from accessing their fund. The irony in the argument is apparent: the very institutional device aimed to protect the AFPs system, is now being used to bring it down. This shows how, when social change puts heavy pressure on a legal institution, its ‘formal chains’ break at its weakest link: in the case of the Chilean pension system, a concept of private property unsuited for third party’s wealth management.

This is not completely unprecedented. At least since the 1960s, scholars have accounted for the instrumental use of abstract legal categories as gateways for political reforms aiming to make the law ‘more responsive’ to social problems. However, it is unusual for the right to private property to play a decisive role in breaking the status quo. In this case, to a large extent, this can be explained by a lack of trust in its pension system and the parallel absence of ‘the trust’ as a legal institution in Chilean private law.


How to cite this blog post (Harvard style) 

Vargas Weil, E. (2020). Property without trust: rise and fall of the Chilean pension system?. Available at: https://www.law.ox.ac.uk/research-and-subject-groups/property-law/blog/2020/08/property-without-trust-rise-and-fall-chilean (Accessed [date]).