Past contributions to the old system are honored by the government through the issue of a recognition bond for workers who have contributed during the six months before the reform and for at least 4 years during the last 10 years prior to 1992. The face value of the bond depends on the years of contributions made and the average salary during the 12 months prior to December 1992.1 Previous contributions, however, are recognized only up to a ceiling. This was originally set at S.60,000; due to adjustments for inflation, it now corresponds to about US$ 46,000. The recognition bonds are indexed to prices but carry no real interest. In the amendment to the pension law passed in November 1996, the requirements to obtain a recognition bond were loosened to offer a greater incentive for affiliates to switch to the new system. Now affiliates only have to have contributed for 4 years during the last 10 years in order to qualify for a recognition bond.

# _Affiliation_

At the end of 1996, about 1.55 million workers were affiliated in the SPP representing about 18 percent of the estimated economically active population and 47 percent of all dependent workers. An estimated 12 percent of the economically active population are still affiliated with the public system. If only the 3.2 million workers under the age of 45 are taken into account as potential affiliates, the SPP affiliation represents a coverage of about 45 percent.

The SPP has been attracting predominantly the younger workers. Almost 70 percent of all SPP affiliates are below the age of 35 and only 4 percent are above the age of 50 years; the average age of all affiliates is 32 years. Male workers account for 67 percent of all affiliates. The majority of affiliates are dependent workers; about one fifth are independent workers. More than half of all affiliates live in the urban centers of Lima and Callao.

The pace of affiliation to the new private system was high in the beginning due to extensive publicity campaigns by the pension fund management companies. In 1993, 63 percent of the SPP affiliates were entitled to recognition bonds for their contributions to the old system which indicates that initially the majority of affiliates to the new system came from the SNP. But, as shown in Graph 1, monthly affiliation declined continuously from more than 100,000 workers during the first three months after the system was launched in July 1993 to less than 5,000 workers in June 1995.

The decline of affiliation was due to several factors. First, the uneven competition between the SPP and the SNP resulted in disincentives for workers to join the SPP. The contribution rate payable by the worker to SNP was only 3 percent compared to 14 percent in the SPP whose affiliates were also required to pay an additional 1 percent "solidarity" contribution to the SNP. Further, a sales tax of 18 percent was levied on the AFP commissions and insurance premiums payable by SPP affiliates. Workers who switched were given a salary increase of about 13.5 percent to compensate for the higher rates in the SPP. However, some private and public sector employers had difficulties paying this increase which effectively resulted in a rise of labor costs because employers had only paid a 6 percent contribution before.

Second, the retirement age in the SPP was 65 years for men and women while retirement ages in the SNP were only 60 and 55 years for men and women, respectively.

For a discussion of the calculation of recognition bonds see Annex 3, World Bank (1996).

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