AFP stands for Administradora de Fondos de Pensiones, meaning "Pension Fund Administrator." These are private financial institutions authorized to manage mandatory retirement savings in several Latin American countries. Chile pioneered this system in 1981, and it was later adopted by Peru, Colombia, and other countries with variations.
How the AFP System Works
Employees contribute a percentage of their salary to an individual account managed by their chosen AFP. In Chile, the mandatory employee contribution is 10% of taxable income plus a commission fee. In Peru, employees contribute approximately 13% (10% to the individual account plus commission and insurance). In Colombia, total pension contributions are 16%, split between employer (12%) and employee (4%).
Fund Options
Most AFP systems offer multiple fund types with different risk profiles. Chile offers five funds (A through E) ranging from aggressive to conservative. Employees can choose their fund based on their age and risk tolerance. Younger workers are typically defaulted to higher-risk funds with greater growth potential.
EOR Relevance
An EOR handles AFP enrollment, monthly contributions, and compliance reporting for each country's specific system. This includes managing employee fund selections, processing contribution changes when salaries are adjusted, and filing the required monthly declarations.