Pension Fund: How to Implement It in Mexican Companies

In Mexico, a corporate pension fund is an excellent option for organizations seeking to retain talent and strengthen their Human Capital, as it helps employees achieve greater financial security, which is an important factor when choosing where to work.

For this reason, more and more companies are incorporating this type of benefit. However, much more is required than simply defining a monthly amount: it is necessary to establish who can participate, how much the company will contribute, what conditions the plan will have, and what its labor and tax implications are.

Below, we review how these funds work, what options exist, and what should be considered to implement them correctly within a company.

It is a mechanism through which a Mexican company helps its employees accumulate retirement resources through periodic contributions, following rules established in a plan.

It should not be confused with mandatory social security contributions, since a corporate fund functions as a complementary benefit that supports better long-term financial planning for employees and is not included as such in the employment contract.

For example, a company could establish that it contributes the equivalent of 5% of each participating employee’s monthly salary. If a person earns $30,000 per month, the company would contribute $1,500 per month to their fund.

There are also schemes in which the employee makes an additional contribution and the company matches a portion of it.

The company and the employee make contributions at regular intervals, and these contributions are managed and invested over a specified period.

Generally, the process requires:

• Defining who can participate.
• Establishing company and employee contributions.
• Determining how the resources will be managed.
• Defining the conditions for accessing the funds.
• Periodically informing employees about their balance.

Likewise, the rules must establish what happens in situations such as resignation, termination, retirement, or changing employers.

Defined contribution plans are usually easier to budget because the company knows in advance how much it will contribute.

On the other hand, a defined benefit plan may involve greater financial and administrative responsibilities, require more management, and add legal obligations for the company.

Mexican companies obtain a tangible return by implementing pension funds through tax benefits.

One of the main attractions is that this structure offers tax advantages to the company, since employer contributions may generate tax deductions. In this regard, Mexico’s Income Tax Law (LISR) allows deductions for contributions intended to create or increase a pension fund, provided they are complementary to those established by the Social Security Law.

However, the deduction does not always equal 100% of the contribution. According to Article 25, Section X, of the LISR, there is a limit of 47% of the contribution made, which increases to 53% when the benefits granted by the company that constitute tax-exempt income for employees do not decrease compared to the previous fiscal year.

In addition to the tax component, pension funds provide other business benefits:

Talent Retention

It is a long-term incentive that can be very attractive for more specialized professionals.

Candidate Attraction

It helps expand the compensation package compared to other companies that only offer traditional benefits, strengthens the perception of total rewards, and can support the attraction of individuals with long-term goals.

Employee Value Proposition

It helps differentiate the company by demonstrating concern for employees’ future financial well-being, which may strengthen employee satisfaction.

It is important not to confuse this treatment with that of a savings fund, as they have different tax rules.

In Mexico, this benefit allows employees to build retirement savings in a simple and systematic way, provide greater financial stability during retirement, and, in some cases, take advantage of additional company contributions.

This offers advantages such as:

Guaranteed Income in Old Age

It guarantees additional or complementary resources beyond those provided by the government to cover daily expenses after retirement.

Financial Peace of Mind

It reduces uncertainty about the future and lessens the financial stress that retirement planning can cause, while also strengthening overall financial health.

Encouragement of Savings

It is an effective incentive for building long-term wealth through periodic contributions during active working years.

In Mexico, there is no predefined percentage; the contribution should be determined based on the pension fund’s budget, objectives, and characteristics.

It can take the form of a fixed amount, a percentage of salary, a contribution equivalent to the employee’s contribution, or a percentage that increases according to seniority.

For example:

These are only examples to illustrate the cost. The appropriate percentage will depend on each organization’s structure and objectives.

There is even a matching scheme in which the company contributes one peso for every peso contributed by the employee, up to a certain limit.

The pension plan must be analyzed from labor, tax, and social security perspectives before implementation.

Let us review the most important points:

1. It Must Be Complementary to Social Security

The pension fund does not replace the obligations that Mexican companies have under the social security system.

It is only complementary to what is established by the Social Security Law; therefore, organizations cannot stop contributing to IMSS.

2. Limited Tax Deduction

As noted, contributions made to the pension fund can be deducted, but there is a limit:

• 47% of the contribution made, as a general rule.
• 53% of the contribution when the benefits granted to employees that constitute tax-exempt income for them do not decrease compared to the immediately preceding fiscal year.

These deductions reduce the taxable income base for ISR, provided that applicable requirements are met. If there are errors in invoices, payments, or supporting documents, the calculation may be affected and generate tax discrepancies.

3. The Reserve Must Be Managed Under Specific Conditions

The Income Tax Law establishes rules on how the resources must be managed.

According to Article 29 of the LISR, the assets comprising the fund must be placed in an irrevocable trust with an authorized credit institution. In other words, companies transfer the pension fund money to a special bank account (trust) and lose the right to reclaim or withdraw the funds for other purposes, or the fund must be managed by specified authorized institutions.

Likewise, the returns generated must remain within the fund and be used for the purposes for which it was created. To generate these returns, resources are typically invested in a diversified portfolio in accordance with the fund’s applicable rules.

4. There Are Rules Regarding Investments

Mexican legislation imposes restrictions on how the reserve may be invested.

For example, investments in securities issued by the company itself or related companies may not exceed 10% of the reserve’s total value and are subject to the conditions established by law.

This is intended to separate employees’ retirement resources from the company’s ordinary business needs. Depending on the type of fund and the chosen investment instruments, employees may be exposed to market risk, although diversification helps mitigate it.

5. The Creation or Modification of the Fund Must Be Reported to SAT

SAT establishes a filing requirement to report the creation or modification of a pension fund.

Any modification or creation must be reported within 10 days after the event through the Tax Mailbox (Buzón Tributario).

In addition, when the fund and its returns are transferred from one managing institution to another, another notice must be filed within the 15 days prior to the transfer.

6. Review Rules Applicable to Employees

Amounts received are not always exempt from ISR, and the plan rules must define how participants acquire rights to the benefits.

There are specific tax treatments for retirement benefits, pensions, and retirement income, including exemptions and limits.

For example, Article 93 establishes an exemption for certain income derived from retirement benefits, pensions, and retirement income up to the limits established by the provision itself. Any excess may be subject to tax depending on the circumstances under which the funds are distributed, such as retirement or termination of employment.

One should not choose solely based on the commission percentage. It is important to compare administration, investments, transparency, experience with corporate pension plans, the provider’s operational management, and its ability to provide control and clear reporting on contributions, balances, and transactions.

Before selecting a provider, request information on:

• Fees
• Investment Options
• Historical Returns
• Reports for Human Resources
• Employee Platform
• Customer Service and Support
• Information Security
• Exit Conditions or Plan Modifications
• Participation of Finance, Payroll, Legal, and Human Resources in the implementation and administration of the plan

A good provider should facilitate both HR administrative operations and employees’ understanding of the benefit.

A pension fund is more than an additional benefit; when properly designed, it can be a tool that helps employees build retirement wealth and allows the company to support growth by strengthening retention of valuable talent.

The key is to design it according to the company’s financial capacity and review the tax and labor implications so that this benefit is integrated into compensation and human capital management strategies.

For this reason, it is ideal to rely on human capital experts who can assist in implementing the pension fund correctly and in compliance with applicable laws.

At H&CO, we have specialists who can provide guidance to ensure the process is carried out correctly and is much simpler for your company.

For more information, please contact us. It is easier to strengthen talent retention within the company through an effective pension fund that benefits both the organization and its employees while fostering a better work environment and a stronger perception of the rewards offered by the company.

Is a pension fund mandatory for companies in Mexico?

No. A complementary corporate pension fund should not be confused with employer obligations related to social security and retirement in Mexico.

How much should a company contribute?

There is no single percentage. The company may design the plan according to its budget, objectives, and applicable legal and tax rules.

Can employees also contribute?

Yes, depending on the plan design. A common arrangement is for both the company and the employee to make contributions.

What happens to the fund if the employee resigns?

It depends on the rules established in the plan. That is why it is essential to define from the outset the conditions applicable to termination of employment.

Are contributions tax-deductible for the company?

Specific tax treatments may apply, but deductibility depends on compliance with the requirements and limits established by current legislation. In addition to the treatment of the pension fund, companies may deduct salaries and wages paid when they comply with applicable tax provisions. In general, payment must be made by bank transfer or card in order to be deductible.