pension reforms: experiences in latin america seminar “the future and the reform on pension...
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PENSION REFORMS: EXPERIENCES IN LATIN AMERICA
Seminar “The Future and the Reform on Pension Funds”
Madrid, SpainOctober 2003
Guillermo Arthur E., President of FIAP
Author: Asociación de AFP de Chile
I. Countries with Reform
II. Bases of the New Pension Systems
III. Results of the Reforms
IV. Political Economics of the Capitalization Systems
V. Final Remarks
CONTENTSCONTENTS
I. Reforms in Latin AmericaI. Reforms in Latin America
Chile (1981) Peru (1993)
Argentina (1994) Colombia (1994)
Uruguay (1995) Bolivia (1997)
Mexico (1997) El Salvador (1998)
Costa Rica (2000) Dominican Rep. (2003)
Ecuador (*) Nicaragua (*)
(*) Not yet implemented(*) Not yet implemented
I. Reforms in Central Europe, Eastern Europe and AsiaI. Reforms in Central Europe, Eastern Europe and Asia
Hungary (1998) Kazakhstan (1998)
Poland (1999) Latvia (2001)
Estonia (2002) Bulgaria (2002)
Croatia (2002) Macedonia (2003)
Lithuania (*) Rep. of Slovakia (*)
Ukraine (*)
(*) In process of reform(*) In process of reform
OLD SYSTEM NEW SYSTEM
- Pay-as-you-go - Individual capitalization
- State administration - Private, competitive administration
- Inflexibility - Individual freedom:
To choose and change AFP
How much to contribute (over the minimum)
When and how to become a pensioner
Which fund to choose (Multifunds)
- Discretionary - Standard
- Without fund accumulation - Net worth separation: AFP and Pension Funds
- Role of the State: Administrator - Role of the State: Supervisory
Subsidiary
- Benefits: Old age, disability and - Benefits: Old age, disability and survivorship pensions survivorship pensions
Disability and survivorship insurance: collective and mutually supportive
II. Bases of the Pension SystemII. Bases of the Pension System
Characteristics of the New Pension SystemsCharacteristics of the New Pension Systems: Latin America: Latin America
COUNTRIES
Single Integrated Mixed Mixed in Competition
LATIN AMERICA (Individual Cap.) (PAYG and Indiv. Cap.) (PAYG and Indiv. Cap.)
Argentina
Bolivia
Colombia
Costa Rica
Chile
Ecuador
El Salvador
Mexico
Nicaragua
Peru
Dominican Rep.
Uruguay
INDIVIDUAL SAVING AND CAPITALIZATION SYSTEM
Characteristics of the New Pension SystemsCharacteristics of the New Pension Systems::Europe and AsiaEurope and Asia
COUNTRIESSingle Integrated Mixed Mixed in Competition
EUROPE AND ASIA (Individual Cap.) (PAYG and Indiv. Cap.) (PAYG and Indiv. Cap.)
Bulgaria
Croatia
Estonia
Hungary
Kazakhstan
Latvia
Macedonia
Poland
INDIVIDUAL SAVING AND CAPITALIZATION SYSTEM
0 25 50 75 100
Mexico
Chile
El Salvador
Colombia
Dominican R
Argentina
Uruguay
Costa Rica
Proportion of the pension financed by the PAYG system
New Pension SystemsNew Pension Systems
Source: Palacios (2003)
1.- Return of the Funds1.- Return of the Funds
The rates of return of the funds exceed the growth of real wages and The rates of return of the funds exceed the growth of real wages and per capita incomeper capita income.
Source: Palacios (2003)
CountryReturn of
Funds
Growth of
Real Wages
Difference Return
Funds-Growth Wages
Ratio Maximum
Returns toMinimum Returns
Growth
Real income per
capita
Difference Return Funds-
Growth
Income per capita
Argentina 11.70% -0,80% 12,50% 1,17 -0,40% 12,10%
Bolivia 16,20% 8,80% 7,60% n.d. 0,40% 15,80%
Colombia 11,80% 1,40% 10,40% 1,13 -0,30% 12,10%
Chile 10,50% 1,80% 8,70% 1,05 4,50% 6,00%
El Salvador 11,30% -0,20% 11,50% 1,3 0,50% 10,80%
Mexico 10,60% 0,00% 10,60% n.d. 2,80% 7,80%
Peru 5,70% 1,80% 3,90% 1,06 2,40% 3,30%
Uruguay 9,50% 3,60% 5,90% 1,06 -0,30% 9,80%
III. Results of the ReformsIII. Results of the Reforms
PENSION FUNDS IN LATIN AMERICAPENSION FUNDS IN LATIN AMERICA
0
5000
10000
15000
20000
25000
30000
35000
40000
45000
81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 '00 '01 '02
Chile
Argentina
Mexico
UruguayBolivia
C. Rica
Colombia
Peru
El Salvador
Total (30.06.2003):
MM US$ 106.018
MM US$
Jun’03
2.- Rapid growth of the funds2.- Rapid growth of the funds
Pension Funds and GDP (June 2003)
Source: FIAP
Country Fund GDP Fund/GDP(MM US$) (MM US$)
Latin AmericaArgentina (2) 15,328 236,631 4.82%Bolivia 1,258 8,160 15.42%Colombia 6,403 71,297 8.98%Costa Rica (1) 218 15,781 1.38%Chile (1) 39,672 67,236 59.00%El Salvador (1) 1,289 14,000 9.20%
Mexico (2) 35,405 584,147 6.06%Peru 5,296 30,592 17.31%Uruguay 1,14
912,321 9.33%
Europe and AsiaBulgaria 113 15,563 0.73%
Kazakhstan 1,432 6,987 20.49%Poland 9,486 343,934 2.76%
(1) GDP as of 31.12.2001(2) GDP as of 30.09.2002
0
5000000
10000000
15000000
20000000
25000000
30000000
35000000
81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 '00 '01 '02
MEMBERSHIP IN LATIN AMERICAMEMBERSHIP IN LATIN AMERICA
Chile
Mexico
Argentina
Colombia
PeruBolivia C. Rica
El Salvador
Total (30.06.2003):
58.747.165
Jun’03
3.- Rapid growth of membership3.- Rapid growth of membership
4.- Economic Effects of the Reforms4.- Economic Effects of the Reforms
QUALITATIVE EFFECTS:
• It offers investors the possibility of combining risk (better combination of risk return and diversification).
• It reduces intermediation costs.
• It encourages the creation of innovative long-term financial instruments.
• It improves transparency and corporate governance.
• It boosts the industry in custodial services, risk assessment, etc.
SOME EXAMPLESSOME EXAMPLES- Corporate Bonds- Corporate Bonds
Debentures or Coporarte Bonds (MM of US$ as of 2002)
7.459
71,40
1.000
2.000
3.000
4.000
5.000
6.000
7.000
8.000
1981 2002
Share of Social Security Funds 2002
40,7%CSV
34,3%AFP
25,1 %
AFP C.S.V. Others
CHILECHILE PERUPERUCorporate Bonds
(MM of US$ as of 2002)
851.105
0
2.000
4.000
6.000
8.000
10.000
12.000
1994 2002
MEXICOMEXICOCorporate Bonds
(MM of US$ as of 2002)
5.039
11.626
0
2.000
4.000
6.000
8.000
10.000
12.000
1997 2002
Share of Social Security Funds 2002
47%
53%
AFP Others
Share of Social Security Funds 2002
35%
3%
62%
AFP C.S.V. Others
Note for Chile: Average life of bonds in the first five years of the 1990s: between 10 and 15 years. Currently between 15 and 20 years. They have been issued at 30 years.
- Equities- Equities
Share of Social Security Funds 2002
7,5%
0,7%
91,8%
AFP C.S.V. Others
Stock Market Net Worth(Millions of US$ as of 2002)
47.430
6600
5.00010.00015.00020.00025.00030.00035.00040.00045.00050.000
1985 2002
PERUPERUStock Market Net Worth
(Millions of US$ as of 2002)
5.084
12.593
05.000
10.00015.00020.00025.00030.00035.00040.00045.00050.000
1993 2002
CHILECHILE
Share of Social Security Funds 2002
11,3%
88,8%
AFP Others
- Mortgage-Backed Securities and Bank Bonds- Mortgage-Backed Securities and Bank Bonds
MBS and Bank Bonds(Millions of US$ as of 2002)
8.431
513
0
1.000
2.000
3.000
4.000
5.000
6.000
7.000
8.000
9.000
10.000
1981 2002
Share of Social Security Funds 2002
42,4%CSV
55,2%AFP
2,5 %
AFP C.S.V. Others
CHILECHILE
N° Loan OperationsHousing MBS
529.321
31.918
0
100.000
200.000
300.000
400.000
500.000
600.000
1980 2002
Stock of Housing Stock of Housing Financed with MBSFinanced with MBS
- Investment Fund Shares- Investment Fund Shares
Share of Social Security Funds 2002
10,9%CSV
78,6%AFP
AFP C.S.V. Others
10,5%
Investment Fund Shares(Millions of US$ as of 2002)
1.117
00
200
400
600
800
1.000
1.200
1981 2002
CHILECHILE
5.- Projection of the Fiscal Deficit of the Reform: Chilean Case5.- Projection of the Fiscal Deficit of the Reform: Chilean Case
0
0,5
1
1,5
2
2,5
3
3,5
4
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Recognition Bond Fiscal Contribution to Old System Total Fiscal Cost
% GDP
6.- Coverage6.- Coverage
• When the costs of the formal sector decrease Employment in this sector increases.
• A strong link is formed between contributions paid and benefits received.
• Incentives are created for both workers and employers to pay contributions into the pension system: lowering of contribution rates, increasing credibility in the system.
GREATER COVERAGEHOWEVER, THERE IS STILL MUCH TO BE DONE TO ENLARGE THE
FORMAL SECTOR IN THE ECONOMY
IV. Political Economics of the Individual Capitalization SystemsIV. Political Economics of the Individual Capitalization Systems
• Relative political risk: - Capitalization - Pay-as-you-go
• Government pressures: - Fiscal - Redistributive
• Resistance of the Individual Capitalization system: - Individual “defined contribution” accounts - Visibility of redistributions - Redistribution of stocks and not flows - Redistribution produces greater impact - Ownership Rights - Private management
•Two examples: Chile and Argentina
• Political economics of adjustment: - Market versus political system - Visibility
V. Final Remarks
• In addition to making a significant contribution towards solving the problem of pensions, this reform has positive economic effects.
• The macroeconomic, labour market and capital market reforms contribute to increasing the positive effects of the pension reform on the economy.
• Although the capitalization system has suffered considerable political threats, it is still stronger than the pay-as-you-go system when it comes to facing up to “political risk”.
Latin America: Investment Diversification (2002)
Source: Palacios (2003)
Country State
instrumentsLocal Investment
Foreign Investment
Cash andTime
Deposits
Fixed Income Equities
Argentina 78% 11% 9% 2% 90% 10%Bolivia 69% 14% 1% 16% 100% 0%Chile 30% 32% 17% 21% 75% 25%Colombia 49% 34% 5% 12% 93% 7%Costa Rica 67% 19% 0% 14% 100% 0%El Salvador 85% 1% 0% 14% 99% 1%
Mexico 83% 15% 0% 2% 100% 0%Peru 15% 53% 7% 25% 71% 29%Uruguay 64% 6% 0% 30% 100% 0%
• The effects on the pension funds of the economic crisis of the past few years would have been less if their investment portfolios had been better diversified.
V. Final Remarks
• The inadequate diversification is explained by the combined effect of limited development in some local capital markets and regulations.
V. Final Remarks
State and Bank State and Bank DepositsDeposits
0%0% 50%50% 100%100% 150%150% 200%200% 250%250%
Costa RicaCosta Rica
ColombiaColombia
UruguayUruguay
NicaraguaNicaragua
Dominican Rep.Dominican Rep.
Peru Peru
El SalvadorEl Salvador
BoliviaBolivia
ArgentinaArgentina
ChileChile
Private Private Investments and Investments and
Mutual FundsMutual Funds
Source: Palacios (2003)Source: Palacios (2003)
Latin America: Differences in Investment Limits
• Fortunately there is evidence that regulation may move in this direction in the near future, and in some cases that is has already done so:
CHILE: - Multifunds- Increase in limit for investment abroad
MEXICO: - Multifunds (Reform to SAR Law)- Investment allowed in foreign securities
ARGENTINA: - Possibility for the AFJPs to buy dollars without limits (Project) PERU: - Multifund
- Increase in limit for investment abroad
V. Final Remarks
Chile : Results of the Multifunds (October 2003)
FUNDS (Millions US$) % YIELD
(Jan. – Oct. 03)
Fund AFund A 1.912,881.912,88 4,09 4,09 24,7%24,7%
Fund BFund B 6.590,386.590,38 14,09 14,09 14,9% 14,9%
Fund CFund C 31.426,2331.426,23 67,20 67,20 10,0% 10,0%
Fund DFund D 4.779,30 4.779,30 10,22 10,22 8,3% 8,3%
Fund E Fund E 2.057,03 2.057,03 4,40 4,40 3,1% 3,1%
TOTAL 46.765,82 100,00
Fund Maximum L. Minimum L. Fund A 80% 40%
Fund B 60% 25%
Fund C 40% 15%
Fund D 20% 5%
Fund E 0% 0%
The Funds are differentiated by their minimum and maximum proportion of equities.