Gonzalo Reyes Social Protection Unit Latin America and the Caribbean The World Bank. World Bank Core Pensions Course Washington, DC, November 2010

Transcription

1 Gonzalo Reyes Social Protection Unit Latin America and the Caribbean The World Bank World Bank Core Pensions Course Washington, DC, November 2010

2 Characteristics of 2 nd Pillar systems in LAC Main Challenges faced by 2 nd pillars Coverage Costs and Competition Investment regulation The case of Chile: illustration of the issues in the most mature 2 nd pillar system The Chilean Pension Reform of 2008: Addressing the issues.

3 Many countries in LAC implemented 2 nd pillar reforms in the 90s, replacing the PAYG system with a Defined Contribution system based on individual accounts. Private Companies in charge of managing funds in a regulated market. Government regulates and supervises through a dedicated agency (Superintendencia)

4 Coverage: Adequate provision through mandatory individual capitalization system. Gender equity Costs: Competition as a driver to keep fees at low levels. Financial Returns Adequate regulation and awareness of risk-return trade-off.

5 Coverage

6 Coverage: In any pension system based on mandatory participation, coverage is limited by the extend of the formal labor market. In theory a DC system gives better incentives to participation in formal employment, but there is weak evidence supporting this. Consistent and continuous history of contributions is relevant for building a better pension in this system.

7 Argentina Bolivia Brazil Chile Costa Rica Dominican Rep. Ecuador El Salvador Guatemala Mexico Nicaragua Panama Paraguay Peru Uruguay Venezuela SSE Formal salaried USE Informal salaried 0% 20% 40% 60% 80% 100% Share of Employment

8 Coverage of Pension systems in LAC: Contributors/Employed Population * * * * * * * * * * * Source: Rofman et.al (2008) *: Countries that implemented 2 nd pillar reform: Bolivia, Peru, Dominican Republic, El Salvador, Colombia, Mexico, Argentina, Panama, Uruguay, Costa Rica and Chile.

9 There is considerable mobility across employment status for people in the working age group. On average, people spend close to 50% of their potential working life in the formal salaried sector Distribution of Potential labor life 100% 80% 60% 40% 20% 0% 4% 60% Hombre 10% 8% 19% 5% 46% Mujer 35% 8% 7% Inactivo Desempleado Sin contrato Con contrato Independiente 100% 80% 60% 40% 20% 0% Distribution of Periods without contributions 31% 11% 5% Hombre The main reason for men not to contribute is being a self-employed worker, while for women is being out of the labor force. 16% 37% 10% 3% Mujer 69% 11% 8%

10 % de los afiliados % de los afiliados As a result, the average density of contributions is close to 50%, with great heterogeneity in its distribution. Male participants Female participants densidad de cotizaciones (%) densidad de cotizaciones (%)

11 Costs and Competition

12 A frequently cited shortcoming of a system based on individual accounts is its expected higher administrative cost (James, Vittas, etc). Economies of scale exist, but different functions have different cost structures (Collection, account management, fund management, customer service, etc.) A related question is whether competition in the PFM market is enough to keep prices at reasonable levels, so that returns are not dissipated by higher costs

13 % Chile: # AFP C2

14 Comparable Statistics on Costs Source: IOPS Chile: Evolution of Fees (Real $ per person and % of wage bill)

15 Chile Colombia Costa Rica El Salvador México Perú Uruguay Bolivia Source: AIOS Chile: Pension Funds Financial Industry Period Return Risk* Return Risk* Initial ,62% 25,65% n.d. n.d. Competitive ,41% 11,27% 17,19% 2,31% Stationary ,47% 4,65% 15,06% 3,23% *Measured as Standard Deviation of Returns Source: Reyes and Castro (2008)

16 Market evolution does not show strong price competition. When more players entered the market, margins decreased as a result of higher marketing costs, not of lower prices to attract customers. Most important determinant of member turnover: size of sales-force. Incumbents have competitive advantage over entrants: investment in sales agents may not be profitable due to high turnover Barrier to entry

17 El Salvador Mexico Peru Uruguay Transfers Sales agents Transfers Sales agents Transfers Sales agents Transfers Sales agents

18 Number of PF switches (thousands) Number of sales agents Simple correlation between Sales-force and transfers in 7 countries between is Berstein and Cabrita (2007) find probability of visit by a sales agent the main determinant of switches in Chile, reinforcing effect of rate of return. Switches Salesforce

19 Investment Regulation

20 In a DC system the amount of the final pension depends crucially on the returns obtained by the investments. Several challenges for this purpose: Well functioning capital markets, adequate regulation, fiduciary responsibility of managers.

21 Composition of Pension Funds: 2009 Total Government Debt Fianncial Institutions Non- Financial Institutions Equity Mutual Funds Foreign Instruments Other (MM US$) % of total fund Bolivia 4, Chile 100, Colombia 31, Costa Rica 1, El Salvador 4, México 77, Perú 18, R. Dominicana 1, Uruguay 3, Total 244, Source: AIOS

22 AFP investment by type of instrument 100% 80% Corporate Sector Investment abroad 60% 40% Financial Sector 20% Government Bonds 0%

23 5 types of funds difrerentiated by asset allocation: MAXIMUM AND MINIMUM LIMITS IN EQUITIES Type of Fund Maximum Limit Minimum Limit Fund A 80% 40% Fund B 60% 25% Fund C 40% 15% Fund D 20% 5% Fund E 5% 0% And by choice: Men 35 or less 36 to and older Retirees Women 35 or less 36 to and older Retirees A Fund X X Investment options B Fund default X C Fund default D Fund default E Fund

24 A B C D E Years Fund A Fund B Fund C Fund D Fund E % -0.50% 3.50% -1.00% 8.80% % 16.00% 10.50% 8.90% 3.30% % 10.30% 8.90% 6.80% 5.40% % 7.30% 4.60% 2.80% 0.90% % 18.80% 15.80% 11.50% 7.40% % 7.50% 5.00% 3.30% 1.90% % % % -9.86% -0.93%

25 Addressing the issues

26 In 2006, the government made a decision to carry out a Pension Reform. The first step was to appoint an Advisory Council for a Reform Proposal. The Proposal was then analyzed by a Ministerial Committee that issued a law finally approved in January 2008.

27 Improve the level of coverage of the system by increasing personal contributions while providing a strong and integrated safety net for individuals who are not able to contribute Improve system s efficiency by increasing the level of competition through higher demand sensitivity, lower barriers to entry and a more flexible investment regulation Improve Investment Regulation and strengthen Corporate Governance of Pension Fund Managers.

28 Create a New Solidarity Pillar Basic Solidarity Pension for individuals who could not contribute Solidarity Complement for individuals who financed small pensions Bonus per child, equivalent to 1 year contributions Subsidy for contributions of young workers Mandate self-employed workers to contribute and improve contribution enforcement Provide equal conditions for men and women Survivorship eligibility Insurance fees adjusted by morbidity Redistribution of savings in case of divorce

29 Old age Solidarity Benefits Disability Solidarity Benefits Total Pension Total Pension APS APS PBS PBS Self financed Pension Self Financed Pension

30 Número de cotizantes By design, only high income individuals take advantage of tax exemptions for voluntary savings. Número de cotizantes de Marzo 2008 con saldo por cotizaciones voluntarias o depósitos convenidos, según ingreso imponible Contributors with Voluntary savings by income level Menos de $100 mil $100 - $200 mil $200 - $300 mil $300 - $400 mil $400 -$500 mil $500 -$600 mil Increase voluntary savings Collective voluntary savings (Occupational plans, like 401k in USA) Matching contributions paid by employers. 15% Subsidy to voluntary savings paid by the State $600 -$700 mil Ingreso imponible de los cotizantes (pesos) $700 -$800 mil $800 -$900 mil $900 mil - 1 millón Más de 1 millón

31 Increase flexibility of Investment Regulation: Only 5 limits by type of instrument remain by law. Investment Regime in Secondary Regulation Investment Regulation can incorporate risk measurement norms. Creation of Technical Investment Council that analyzes and proposes investment regulation Strengthen Corporate Governance of AFPs: AFPs must incorporate at least two autonomous directors into their board. AFPs must create Investment and Conflict of Interests Committees in their board. Obligation to prepare Investment Policies and Conflict of Interest Resolution Policies that they must comply.

32 Market in high returns/no entrance equilibrium: Low contestability. Requires higher contestability without threat of high turnover of new members. New measure: Bidding process to assign new members. Shifts competition in the field towards competition for the field. Other Measures: Allow separation of functions for AFPs with preferential tax treatment Separate provision of Disability and Survivors Insurance. Simplify fee structure

33 Increase limit for investing abroad to up to 80% of pension fund. Transfer Most Investment Regulation from the law (inflexible, difficult to change, nontechnical discussions) to secondary regulation Form an Investment Committee to study and issue proposals for this regulation (technical discussions) Develop appropriate risk-measures for pension funds.

34 VOLUNTARY PILAR VOLUNTARIO PILLAR APV PMG MANDATORY PILAR PILAR CONTRIBUTIONS CONTRIBUTIVO PASIS Solidarity Pillar

35 Berstein, Castaneda, Fajnzylber, Reyes Chile 2008: A Second Generation Pension Reform edited by Superintendencia de Pensiones. Berstein and Cabrita (2007) Los determinantes de la elección de AFP en Chile: nueva evidencia a partir de datos individuales Impavido, Lasagabaster and Garcia-Huitron (2009) Competition And Asset Allocation Challenges For Mandatory DC Pensions: New Policy Directions Electronic copy available at: Gomez & Stewart (2008), Comparison of Costs and Fees in Countries with Private Defined Contribution Pension Systems, IOPS Working Paper 6, Reyes and Castro (2008) Medidas Pro-Competencia de la Reforma Previsional