IOPS COUNTRY PROFILE: CHILE

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1 IOPS COUNTRY PROFILE: CHILE DEMOGRAPHICS AND MACROECONOMICS GDP per capita (USD) Population (000s) Labour force (000s) Employment rate 91.3 Population over 65 (%) 9.6 Dependency ratio 1 21 Data from 2010 or latest available year. 1. Ratio of over 65-year-olds / labour force. Source: OECD, various sources. STRUCTURE OF THE PENSION SYSTEM CHILE COUNTRY PENSION DESIGN Public pensions Three different pennsions schemes are available, i.e. the pension programme for those members who remain in the old system, a mininum old age pension, and the welfare pension programme (which is means-tested) Civil servants are covered by separate scehemes Private pensions: personal (mandatory) It covers all employees (including self-employees) who joined the labour force after Dec It is a fully funded and individual account Private pensions: personal (voluntary) It covers both employed and self-employees It is a fully funded individual account too, and the balance can be transferred to the mandatory individual account upon retirement Source: OECD Global Pension Statistic January

2 CHILE: PENSION FUNDS DATA OVERVIEW Assets Total investments (National currency millions) ND 25,521,621 29,505,951 33,889,085 38,312,676 47,186,675 55,173,152 46,750,887 Total investments, as a % of GDP ND Of which Assets overseas, as a % of Total investment: Issued by entities located abroad ND Issued in foreign currencies ND By financing vehicle (as a % of Total investments) Pension funds ND Book reserves ND ND ND ND ND ND ND ND Pension insurance contracts ND ND ND ND ND ND ND ND Other financing vehicule ND ND ND ND ND ND ND ND By pension plan type Occupational assets ND % of DB assets ND ND ND ND ND ND ND ND % of DC (protected and unprotected) assets ND ND ND ND ND ND ND ND Personal assets ND 25,521,621 29,505,951 33,889,085 38,312,676 47,186,675 55,173,152 46,750,887 Structure of Assets (as a % of Total investments) Cash and Deposits ND Fixed Income ND Of which: Bills and Bonds issued by the public and private sector ND Loans ND Shares ND Land and Buildings ND Other Investments ND Contributions and Benefits Total Contributions, as a % of GDP ND Employer Contributions, as a % of Total contributions ND Employee Contributions, as a % of Total contributions ND Total Benefits, as a % of GDP ND % of benefits paid as a Lump sum ND % of benefits paid as a Pension ND Membership (in thousands of persons) 1 Total membership ND 6,824 7,105 7,217 7,544 7,847 8,224 8,567 % of Active membership ND Of which: % of Deferred membership ND ND ND ND ND ND ND ND % of Passive membership ND Other beneficiaries ND ND ND ND ND ND ND ND Number of Pension Funds/Plans Total number of funds ND Total number of plans ND ND ND ND ND ND Note: Data refer only to Chilean pension funds. 1. Membership figures reflect membership rather than people. Therefore a person may be a member of more than one types of plan at any one time, particularly if the person has a number of employments in the year. ND = data not available NA = data not applicable Source: OECD, Global Pension Statistics January

3 PUBLIC PENSION CHILE: THE PENSION SYSTEM S KEY CHARACTERISTICS The public pension scheme includes at least three different programmes. First, the pension programmes for those members who remain in the old system, run by the Institute of Social Security Normalization (INP), which is now closed. As of December 2004, there were 156,806 contributors and 835,608 pensioners in this program. Second, the State promises to finance a minimum old age pension to all members of the private pension system who, at retirement, have not accumulated enough funds in their personal accounts to finance a pension of an amount equal to or greater than the minimum pension, and who fulfill certain requirements as specified by law. These requirements include contribution for at least 20 years. The State assumes responsibility for the payment of this pension once the funds in the personal accounts are exhausted. Minimum disability and survivorship pensions are also offered to workers who meet certain conditions. The value of the minimum pension is fixed by law and the expenditure is financed from the central government budget. At the end of 2004, the minimum pension was $ 77,077 per month (US$138). Third, the welfare pension program (or mean tested ) grants pensions to those people over 65 years of age and to disabled persons, provided that their income is lower than 50% of the minimum pension. This benefit is incompatible with receipt of any other pension. At the end of 2004, the minimum pension was $ 39,484 per month (US$71). Civil servants, other government employees and members of the armed forces have their own scheme. OECD estimates the gross replacement rate for an average worker from the mandatory system at 43.8% (53.5% net). PERSONAL MANDATORY Coverage Private and public employees who entered the labour market after 1 st January 1983 are required to participate in a private pension scheme. Participation is not mandatory for the selfemployed, the unemployed, those in the informal sector or those who covered by the old system. At the end of 2005, the number of members in the mandatory private pension system had risen to 7.3 million Contributions All workers who joined the labour force after December 31, 1982, and those who opted out of the old system must contribute 10% of their wages to their private investment funds. Wages are taxable up to a limit of 60 U.F. 1, which is currently US$2,017 a month. Workers must contribute another 3% of wages to cover term life and disability insurance. 1 UF is a measurement unit indexed to consumer prices. As a March of U.F. was equivalent to US$ January

4 Benefits The system is defined contribution in nature. Retirement benefits are available at age 60 for women and 65 for men. They can be paid as life annuities, programmed withdrawal or temporary income with deferred life annuity. Not all the accumulated capital must be used to buy a pension. If the member obtains a pension of more than 150% of the minimum pension and more than 70% of his or her average taxable income over the last 10 years, the surplus may be freely withdrawn. Employees who moved from the old system to the privatized one received a recognition bond representing the value of accrued rights under the old system; the bond was indexed for inflation and funded by general revenues. The recognition bond is paid into an employee's pension account when he retires. Taxation Mandatory contributions and investment incomes are tax exempt. Benefits are taxed as income. PERSONAL VOLUNTARY Coverage Both employees and self-employed are allowed to contribute in the voluntary pension scheme. Additionally, people contributing to some of the social security schemes administered by the Institute of Social Security Normalization (INP) will be able to make voluntary savings in the various institutions authorized to manage them. The voluntary savings accounts are independent of the individual capitalization account. Currently, around 420,000 workers have this type of savings. Contributions Benefits Employees pay in contributions of up to 50 UF per month, regularly or not. Members can transfer all or part of the funds to the individual capitalization account when they retire, in order to increase the amount of their pension. Additionally, workers are allowed to withdraw their voluntary social security savings at any point in their working life and not only on retirement. However, withdrawals made by the worker before retirement will be subject to a special tax and will be considered as income in the year in which they take place. Taxation Contributions to voluntary accounts are tax exempt. MARKET INFORMATION Personal mandatory The mandatory pension system is managed by private, specialized pension fund administrators (AFPs). The AFP is separate from the funds which it administers, which are owned by the members. In addition to their fund management services, the AFPs collect January

5 contributions and make payments, keep records of individual accounts, provide information to the regulatory body and members, and purchase group insurance policies to provide death and disability cover for members. Currently there are 6 AFPs operating in the market. As of 2002, AFPs are allowed to operate four different pension funds, which are differentiated by the proportion of their portfolio invested in equities and fixed income securities: funds B (up to 60% in equities), C (up to 40% in equities), D (up to 20% in equities), and E (equities are not allowed). AFPs may also offer an additional fund A (up to 80% in equities). This system is called the multifunds system. Members can allocate their contributions between two different funds within one AFP, in whatever proportion they choose. The only limitation is for pensioners, who may choose only among the funds C, D and E; and members within 10 years or less of the legal retirement age, who may access only to the fund type B, C, D and E. Assets may only be invested only in instruments that have been specifically authorized by law, or by the Central Bank of Chile and the Superintendency of AFPs. Quantitative investment restrictions apply for each asset class and vary for the different types of funds. Since March 2004, the AFPs were allowed to allocate between 20% and 30% of their portfolio to foreign instruments. Investment regulation also sets specific limit per issuer which vary by economic sector (financial sector, external sector, investment and mutual funds, the State and companies). Pension funds administrators have accumulated assets equivalent to 74,756 million dollars as of December 2004 or 60% of GDP. The average rate of return of the pension system (excluding administration fees) was around 10% between 1981 and At the end of 2005, 16% of total assets were invested in government bonds, 29% in securities issued by domestic financial institutions, while investment in domestic corporate bonds represented around 7%. Local equities and mutual funds represented 15% and 3% respectively, whilst foreign securities have increase to around 30%. Each year each AFP must guarantee that the average real return in the last 36 months is not lower than the lesser of (i) the average real return minus 4 percentage points for the funds A and B (with a higher equity exposure), and minus 2 percentage points for the funds C, D and E (with a higher proportion of fixed income securities) or (ii) 50% of the average real return of all the funds. To cover this guarantee, the law obliges the AFPs to constitute a Yield Fluctuation Reserve and a Mandatory Reserve. The AFPs are entitled to charge fixed and variable commission. The fixed commissions are charged for maintaining the balance. The variable commission comprises payment of insurance premium on disability and survivor insurance, as well as the variable net commission paid to AFPs to cover their cost and profit. By the end of 2005, the average commission was 2.3%. 0.95% was used to pay the premium for the employee's disability and survivorship insurance, whereas the remaining 1.35% cover the administration costs of the AFPs. Personal voluntary Voluntary pension funds are defined contributions funds managed by AFPs or financial institutions, including banks, mutual funds, insurance companies, housing fund managers and others authorized by the Superintendency of Securities and Insurance. AFPs that manage voluntary pension funds have the same institutional framework as those managing mandatory funds. January

6 POTENTIAL REFORM On December 19, 2006, the Chilean President sent Congress a pension reform bill in order to introduce changes into the pension system created in The government expects Congress to approve the bill this year and implement the reforms in The central components of the reforms are: -- The creation of a Solidarity Pension System (SPS) for members unable to save towards their retirement. The SPS would replace the current means-tested pensions and the guaranteed minimum pension with two types of pension benefits to the country's low-income population aged 65 or older who have lived in Chile for at least 20 years. -- The reform includes a set of instruments in order to address gender equity. -- Pension reform mandates that the self-employed, who currently are not obligated to contribute to the pension system, join the individual retirement account system within 7 years after the reform has been implemented. -- In order to promote participation of younger workers, the reform proposes a monthly subsidy to low-income workers (those who earn less than 1.5 times the minimum wage) between ages 18 and 35 for the first 24 months of employment after they are formally employed. -- The pension reform introduce proposal that favor direct or indirect competition among the pension fund administrators (AFPs). -- With the aim to make the investment portfolio more flexible, the proposed reform introduces changes in the investment regulatory framework. -- The reform bill also includes a provision for employer-sponsored voluntary pension plans, known as Collective Voluntary Pension Saving (APVC). KEY LEGISLATION REFERENCE INFORMATION Law Nº 19,795 of 2002: extended the number of pension funds managed by each APF to 5. Law Nº 19,768 of 2002: reformed the mechanism for voluntary social security saving. Decree-Law 3,500 of 1980: created the mandatory private pension system. KEY REGULATORY AND SUPERVISORY AUTHORITIES Superintendencia de Administradoras de Fondos de Pensiones January

7 January

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