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PENSION REFORMS: EXPERIENCES IN
LATIN AMERICA
Seminar “The Future and the Reform on Pension Funds”
Madrid, Spain
October 2003
Guillermo Arthur E., President of FIAP
Author: Asociación de AFP de Chile
CONTENTS
I.
II.
III.
IV.
V.
Countries with Reform
Bases of the New Pension Systems
Results of the Reforms
Political Economics of the Capitalization Systems
Final Remarks
I. 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
I. 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
II. Bases of the Pension System
OLD SYSTEM
NEW SYSTEM
- Pay-as-you-go
- Individual capitalization
- State administration
- Private, competitive administration
- Inflexibility
- Individual freedom:
w To choose and change AFP
w How much to contribute (over the
minimum)
w When and how to become a
pensioner
w 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: w Supervisory
w Subsidiary
- Benefits: Old age, disability and
survivorship pensions
- Benefits: Old age, disability and
survivorship pensions
Disability and survivorship insurance:
collective and mutually supportive
Characteristics of the New Pension Systems: Latin America
COUNTRIES
LATIN AMERICA
INDIVIDUAL SAVING AND CAPITALIZATION SYSTEM
Single
Integrated Mixed
Mixed in Competition
(Individual Cap.)
(PAYG and Indiv. Cap.)
(PAYG and Indiv. Cap.)
a
Argentina
Bolivia
a
a
Colombia
a
Costa Rica
Chile
a
a
Ecuador
El Salvador
a
Mexico
a
Nicaragua
a
a
Peru
Dominican Rep.
Uruguay
a
a
Characteristics of the New Pension Systems:
Europe and Asia
COUNTRIES
EUROPE AND ASIA
INDIVIDUAL SAVING AND CAPITALIZATION SYSTEM
Single
Integrated Mixed
Mixed in Competition
(Individual Cap.)
(PAYG and Indiv. Cap.)
(PAYG and Indiv. Cap.)
Bulgaria
a
Croatia
a
Estonia
a
Hungary
a
Kazakhstan
a
Latvia
a
Macedonia
a
Poland
a
New Pension Systems
Proportion of the pension financed by the PAYG system
Costa Rica
Uruguay
Argentina
Dominican R
Colombia
El Salvador
Chile
Mexico
0
Source: Palacios (2003)
25
50
75
100
III. Results of the Reforms
1.- Return of the Funds
The rates of return of the funds exceed the growth of real wages and
per capita income.
Country
Argentina
Bolivia
Colombia
Chile
El Salvador
Mexico
Peru
Uruguay
Return of
Funds
11.70%
16,20%
11,80%
10,50%
11,30%
10,60%
5,70%
9,50%
Source: Palacios (2003)
Growth
of
Real
Wages
-0,80%
8,80%
1,40%
1,80%
-0,20%
0,00%
1,80%
3,60%
Difference
Return
FundsGrowth
Wages
12,50%
7,60%
10,40%
8,70%
11,50%
10,60%
3,90%
5,90%
Ratio
Growth
Maximum
Real
Returns to
income per
Minimum
capita
Returns
1,17
n.d.
1,13
1,05
1,3
n.d.
1,06
1,06
-0,40%
0,40%
-0,30%
4,50%
0,50%
2,80%
2,40%
-0,30%
Difference
Return
FundsGrowth
Income per
capita
12,10%
15,80%
12,10%
6,00%
10,80%
7,80%
3,30%
9,80%
2.- Rapid growth of the funds
MM US$
PENSION FUNDS IN LATIN AMERICA
45000
40000
Total (30.06.2003):
35000
MM US$ 106.018
Mexico
30000
25000
Argentina
20000
Chile
15000
Peru
Colombia
10000
5000
Uruguay
0
81 82
83 84 85 86
87 88 89 90
91 92 93
94 95 96 97
Bolivia
C. Rica
Jun’
98 99 '00 '01 '02 03
El Salvador
Pension Funds and GDP (June 2003)
Country
Fund
(MM US$)
Latin America
Argentina (2)
Bolivia
Colombia
Costa Rica (1)
Chile (1)
El Salvador (1)
Mexico (2)
Peru
Uruguay
Europe and Asia
Bulgaria
Kazakhstan
Poland
(1) GDP as of 31.12.2001
(2) GDP as of 30.09.2002
Source: FIAP
GDP
(MM US$)
Fund/GDP
15,328
1,258
6,403
218
39,672
1,289
35,405
5,296
1,149
236,631
8,160
71,297
15,781
67,236
14,000
584,147
30,592
12,321
4.82%
15.42%
8.98%
1.38%
59.00%
9.20%
6.06%
17.31%
9.33%
113
1,432
9,486
15,563
6,987
343,934
0.73%
20.49%
2.76%
3.- Rapid growth of membership
MEMBERSHIP IN LATIN AMERICA
35000000
30000000
Total (30.06.2003):
Mexico
58.747.165
25000000
20000000
15000000
Argentina
10000000
Chile
5000000
Colombia
Peru
Bolivia
C. Rica
0
81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 '00 '01 '02 Jun’
El Salvador
03
4.- 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 EXAMPLES
- Corporate Bonds
CHILE
PERU
MEXICO
Corporate Bonds
(MM of US$ as of 2002)
Corporate Bonds
(MM of US$ as of 2002)
Debentures or Coporarte Bonds
(MM of US$ as of 2002)
7.459
8.000
12.000
12.000
7.000
10.000
10.000
8.000
8.000
4.000
6.000
6.000
3.000
4.000
4.000
6.000
5.000
2.000
1.105
2.000
1.000
71,4
0
0
1994
2002
Share of Social Security Funds
2002
5.039
2.000
85
0
1981
11.626
2002
1997
Share of Social Security Funds
2002
2002
Share of Social Security Funds
2002
25,1 %
34,3%
AFP
35%
53%
47% 62%
40,7%
CSV
3%
AFP
C.S.V.
Others
AFP
Others
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
50.000
45.000
40.000
35.000
30.000
25.000
20.000
15.000
10.000
5.000
0
CHILE
PERU
Stock Market Net Worth
(Millions of US$ as of 2002)
Stock Market Net Worth
(Millions of US$ as of 2002)
47.430
660
1985
50.000
45.000
40.000
35.000
30.000
25.000
20.000
15.000
10.000
5.000
0
12.593
5.084
1993
2002
Share of Social Security Funds
2002
2002
Share of Social Security Funds
2002
7,5%
11,3%
0,7%
91,8%
88,8%
AFP
C.S.V.
Others
AFP
Others
- Mortgage-Backed Securities and Bank Bonds
CHILE
10.000
MBS and Bank Bonds
(Millions of US$ as of 2002)
Share of Social Security Funds
2002
8.431
9.000
2,5 %
8.000
7.000
55,2%
AFP
6.000
5.000
4.000
3.000
2.000
1.000
42,4%
CSV
513
0
1981
2002
AFP
N° Loan Operations
Housing MBS
Stock of Housing
Financed with MBS
600.000
529.321
500.000
400.000
300.000
200.000
100.000
31.918
0
1980
2002
C.S.V.
Others
- Investment Fund Shares
CHILE
Investment Fund Shares
(Millions of US$ as of 2002)
1.117
1.200
Share of Social Security Funds
2002
78,6%
AFP
10,9%
CSV
1.000
800
10,5%
600
400
200
0
0
1981
AFP
2002
C.S.V.
Others
5.- Projection of the Fiscal Deficit of the Reform: Chilean Case
% GDP
4
3,5
3
2,5
2
1,5
1
0,5
0
2002
2003
2004
2005
Recognition Bond
2006
2007
2008
2009
2010
Fiscal Contribution to Old System
2011
2012
2013
Total Fiscal Cost
2014
2015
6.- Coverage
•
When the costs of the formal sector decrease
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.
Employment in this
GREATER COVERAGE
HOWEVER, THERE IS STILL MUCH TO BE DONE TO ENLARGE THE
FORMAL SECTOR IN THE ECONOMY
IV. Political Economics of the Individual Capitalization Systems
• Relative
political risk:
• Government pressures:
- Capitalization
- Pay-as-you-go
- 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”.
V. Final Remarks
•
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.
Latin America: Investment Diversification (2002)
Country
Argentina
Bolivia
Chile
Colombia
Costa Rica
El Salvador
Mexico
Peru
Uruguay
State
instruments
78%
69%
30%
49%
67%
85%
83%
15%
64%
Source: Palacios (2003)
Local
Foreign
Investment Investment
11%
14%
32%
34%
19%
1%
15%
53%
6%
9%
1%
17%
5%
0%
0%
0%
7%
0%
Cash and Fixed Income
Time
Deposits
2%
90%
16%
100%
21%
75%
12%
93%
14%
100%
14%
99%
2%
100%
25%
71%
30%
100%
Equities
10%
0%
25%
7%
0%
1%
0%
29%
0%
V. Final Remarks
•
The inadequate diversification is explained by the combined effect
of limited development in some local capital markets and
regulations.
Latin America: Differences in Investment Limits
State and Bank
Deposits
Private
Investments and
Mutual Funds
Chile
Argentina
Bolivia
El Salvador
Peru
Dominican Rep.
Nicaragua
Uruguay
Colombia
Costa Rica
0%
Source: Palacios (2003)
50%
100%
150%
200%
250%
V. Final Remarks
• 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:
 MEXICO:
 ARGENTINA:
 PERU:
- Multifunds
- Increase in limit for investment abroad
- Multifunds (Reform to SAR Law)
- Investment allowed in foreign securities
- Possibility for the AFJPs to buy dollars without
limits (Project)
- Multifund
- Increase in limit for investment abroad
Chile : Results of the Multifunds (October 2003)
FUNDS (Millions US$)
Fund A
Fund B
Fund C
Fund D
Fund E
TOTAL
1.912,88
6.590,38
31.426,23
4.779,30
2.057,03
46.765,82
%
YIELD
(Jan. – Oct. 03)
24,7%
14,9%
10,0%
8,3%
3,1%
4,09
14,09
67,20
10,22
4,40
100,00
The Funds are differentiated by their minimum and maximum proportion
of equities.
Fund
Fund A
Fund B
Fund C
Fund D
Fund E
Maximum L. Minimum L.
80%
40%
60%
40%
20%
0%
25%
15%
5%
0%