The Future of the Individually Funded System in Peru: The Supervisor’s View May 2008

1. Development of the Private Pension System

Main Varianbles of the PPS March 2008 Membership and Transfers Active members 4 156 077 Contributors (1) 1 698 782 Accepted Transfer Requests (Monthly flow) 25 055 Investments Pension Funds (million of US$) 22,230 Domestic Investments (millions of US$) 19,581 Foreign Investments (millions of US$) 2,606 Real Annual Profitability of Fund Type 1 (%) 1.3 Real Annual Profitability of Fund Type 2 (%) 6.6 Real Annual Profitability of Fund Type 3 (%) 11.8 Benefits (2) Pensioners 36 749 Disability Pensioners 4 524 Survival Pensioners 33 709 AFPs Number of AFPs 4 Number of Sales Personnel 2 031 Number of Agencies 58 (1) The information corresponds to December, 2007. (2) The information corresponds to January, 2008

Pension Funds and Macroeconomic Data The pension funds have become the largest institutional investors in the Peruvian economy. Pension fund investment has an ever growing impact on the economy and growth financing. Dec-04 Dec-05 Dec-06 Dec-07 Mar-08 Pension Funds (Millions of S/) 25 651 32 223 45 547 60 406 60 540 Pension Funds / GDP 10.8 12.3 15.0 17.7 Pension Funds / Domestic savings 56.8 57.0 57.5 73.7 73.8 Pension Funds / Investment 60.3 63.4 69.5 79.3 79.5 4

The nature of the Peruvial labor market generates low population coverage 29,4 11,4 30,6 11,1 31,8 11,7 32,7 13,4 0,0 5,0 10,0 15,0 20,0 25,0 30,0 35,0 Mar-05 Mar-06 Mar-07 Mar-08 * MEMBERS AND CONTRIBUTORS vs. PEA (In Percentages) Active members / PEA Contributors / PEA * Contributors / PEA as of December, 2007. The level of coveragre has increased slightly, but it is still low compared to other countries in the region

The PPS is the main source of development of the local capital market

The PPS encourages the growth of the variable income market * Information as of March 2008. Source: SBS, CONASEV.

... And also contributes to the growth of the Fixed Income market Information as of March 2008. Source: SBS, BCRP

The Fund has achieved a greater degree of diversification by economic sectors in the last few years, but it is concentrated in few issuers

The Pension Fund is ever more diversified, reducing its risk level Pension Funds by Economic Sectors (In Percentages) 0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0 80.0 90.0 100.0 Dec-1995 Dec-2000 Dec-2005 Dec-2006 Dec-2007 Feb-08 Others Hydrocarbons Telecommunications Holdings Foreign Mutual Funds Industry Central Reserve Bank Energy Peruvian Government Mining Financial Intermediation Source: SPP Buletin.

The implementation of the multifunds has generated new alternatives for members Three types of funds are established, according to the members’ profitability and risk expectations: Fund type 1 or capital preservation (conservative): For members about to retire and who require a low investment risk. Fund type 2 or mixed (balanced) : Aimed at members of intermediate age who seek a moderate investment risk. Fund type 3 or capital appreciation (growth): Aimed at young people prepared to assume a high investment risk. Seeks long term above-average returns.

The Managed Portfolio reflects an annual growth trend in all funds, reaching a total of S/. 61 177 million in March, 2008 Managed Portfolio According to Fund Type 10,000 20,000 30,000 40,000 50,000 Dec-05 Dec-06 Dec-07 Mar-08 In Milliones of New Soles Fund Type 1 Fund Type 2 Fund type 3

Members’ preferences are concentrated in Fund 2 1 % 7 % 96 % 90 % 3 % 3 %

Distribution of the managed portfolio per fund type Nonetheless, a considerable increase in Fund Type 3 can be observed as a result of the obtained profitability which attracted members with a greater risk appetite (mandatory savings) or those who seek to invest surpluses (voluntary savings for purposes other than pensions). Participation of the Managed Portfolio per Fund Type In millions of New Soles 10,000 20,000 30,000 40,000 50,000 60,000 70,000 Dec-06 Mar-08 Fund Type 1 Fund Type 2 Fund Type 3 89% 6% 23% 72% 5%

The historical profitability of the PPS in its first 14 years has been high despite international financial crises

The long-term profitability of the pension funds has been significant: 17.4% annual average in New Soles Nominal Annual Profitability of the Type 2 Pension Fund in Soles (In Percentages) -5 5 10 15 20 25 30 Dec-94 Dec-95 Dec-96 Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Jan-08 Feb-08 Mar-08 17.4%

The pension fund has grown significantly The pension fund has grown significantly. As of March, 2008, the contributions and the profitability obtained were 44.8% and 51.2% respectively Profitability and contributions of the Pension Funds January 1994 - March 2008 Contributions Profitability 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 50,000 55,000 60,000 65,000 70,000 Ene-94 jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 jan-06 Jan-07 Jan-08 In millions of New Soles System – Accumulated Contributions System - Profitability Note: Real data as of February 2008 and projected for March 2008.

Foreign investments record a slight increase in their participation within the portfolio

As of February, 2008, the Peruvian Central Bank increased the foreign investment limit to 17% and it is currently at 20% As of April* 11.44% of the fund had been invested. Foreign Investments (In Percentage of the Managed Portfolio 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 18.0% 20.0% 22.0% 2000/06 2001/06 2002/06 2003/06 2004/06 2005/06 2006/06 2007/04 2007/08 2007/12 2008/04 Limit 11.44% 10.5% 9% 7.5% 15% 13.5% 12% 17% 16% 20% * Information as of 07.04.2008.

The AFP have been achieving lower operative costs per member

Initially, the reduction of operative expenses per member was reflected in an increase of the operative margin per member, which was then reduced due to the effects of competition Operational Expenses / Members and Operative Margin / Members (In New Soles) - 25 50 75 100 125 150 175 200 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 -40 -20 20 40 60 80 120 Operational Expenses / No. of Members Operational Margin No. of Members Operational margin / No. of Members

The AFPs have reduced their commissions as of October, 2005, and premiums have been reduced through a bidding mechanism

In November, 2003, the average Insurance Premium was reduced 25%, and with the entry of the new AFP, the average commission was reduced 20% due to greater competion promoted by the Superintendency of Securities and Insurance Variable Comission and the average Insurance Premium of the PPS (Percentage of Income) 0.00 0.50 1.00 1.50 2.00 2.50 3.00 Dec-95 Dec-96 Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Mar-08 Average Comission Average Insurance Premium Elimination of the fixed commission Disability and Survival Insurance put out to Tender A new AFP enters

As a result of the changes in the regulatory framework, the Pension Cost has been reduced by more than 100 points to the benefit of millions of members Average level of Commissions and Insurance Premiums in the PPS 2.39% 1.34% 3.73% 2.72% 1.81% 0.91% 0.88% 2.69% 0.5 1 1.5 2 2.5 3 3.5 4 4.5 Average commission Insurance premium Total cost En % Aug-01 Dec-07 Mar-08 Note: The average level of the commissions does not include Permanence Plans.

2. The Supervisor’s view

How to measure the growth of the PPS over 5 years? Increased coverage New investment alternatives Tightening of risk control and handling of conflicts of interest (trustee responsibility) Greater efficiency and costs reduction in the pension industry Greater efficiency in benefits contracting

Greater pension coverage is expected to be achieved over the next 5 years, for which the adoption of the following measures is being studied: With respect to dependent workers, intensify inspection visit schedules to include workers who are not included in the payroll and link the pension collection system to the health system. Mandatory membership of self-employed workers who pay taxes. Implementation of social pensions for workers in small companies or micro-enterprises who receive incomes close to the minimum wage. The State will subsidize the contribution aimed at accessing a retirement pension. Financial education programs for promoting voluntary savings.

With respect to investments, the incorporation of new investment alternatives that enable mitigating investment risks will be continued… Extension of foreign investment limits. Incorporate new issuers into the domestic market: administrative simplification of investment recording, modification of criteria for investing in listed shares and investment funds. Include derived instruments in the portfolio risk management policy in order to mitigate the commodities price variations and exchange risks.

….as well as continuing to tighten risk control and the handling of conflicts of interest in pension fund investment management Improvement of the pension fund profitability performance analysis (reserve requirements, minimum profitability and benchmarks). Development of methodologies for measuring market risk in low liquidity markets Market transaction supervision system (Market Watch) Implementation of trustee diligence compliance indicators which include aspects such as the handling of conflicts of interest, transparency in the personal investment policies of fund officers linked to the investment process, prior registration of transactions, compliance with the Code of Ethics and professional capability requirements.

Greater efficiency in the reduction of costs in the pensions industry is also expected to be generated Electronic and centralized mechanism for the declaration and payment of pension contributions. Centralize the administration of individual accounts? In the mid-term, evaluate the application of a mixed commissions system or commissions on managed balances for new members.

Greater efficiency in benefits contracting Development of new pension products: for example, mixed income Simplification of the pension contracting process: seek processes that are member-friendly Information for the member on pension modes, pension products, disability, survival and minimum pension coverage