Guillermo Arthur E. FIAP April, 2003 INTERNATIONAL PERSPECTIVES: DEVELOPMENT AND PROSPECTS OF MANDATORY FUNDED PENSION SYSTEMS IN LATIN AMERICA AND EASTERN EUROPE * Guillermo Arthur E. FIAP April, 2003 * Presented at the Annual Conference of the World Pension Association - “The Impact on Pension Fund of Major Global Exchange”. Dublin, Ireland, April, 2003.

INTERNATIONAL PERSPECTIVES: DEVELOPMENT AND PROSPECTS OF MANDATORY FUNDED PENSION SYSTEMS IN LATIN AMERICA AND EASTERN EUROPE IV Conferencia Internacional de Fondos de Pensiones Dublín, Irlanda Abril 2003 Guillermo Arthur E., Presidente FIAP Autor: Asociación de AFP de Chile

I. The “reformist” countries Source: FIAP (*) Not yet implemented

PENSION REFORM IN LATIN AMERICA AND EASTERN EUROPE (as of December 2002) Source: FIAP

PENSION FUND IN LATIN AMERICA MM US$ Accumulated FIAP: MMU$ 101.409 Source: FIAP

II. The impacts of pension reform Although it may be too soon to make a complete assessment of pension reform, some remarkable results can already be observed: High rates of return of pension funds investment. Positive impact on capital markets development. Positive impact on savings and economic growth. In some countries social security debt did stop growing after pension reform. In others, social security debt growth rates did decrease.

Lower social security debt When a new funded pension system substitutes an existing pay-as-you-go system, the growth rate of the implicit social security debt will first decrease and afterwards it will stop. When a funded pension system partially substitutes a pay-as-you-go system, the growth rate of the implicit social security debt will decrease (There are transitory negative effects on fiscal deficit flows because: Revenue of the old pensions system will decrease (as contributors move to the new system). Obligations of the old system with workers who switch to the new system are usually recognized and paid.)

Implicit Social Security (Pension) Debt (ISSD) and Public Debt (%GDP) Source: Holzmann; Palacios; Zviniene (2002) * 4% discount rate

III. Prospects of mandatory pension funds Challenges In some reformist countries, the new pension systems are under some criticism because of political reasons; because the impact of pension reform on the cash flow fiscal deficit; and because some groups of workers which did receive privileged pension conditions in the old system, lost their privileges with pension reform. The weakness of the world economy has a negative impact on pension fund returns. This situation could strengthen opposition to pension reform. (Continue)

III. Prospects of mandatory pension funds In some countries pension fund investment rules do not allow fund managers to diversify the portfolio in the most efficient way. In many countries it’s difficult to extend the coverage of the new funded pension systems because the relatively large size of the informal sector.

III. Prospects of mandatory pension funds Opportunities In most reformist countries the results of the new mandatory pension funds are encouraging. This should help to give momentum to the reform impulse in other countries (Slovakia, Czech Republic, Dominican Republic, Nicaragua, etc.). The practical experience of reformist countries should help other countries which are considering pension reform, to improve the design of their own new systems.

III. Prospects of mandatory pension funds Conclusion Pension funds are playing a growing role within social security system. This trend opens great opportunities for the industry. However the new mandatory funded pension systems are facing a tough world economic scenario and pension reform is been challenged by their opponents. To overcome this situation the industry must show discipline, creativity and a strong compromise with the principles of the new pension system .