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

2. 1. Development of the Private Pension System

3. Main Varianbles of the PPS
March 2008
Membership and Transfers
Active members
Contributors (1)
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

4. 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

5. 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

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

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

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

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

10. 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.

11. 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.

12. The Managed Portfolio reflects an annual growth trend in all funds, reaching a total of S/ 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

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

14. 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%

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

16. 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%

17. 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 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.

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

19. 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

20. The AFP have been achieving lower operative costs per member

21. 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

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

23. 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

24. 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.

25. 2. The Supervisor’s view

26. 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

27. 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.

28. 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.

29. ….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.

30. 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.

31. 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