1. The reformed pension systems in Latin America Robert Palacios Social Protection Department, World Bank ILO-FIAP Conference, Geneva, October 2003

2. Why reforms in Latin America? Reformers usually cite: – Increasing pressure on the central budget – Lack of long term sustainability – Failure to provide promised benefits – Poor management of reserves – Inequities within and across schemes – Incentives to evade But, initial conditions very different…

3. Yet initial conditions varied... Pension spending % GDP Level of reserves System support ratio Implicit Pension debt % of GDP Argentina 6.2 None.60 305 Bolivia 2.5 Some 3.0 31 Colombia 1.1 Some 12.1 35 Costa Rica 1.6 Significant 6.6 94 Chile 5.7 None 2.5 131 DominicanRep. 0.8 None 17.0 22 Ecuador 2.0 Some 5.6 19 El Salvador 0.4 Some 11.6 9 México 1.0 None 8.0 37 Nicaragua 2.5 Some 4.8 14 Peru 1.2 None 4.3 45 Uruguay 15.0 None 1.4 290

4. There are common elements… Separation of redistribution and savings privately-managed, defined contribution accounts with restricted withdrawals Specialized industry participants within a strict regulatory framework Individual (not employer) choice of provider and reliance on competition Respect for rights generated in the old pension scheme

5. …but also variations in design Size, degree of funding and reliance on private versus public schemes –Parallel, add-on, substitute, replacement rates Regulations and rules –Investment rules –Restrictions on charges –Restrictions on withdrawals, annuities –Guarantees Institutional arrangements –Collection and recordkeeping –State-owned pension funds –Supervision

6. Example: relative size of pillars What share of the pension wealth of workers entering in 2003 will come from the PAYG component of the system? 0255075100 Mexico Chile El Salvador Colombia Dominican Republic Argentina Uruguay Costa Rica Unfunded share of projected pensions

7. Example: relative size of pillars 051015202530 Dominican Rep. El Salvador Nicaragua Costa Rica Bolivia Chile Peru Mexico Colombia Argentina Uruguay funded, DCunfunded, DB Contribution as share of salary

8. Challenges facing new systems Investment policy and government intervention Commissions vs market concentration Coverage and exemptions Payout period and annuities Idiosyncratic issues –Mexican housing fund –Colombias switchback provision

9. Challenges facing new systems Investment policy and government intervention Commissions vs market concentration Coverage and exemptions Payout period and annuities Idiosyncratic issues –Mexican housing fund –Colombias switchback provision

10. Challenges: investment policy 0%5%10%15% Peru Uruguay Bolivia México Chile Colombia México El Salvador Argentina Return minus wage growth since inception

11. Challenges: Investment policy 0%20%40%60%80%100% El Salvador Uruguay Bolivia Mexico Costa Rica Argentina Colombia Chile Perú Government bonds/ bank depositsPrivate securitiesinternational

12. Challenges: Investment policy 0 1,000 2,000 3,000 4,000 5,000 6,000 9596979899000102 Fixed income trading volume Variable income Trading volume Pension funds Peru: pension fund demand overwhelms domestic supply

13. Assets will continue to grow… 0102030405060708090100 Costa Rica Uruguay Colombia México Peru Argentina Bolivia Chile Assets as share of GDP in 2015

14. Challenges: Investment policy Diversification is key to good risk-adjusted returns to reach replacement rate targets High public debt component leads to: –Inadequate diversification and default risk –Reduced impact on capital market development –debt financed transition/lower savings effect Solution involves combination of changes to investment limits including foreign share and parallel reforms of domestic capital markets

15. Conclusions Systemic reforms differ greatly in terms of design and implementation –Implicit replacement rate targets and reliance on private DC vs public DB –Regulations Rules on commissions Guarantees Investment limits –Institutional arrangements Collection, supervision, disability provision etc.

16. Conclusions Too early to judge success –Good performance in terms of returns-earnings differentials, especially when compared to public –But underlying portfolios cause for concern and governments may continue to interfere –Indirect positive impact on economy in Chile but this impact not automatic or assured Reforms at a crossroads –Diversification versus public debt or mandates –More choice and education for consumers or not –Proactive approach to annuities, coverage, etc. –Rationalization of design required in some cases

17. End