1. CHILEAN EXPERIENCE IN INVESTMENT REGULATION International Conference “The Private Pension System in the Context of the Development of the Financial Services Market” Ukraine January 2003 Guillermo Arthur E., President of FIAP Author: Asociación de AFP de Chile

2. Index  Chilean Pension System  Investment Scheme  Results  Impact on the Economy  Some lessons from the Chilean experience

3. Chilean Pension System OLD SYSTEMAFP SYSTEM FUNDING Pay-as-you-goIndividual Capitalization MANAGEMENT StatePrivate BENEFITS DiscriminationUniformity MEMBERSHIP InflexibilityIndividual Freedom

4.  Framework of Laws and Regulations  Supervision  Subsidiary Minimum Pension Insurance Company Bankruptcy Minimum Yield Role of the State

5. Characteristics of the Pension System  Benefits:  Funding:  Mode of Pension Payment:  Programmed Withdrawal (AFP)  Life Annuity (Insurance Company)  Temporary Withdrawal with Deferred Life Annuity (AFP and Ins. Company) - Old-Age Pensions (Legal Age and Early) - Disability Pension (Total and Partial) - Survivorship Pension - Savings: Mandatory 10% Gross Wage - Disability and Survivorship Insurance - Recognition Bond

6. Investment Scheme  OBJECTIVES: - Yield - Security  RESULTS: - Better Pensions - Contribution to Economic Development

7. Pension / Last Income Source : The Private Pension System CEP- 1988 Assumptions -Male member, married with a wife 5 years younger. - Age when working life begins : 18 years. - He contributes during 85% of his working lifel. -Growth in earnings : 2% per year until the age of 50, and then stable. -He retires at 65 years of age Effect of Yield on Pensions

8. Impact of Yield on the Total of the Accumulated Pension Fund In December 2001, 63% of the accumulated fund was accounted for by the yield of the investments. MM$ Note: in order to obtain a pure measurement of the impact of the yield on the accumulated fund, an uninterrupted monthly contribution of $30.000 was taken, with a fixed commission of $534. The real annual yield obtained by the Pension Funds on average during the period was used, deflated by the UF. In the year 2021 (40 years) contributions represent 84% of the fund and contributions only 16%, with n average projected yield of 6% per annum.

9. How can adequate yield and security be achieved?  Investment in Instruments Authorized by the Law: Bonds, Shares, Mortgage-Backed Securities, Fund Shares, Foreign, etc.  Diversification: Instrument class; Issuer (risk, net worth or asset, issue, concentration, liquidity); Group of instruments, etc.  Competition between AFPs.  Single Corporate Purpose.  Net Worth Separation: AFP and Pension Fund  Risk Rating Process.  Trading in Formal Markets (Primary and Secondary)  Physical Custody of 90% of the Securities.  Guaranteed Minimum Yield.  Conflicts of Interest.  Supervision by the Superintendency of AFPs.

10. Diversification: By Instrument 1981 1990 2002 StateTime Dep.MBS.Corp. Bonds SharesInv. FundsAbroad

11. Diversification: By Fund FundMaximum L.Minimum L. Fund A80%40% Fund B60%25% Fund C40%15% Fund D20%5% Fund E0%  Limits on Equities:

12. Distribution Multifunds (31.XII.2003) FundMillions US$% Equities Fund A489,2272,49% Fund B3.936,1341,34% Fund C25.275,2524,04% Fund D3.769,1414,75% Fund E2.045,530% TOTAL35.515,2724,25%

13. SINGLE CORPORATE PURPOSE D.L. N° 3.500 Art. N° 23 The AFPs shall be corporations whos “exclusive purpose” shall be the management of Pension Funds... Concentrates efforts on achieving the best social security benefits for members Facilitates supervision Minimizes the risk of conflicts of interests

14. Guaranteed Minimum Yield  The Law ensures a Minimum Yield  Each AFP is responsible for obtaining it and it is calculated on the basis of the average yield of the P.F. (36)  Calculation: The lower of the following yields...  Real Average Annualized Yield minus 50%  Real Average Annualized Yield minus 2 % (Funds C,D and E) and 4% (Funds A and B)  Financing of Difference: Yield Fluctuation Reserve, Mandatory Reserve Fund and State as a last resort (Bankruptcy of AFP).

15. CONFLICTS OF INTEREST  Responsibility of the AFP: The AFP is answerable for any harm to the P.F.; Legal actions, compensation, not revealing investments or confidential information etc.  Activities forbidden to the AFPs: Using information, charging the P.F. for services; obtaining unlawful benefits with P. F. operations; etc.  Participation of the AFPs in the election of the directors of a Corporation: Vote in person, AFP Board decides votes, not to vote for the controller or related person, not to vote for executives or directors of the AFP, etc.  The directors of the AFPs: May not take part in investment decisions in financial firms, give opinions on matters involving conflicts of interest, etc.

16.  Daily information. a) Balances in current accounts b) Operations carried out (purchases and sales) c) Mandatory reserve required and held d) Value of the investment portfolio e) Fund and mand. reserve in custody f) Inflow and outflow of custody from in the C.S.D. and abroad. the Central Securities Depository.  Periodic Information. – Financial Statements of the Fund. – Financial Statements of the AFP. – Quarterly balances. – Publication of the investment portfolio. – Etc... $ AFPFund Supervision of the Superintendency of A.F.P.

17. RESULTS

18. PENSION FUNDS In December of each year in Millions of Dollars as of 31 Dec.2002

19. Evolution in the Number of Contributors ( Thousands ) Agosto 3.465

20. 10,3% 4% 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 (*1) YEAR ( *1) Average accumulated yield July 81- December 02 REAL ANNUAL YIELD OF THE PENSION FUNDS

21. Monthly Social Security Cost For an Average Contributor (Includes fixed commission and cost paid under the item Disability and Survivorship Insurance) 2,43% % Commission: 2,26% (Includes the cost of the Insurance) Fixed Commission: $ 538 Average August

22. Impact on the Economy

23.  IN THE FISCAL – FINANCIAL ASPECT: The pension reform deactivated the crisis that would have occurred in the future due to demographic changes.  INCREASE OF G.D.P.: 26,5% of the increase in the growth rate of G.D.P. in the period 1985 – 1997, is explained by the pension reform.  DEVELOPMENT OF THE CAPITAL MARKET: Creation of new institutions and financial instruments, accumulation of long-term resources, growth of the stock market, etc. ECONOMIC EFFECTS OF THE PENSION REFORM Source: Klaus Schmidt-Hebbel, Head of Economic Research Banco Central de Chile

24.  EFFECTS ON UNEMPLOYMENT DECREASE IN STRUCTURAL UNEMPLOYMENT - permanent, long-term - BY 2 PERCENTAGE POINTS  EFFECTS ON EMPLOYMENT INCREASE IN COVERAGE: 1980 - 51% of the Work Force Active contributors (Old System) 1998 - 65% of the Work Force All Contributors - ( 4% Old System and 61% Present System) INCREASE IN FORMAL WORK – Reduces the incentives of informality in Production and Employment Participation of the Informal Sector in GDP in the 1990s: Chile - 18%; Argentina - 22%, Bolivia - 66% IMPACT OF THE PRIVATE PENSION SYSTEM ON THE LABOR MARKET

25. Fiscal Impact of the Reform Social Security Deficit (% of GDP) 198219992037 Pension Payment2,0%3,1% 0,2% Recognition Bonds0,1%1,1% 0,0% Minimum Pensions0,0% 0,0% 0,6% TOTAL DEFICIT2,1% 4,2%0,8%

26. The Pension Funds are invested in various sectores of our Economy

27. PENSION FUND INVESTMENT SECTOR MMUS$ % P.F. n Electricity1,305 3.73% n Telecommunications1,025 2.92% n Sanitation 90 0.26% n Natural Resources1,119 3.20% n Real Estate4,78613.63% n Infrastructure 613 1.76% n Financial7,57321.58% n Foreign5,38915.36% n Government 11,57232.99% n Various Industries1,613 7.64% TOTAL 35,085 100%

28. Some lessons from the Chilean experience  Advantages of the individual capitalization system compared with the PAYG systems.  Private, competitive management.  Freedom of members:  Choice of AFP and freedom to change  Amount contributed (above the minimum)  Age and mode of retirement  Type of Fund  Ensure professional and technical supervision. (Continued)

29.  Diversified investments. Without minimum limits.  Regulate the capital market.  Carry out the reform without waiting for all the conditions to be fulfilled that are theoretically necessary for its success.  Take the discussion from the political to the technical plane. Some lessons from the Chilean experience