1. PRIVATE PENSION PLANS: THE MULTI-FUNDS PROPOSAL… THE FREEDOM of “MULTIPLE CHOICE” INVESTMENT! by ERIC CONRADS – CIO AFP Santa Maria / ING

2. 1 COMPETITION PRICE SERVICE QUALITY FUND RETURNS RISK CONTROL BASED ON… CLIENT FREEDOM OF CHOICE FUND TYPE FAMILY (MULTI-FUNDS) ASSET MANAGER (AFP) PHILOSPOHY PILARS: COMPETITION & FLEXIBILITY

3. 2  PORTABLE PENSION  PORTABLE PENSION: CLIENTS CAN PICK THEIR MANAGER RISK PROFILE  PENSION RISK PROFILE IN THE HANDS OF THE CLIENT!  AVAILABILITY  AVAILABILITY OF DIFFERENT FUND RISK PROFILES  GUIDED FREEDOM  GUIDED FREEDOM OF CHOICE VIA AGE RESTRICTIONS or AUTOMATIC ASSIGNATION IF NO CHOICE IS MADE IMPROVING RETURN  EXPERIENCE DEMONSTRATES IMPROVING RETURN VIA MULTI - FUNDS AFFILIATE MORE ACTIVELY INVOLVED  AFFILIATE MORE ACTIVELY INVOLVED IN THE DYNAMIC OF HIS RETIREMENT LOWER COST  LOWER COST TO MANAGE THE RETIREMENT SYSTEM LOCAL CAPITAL MARKET  STABILZATION & DEEPENING OF THE LOCAL CAPITAL MARKET  NECESSITY OF WIDE SPECTRUM OF INVESTMENT POSSIBILITIES FOR DIVERSIFICATION NEEDS AND FACE GROWTH OF ASSETS MULTI FUNDS EXPERIENCE: KEY MESSAGES

4. 3 Fuente: Asociación de AFP AFP CHILE: EXAMPLE OF DETAILED PORTFOLIOS 5 FUNDS SYSTEM: different RISK-RETURN PROFILES…DIFFERENTIATED BY LIMIT OF EQUITY EXPOSURE

5. 4 MULTI-FUNDS: EMPIRICALLY DIFFERENT RETURN PROFILES AS ONE WOULD EXPECT…MORE AGRESSIVE FUNDS DELIVERED HIGHER RETURNS…

6. 5 MULTI-FUNDS: DIFFERENT CHESTS OF RISK PROFILE …AND OBVIOUSLY IT IMPLIES HIGHER RISK!

7. 6 RETURN DIFFERENTIALS = COMPETITION & TRANSPARENCY

8. 7 MULTI-FUNDS: AFFILIATES ARE USING THE FREEDOM OF CHOICE! AFFILIATES HAVE BEEN KEEN TO USE THE FREEDOM OF CHOICE FOR THEIR RETIREMENT PLAN… Fuente: Asociación de AFP

9. 8 FUND TYPE EVOLUTION: CLIENTS MIGRATE TO HIGHER RETURN FUNDS …AND THEY HAVE MOSTLY GONE FOR THE HIGHER RETURN FUNDS (92% OF FUND A & B clients are under 40) BALANCED FUND C IS ASSIGNED BY DEFAULT (nearly half of the total…syndrom of excess of choice = you dont choose?)

10. 9 AFP FOREIGN INVESTMENTS EVOLUTION: NEEDS OF FLEXIBILITY! THE MANAGERS HAVE USED AT THE MAXIMUM THE AVAILABILITY OF INTERNATIONAL DIVERSIFICATION Fuente: Asociación de AFP

11. 10 MULTI-FUND SYSTEM: INTERNATIONAL EXPERIENCE  2002: CHILE moves from 1 to 5 funds & MAX 30% internationally invested  Initially 2 funds for RISK needs: people close to pension preoccupied by volatility  Expanded to 5 funds for RETURN needs: critic was the lack of equities exposure in the fund.  2004: MEXICO offers the choice between 2 funds with MAX 15% in equities  2005: SLOVAKIA introduces 3 multi - funds: growth-balanced-conservative  2006: PERU introduces 3 multi - funds: growth-balance-conservative  THE AFP have the freedom to introduce more if they want…3 was a CHOICE!  2007: MEXICO moves from 2 to 5 funds and raises MAX equities to 30% CHILE has a reform plan on the table to improve the system. PERU increased the foreign limit to 13.5% from 10.5% TO OFFER CHOICE OF “TAILOR-MADE” FUNDS RATHER THAN ONE “READY-TO-WEAR” FUND TO BALANCE INVESTMENT FLEXIBILITY WITH THE REALITY OF THE LOCAL CAPITAL MARKET WHAT MATTERS?

12. 11 MULTI-FUND SYSTEM: SOME KEY CONCLUSIONS…  MULTI-FUND SYSTEM IS OFFERING RISK-RETURN ALTERNATIVES  EXPERIENCE SHOWS DIFFERENT SCALES OF CHOICE BUT POOR CONSIDERATION FOR RISK  RANKING IS MAIN SELLING POINT…DUE TO TIMING OF MULTI-FUNDS…MARKETS WERE ONLY UP  “RISK”: CONTRIBUTORS MIGHT HAVE TO LEARN THE CONCEPT OF RISK… BY EXPERIENCE!  MULTI-FUND SYSTEM PERMITS FREE-CHOICE OF PENSION PLAN  EXPERIENCE DEMONSTRATES THAT PEOPLE HAVE EXPLOITED IT & ARE ACTIVELY INVOLVED.  MULTI-FUND SYSTEM SHOULD CONSIDER AGE AS A DIVISION BREAKER  GENERATION NEEDS SEEMS THE EASIER WAY TO GUIDE THE CONTRIBUTOR BY DEFAULT.  LIFE-CYCLE FUNDS BOOM IN DEVELOPED MARKETS IS A SOURCE OF INSPIRATION.  MULTI-FUND SYSTEM NECESSITATES EDUCATION  ESSENTIAL TO FOSTER KNOW-HOW AMONG THE POPULATION  THE MORE SOPHISTICATED IS THE SYSTEM, THE MORE KNOWLEDGE IS NEEDED…

13. 12 MULTI-FUND SYSTEM: SOME KEY CONCLUSIONS…  MULTI-FUND SYSTEM DEFINES STRICTLY THE FUND PROFILES  NECESSITY OF A “POLICE REGULATOR” TO ENFORCE THE LIMITS  ESSENTIAL THAT FUNDS MANDATE ARE ALIGNED WITH CLIENT EXPECTATIONS  MULTI-FUND SYSTEM: PRIVATE MANAGEMENT / PUBLIC REGULATIONS  ODD WEDDING REQUIRES TO MELT FLEXIBILITY OF INVESTMENT DECISIONS WITHIN A PUBLICLY REGULATED LIMITED-FIELD TO ENSURE A MINIMUM RETURN.  ASSET ALLOCATION IS STILL THE LEADING FACTOR IN INVESTMENT PERFORMANCE  BUT THE RISK IS THAT AN EXCESS OF REGULATION = PUBLIC ENTITY IS THE ALLOCATOR! THE MULTI-FUNDS SYSTEM IS A GOOD ONE BUT HAS SOME YOUTH IMPERFECTIONS…  Is it normal to be restricted in foreign investments? (Government currency management!?)  Is it normal that an agressive fund has to hold 20% of cash? (what a long-term cost!)  Is it normal that an agressive fund has a maximum of 15% in equities? (interest of the youngsters?)  Is it wise to keep most of your investments locally when the market tripled in a year? (bubble trigger?)

14. 13 Contributors want to feel confident that their retirement savings are being managed in their best interest by professionals. The next level is ACTIVE participation of the contributor to the future of his retirement. Leave it to the pros Do it yourself MULTI-FUNDS SYSTEM Contributors select a portfolio basket (conservative, moderate, aggressive) based on their risk profile. Ideally it should be linked to the LIFE CYCLE of the person. MULTI-FUNDS available ONE FUND SYSTEM Contributors leave the selecting and monitoring to the professionals through the only ONE FUND available for his pension Manage Your Own Portfolio of Funds Contributors select, manage and monitor their own portfolio by advice and help of AFP Model Portfolio Asset Allocations taking into consideration their age, goals and investment horizon. 3rd PILAR -APV Increasing level of choice Increasing need for education CONCLUSION: INSPIRATION FOR TRADITIONAL PENSION SYSTEMS

15. 14 CONCLUSION: INSPIRATION FOR TRADITIONAL PENSION SYSTEMS  CITIZENS IN DEVELOPED COUNTRIES RETIRED AT 61 AND CAN EXPECT TO LIVE FOR A FURTHER 17 YEARS  SOON A MAJORITY OF THE VOTING POPULATION IN DEVELOPED COUNTRIES WILL BE OVER RETIREMENT AGE = HIGHER BURDEN DEPENDENCY RATIO!  FINANCING CURRENT PENSION SYSTEM IS UNSUSTAINABLE: SOLUTION 1  SOLUTION 1: YOU WILL WORK TILL YOU DROP SOLUTION 2  SOLUTION 2: YOU RAISE TAXES  SOLUTION 3  SOLUTION 3: THE FINANCING MODEL OF PENSION HAS TO BE REVISED. PAY-AS-YOU-GO SCHEME PRIVATE DEFINED CONTRIBUTION PLANS BEST SOLUTION: MULTIFUNDS SYSTEM WITHOUT TRANSITION FROM ONE FUND