Lessons from LAC reforms Parallels with Chile’s next generation reforms

1. Lessons from LAC reforms Parallels with Chile’s next generation reforms Carolin A. Crabbe Sr. Financial Specialist, Infrastructure and Financial Markets

2. Lessons from reforms and Chile’s next generation reforms • Pension coverage to avoid old age poverty • Efficiency and transparency of pension systems • Ability of pension systems to deliver on promises

3. LAC Experience with Pension Coverage 11 – 50 % of labor force covered in region Low density of contributions and replacement rates Many groups not covered • Part-time and temporary workers • Independent, self employed workers • Women and gender inequality • Poor unable to contribute • Informal labor

4. LAC: INFORMAL ECONOMYAS A % OF GNP Source: Schneider, F. 2002. Size and Measurement of the Informal Economy in 100 Countries Around the World. Washington, D.C.: The World Bank.

5. LAC Experience Low coverage Low density of contributions and replacement rates Part-time and temporary workers Independent, self employed workers Women and gender inequality Poor unable to contribute Informal labor Chile’s Proposal New Solidarity Pillar Replacement rate = 70% Greater access to Pillar Smoothing inequality Independent workers included Eliminate years of contribution criteria Unemployment insurance pays pension benefit while unemployed Pension coverage

6. LAC Experience with Pension Systems’ Efficiency and Transparency • Commissions often high • 50 % of contribution in Argentina and Mexico • 30 - 38 % of contribution in Colombia, DR and Peru • Commissions deducted from account reduce amount invested and acculmulated • Inadequate information disclosure contributes to worker wariness • Lack of good actuarial models limits systems’ responsiveness to changes in labor and gender • Outdated mortality tables inappropriate to region contribute to gender disparity

7. LAC Experience Commissions often high Commissions deducted from account reduce acculmulation Inadequate information disclosure Lack of good actuarial models limits responsiveness Outdated mortality tables inappropriate to region Chile’s Proposal Deduct fixed commission from wage Fund for Pension Education financed Develop new actuarial model which links goals, replacement rates and commitments Study of life expectancy and gender Efficiency and transparency

8. Ability of LAC pension systems to deliver on promises • AFPs are not offering their clients differentitated services and best pricing • Lack of AFP competition removes incentive to maximize returns • Minimum yield requirements reinforces herd behavior of AFPs • Portfolio investment limits impede returns and endanger system

10. LAC Experience Lack of AFP competition Minimum yield requirements reinforces herd behavior Portfolio investment limits impede returns and endangers system Chile’s reform Efficiency measures to encourage economies of scale, e.g. separate operations from investment Remove minimum yield requirement Link investment limits with portfolio risk in line with best practices Establish independent Technical Investment Committee Ability of pension system to deliver on promises

11. Thank you.