Coverage in the Chilean Pension System

1. Coverage in the Chilean Pension System Solange Berstein– Chair IOPS Technical Committee Pensions Supervisor, Chile IOPS Regional Workshop Amman, Jordan February 2011

2. Content • Main Features of the Chilean Pension System • Coverage in a Defined Contribution System • Latest and most important reform in Chile • Lessons from Chile

3. Chilean Multi-Pillar Pension System • The Chilean Pension System is supported by three pillars: • Pillar 1: Old age poverty prevention: State financed • Pillar 2: Consumption smoothing: Mandatory (defined contributions) • Pillar 3: Consumption smoothing: Voluntary savings

4. Coverage in a Defined Contribution System • Pensions provided by the system depend directly on individuals contribution histories • Making consistent contributions throughout the working life (high density of contributions) • The timing of those contributions (contributions when young benefit from compound interest) • Time of retirement (as benefits are based on actuarial calculations, early retirement has a significant negative impact) • Participation is closely linked to occupational status • Mandatory participation for salaried workers – > 80% coverage • Voluntary participation for self-employed – > 5% coverage

5. Pension Early contributions PAYG Constant density Late Contributions Years contributed 20 40 Density and Timing of Contributions

6. Latest and Main Reforms to the Pension System • 2008-2010 (non-comprehensive list) • Creation of the basic pension (PBS) for non-contributors and a supplementary state contribution (APS) • Competitive auctions for new affiliates and for the disability and survivorship insurance • Introduction of gender-equality elements: grant per child for women; economic compensation in case of divorce; survivorship pensions for men • Introduction of risk-based supervision for AFPs • Increased flexibility of the investment regime of pension funds

7. Latest and Main Reforms to the Pension System Coverage: The 2008 Pension Reform Improve the level of coverage of the system by increasing personal contributions while providing a strong safety net for individuals who are not able to contribute

8. A More Integrated Pension System VOLUNTARY PILLAR MANDATORY CONTRIBUTIONS SOLIDARITY PILLAR

9. Increase Coverage: Solidarity Pillar • Diagnosis: • The poverty-prevention pillar offered limited coverage to individuals excluded of the formal labor market or with very little participation in it • A large proportion of individuals presented low density of contributions thus not qualifying for the MP-g (minimum of 240 non-consecutive contributions needed), in particular women • Reform: • Basic Solidarity Pension (PBS) for individuals who could not contribute and belong to the least affluent 60% of the population (target will be reached in 2011, currently 55%) • Solidarity Complement (APS) for individuals who financed small pensions, designed to limit savings disincentives

10. Increase Coverage: Solidarity Pillar • Effects: Number of PBS beneficiaries and Average PBS

11. Increase Coverage: Solidarity Pillar • Effects: Number of APS beneficiaries and Average APS

12. Increase Coverage: Contributive Pillar • Diagnosis: • High levels of occupational coverage (i.e. proportion of workers in work who pay contributions) • However, many individuals presented low density of contributions, meaning inadequate levels of savings for old age • Lack of contributions for self-employed along with low savings rates for this group • Poor contributory behavior and low contributions densities for young people (related to their high levels of unemployment) • Reform: • Additional tools for supervising contribution payment • Default participation as of 2012 and mandatory participation starting 2015, plus associated benefits for self-employed • Subsidy on hiring and on pension contributions of young, low-income workers

13. Increase Coverage: Contributive Pillar • Effects: Recovered unpaid contributions • As of August 2010 a total of 70,000 workers have been benefited with the recovery of unpaid contributions for over USD 1 million • Effects: Voluntary affiliates • As of November 2010 a total of 6,090 individuals became voluntary affiliates • These are mainly women that has been affiliated in order to get the bonus per child of the reform, but there are also cases of affiliates with less than one year of age

14. Increase Coverage: Contributive Pillar • Effects: Number of subsidies for young workers

15. Increase Coverage: Voluntary Pillar • Diagnosis: • Levels of voluntary savings seemed insufficient, especially among workers with medium and low earnings, for whom the system of tax exemptions did not represent a strong incentive • Reform: • Creation of collective voluntary pensions savings plans (APVC in spanish) • Matching contributions for low and middle income voluntary savings

16. Increase Coverage: Voluntary Pillar • Effects: Number of APV accounts eligible for subsidy

17. Lessons from Chile • Coverage cannot be measured just by the number of people contributing in a given moment • For a defined contribution system early contributions are very important, efforts should be made to encourage people to contribute at an early stage • There might be significant heterogeneity between individuals, this should be considered by policy makers giving the tools for different types of workers to make up their pension • Monitoring the performance of the pension system with adequate data is very important, so that reforms are based in relevant information

18. Coverage in the Chilean Pension System Solange Berstein– Chair IOPS Technical Committee Pensions Supervisor, Chile IOPS Regional Workshop Amman, Jordan February 2011