1. New Pension Reform in Chile: Some Comments Heinz P. Rudolph The World Bank November 27, 2006

2. Intermediate Objectives of the Proposal Integrated and strong first pillar Increase density of contributions Increase price competition Improve risk management and increase returns of contributions Strengthen the voluntary pillar Increase Transparency and Predictability of the system

3. General Comment Highly comprehensive and ambitious The Presidential Commission was in line with the highest expectations. It provides a general framework that will help to move the Chilean system to a multi-pillar scheme. Unbalanced equilibrium between carrots and sticks

4. Competition and IO The pension system has to be non expensive Competition has not been able to substantially reduce costs It can be explained by: –Unnecessary regulations –But also by the nature of the product…

5. Definition of the pension service What do AFPs sell? What is the best plan for an individual? How people know that is choosing the best plan? Is it the return of the last month? Is it the quality of service? Is it the expected return? Is it the quality of management? ….Not a clear answer

6. Competition If we cannot define the product or advise appropriately people to choose a plan, how can we create competition? –Is it more competition = more switchovers? –Is it more competition = different rates of returns? Until now we have not seen effective competition in this market …Room for creation of elaborated and artificial competition (bidding) and “incentives” for taking advantage of scale economies.

7. Alternative Approach AFPs would be regulated as any utility company –Forget about competition and focus on cost reduction –Price ceilings –Regulation of the quality of service There are good experiences in Sweden and Poland

8. Alternative Approach (2) If you want to take advantage of scale economies, you have to design it as such: –Mandatory contributions by internet for companies with more than x workers (IRS system). –A single Individual Accounts Manager (IRS) Collection of contributions, account management, client support, etc. –Multiple fund managers

9. Competition Not clear that the voluntary approach will get to far in terms of cost reduction. –And involve additional risk associated to the possibility of other financial institutions to offer pension services –The supervisory framework is not prepared for dealing with this issues: experience of consolidation of BBVA and Bansander was unnoticed by supervisors. Consolidated supervision is not designed to solve the problems of tide sales, shared sales force and other specific problems.

10. Investments More flexibility in regulation of investments portfolios is very welcome. Proposals need to be considered with long transitions. Risk management is not well developed in all pension funds and SAFP is not well prepared to handle risk based supervision Careful with VaR and other metrics (they are not the panacea) Replace the limit abroad by the currency limit is risky (90% of currency forwards maturates in less than 90 days). There are different mechanisms to make more flexible the Minimum Return Guarantee (i.e. reporting period)

11. Total Fees over Assets