1. Conclusions are the author's 1 The Effectiveness of Multi-Pillar Pensions– A Precautionary Tale NASI Conference Emily S. Andrews World Bank (retired) January 20, 2006

2. Conclusions are the author's 2 Lessons about Multi-Pillar Reforms Findings from World Bank Report Why Multi-Pillar Reform? The Appropriateness of Multi-Pillar Reforms The Development Impact of Multi-Pillar Reforms Lessons for the Future

3. Conclusions are the author's 3 Why Multi-Pillar Reform? Affordability of PAYG systems given population aging Better rates of return through private sector investment Need for increased savings to bolster economic growth Need for capital market development Need to reduce the impact of (inefficient) governments

4. Conclusions are the author's 4 Initial Conditions for Multi-Pillar Reforms Are initial conditions inappropriate for multi- pillar reform? Do countries have macroeconomic stability, banking sector readiness, moderate indebtedness, and a low risk for corruption? Have non-contributory options to expand the safety net to those outside the formal pension system been considered?

5. Conclusions are the author's 5 Many Countries Had High Inflation at Reform

6. Conclusions are the author's 6 Poor Financial Sectors Characterize Some ECA Multi-pillar Reformers

7. Conclusions are the author's 7 Many Reformers Had Poor Corruption Index at the Time of Reform

8. Conclusions are the author's 8 Some Multi-pillar Countries Already Had High Savings Rates

9. Conclusions are the author's 9 The Impact of Multi-Pillar Reforms Multi-pillar reforms have helped improved fiscal sustainability, but the improvements are not sufficient for the long-term In many countries with multi-pillar systems, funded pillars were not well-diversified and remained open to political influence The secondary objectives of funded plans—to increase savings, develop capital markets, and improve labor market flexibility—have remained largely unrealized

10. Conclusions are the author's 10 In LAC, Only Some Funded Pension Portfolios Are Well-Diversified (percentage of holdings as of December 2002) Government securities Financial institutions Corporate bonds Equiti es Investment funds Foreign securities Oth er Argenti na 76.72.61.16.51.88.92.4 Bolivia69.114.713.40.0 1.31.5 Chile30.034.27.29.92.516.20.1 Colom bia 49.426.616.62.90.04.50.0 Mexico83.12.114.80.0 Peru13.033.213.131.20.87.21.5 Urugua y 55.539.64.30.0 0.5 Source: Keeping the Promise, based on data from AIOS, FIAP (data for Colombia). Note: Information for Colombia refers only to the mandatory pension fund system.

11. Conclusions are the author's 11 Fiscal Deficits Have Grown in Many Countries with Second Pillars

12. Conclusions are the author's 12 Savings Rates Increased Only in Kazakhstan

13. Conclusions are the author's 13 Market Capitalization Remains Quite Low

14. Conclusions are the author's 14 Pension Participation Rates Have Not Changed in LAC

15. Conclusions are the author's 15 Policy Lessons for the Future Multi-pillar reforms are reasonable when preconditions hold Multi-pillar reforms may improve fiscal sustainability but only if related policies are implemented Secondary impacts on savings and capital formation should be de-emphasized as funded pensions are not a magic bullet for growth Multi-pillar reforms have not increased coverage and, in any case, only relate to the formal sector Non-contributory pensions are needed if poverty among the aged is to be reduced. PAYG system reform is essential, in particular, increasing normal retirement ages, making benefits affordable, and outlawing mandatory retirement.