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SAVINGS AND INDIVIDUAL CAPITALIZATION SOCIAL SECURITY REGIME Latin American Experience and its Economical Implication Mr. Pedro Corona Bozzo President.

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Presentation on theme: "SAVINGS AND INDIVIDUAL CAPITALIZATION SOCIAL SECURITY REGIME Latin American Experience and its Economical Implication Mr. Pedro Corona Bozzo President."— Presentation transcript:

1 SAVINGS AND INDIVIDUAL CAPITALIZATION SOCIAL SECURITY REGIME Latin American Experience and its Economical Implication Mr. Pedro Corona Bozzo President International Federation of Pension Funds Administrations (FIAP)

2 CONTENTS Ô Background:Latin America and the Caribbean Ô Pay As You Go System Crisis in Latin America and the Caribbean Ô Pension Funds in Latin America: Countries with Reforms Ô Economical Implication of the Reforms Ô Latin America Projections Ô Challenges

3 LATIN AMERICA FIAP Countries:20 countries 15 countries Population:507,93 million 474,95 million E.A.P.:202 million 189 million G.N.P.:MM US$ MM US$ G.N.P./Pop.:US$ US$ CARIBBEAN Countries:25 countries. Population:11,99 million. E.A.P.:7 million G.N.P.:MM US$ G.N.P./Pop.:US$ 5.612

4 DECLINE OF THE FERTILITY RATE Number of children per countries of America Period World ,0 q ,0 q ,4 Source: Population Division, United Nations.

5 INCREASE OF THE LIFE EXPECTANCY Life expectancy years by countries of America Source: Population Division, United Nations.

6 INCREASE OF THE OLDNESS DEPENDENCY RATE Demographical calculation per countries of America Population over 65 years as % of active population Source::Population Division, Unites Nations.

7 Colombia 1994 Peru 1993 Chile 1981 Argentina 1994 Mexico 1997 Uruguay 1995 Bolivia 1997 PENSION FUNDS IN LATIN AMERICA Venezuela 1998 E.A.P.: El Salvador 1998 Total Affiliates: ,59% of E.A.P. Countries with Reforms Total Funds: MM US$ ,11% of G.N.P. Population: G.N.P.: MM US$

8 Savings and Individual Capitalization Regime PRINCIPAL CHARACTERISTICS T The contributions are deposited in individual accounts owned by the worker. T The fund is administrated by specialized societies, allowing for competence and efficiency. T There exists a separation between the patrimony of the pension fund and the one of the administrating society. This guarantees security of the resources in order to offer an adequate protection to the worker and his family group. T The worker has liberty in order to choose and transfer to another Administrator, and to decide when and how to retire.

9 Savings and Individual Capitalization Regime STATE ROLE The Government has the Role of: Warrantor guarantees everyone the right of social security. Subsidiary grants minimal pensions grants assistance welfare. Regulator and Inspector dictates laws and regulations supervises, controls and sanctions.

10 COUNTRIES WITH REFORMS

11 COUNTRIES WITH REFORMS: Pension Funds (In million US$ to December 1999) Total MM US$

12 COUNTRIES WITH REFORMS: Pension Funds (Percentage participation to December 1999) TOTAL FUND: MM US$

13 COUNTRIES WITH REFORMS: Number of Affiliates (In thousands to December 1999) Total

14 COUNTRIES WITH REFORMS: Number of Affiliates (Percentage participation to December 1999) TOTAL AFFILIATES :

15 COUNTRIES WITH REFORMS: Pension Fund Inverstment (December 1999) NOTE: For the cases of Colombia and Mexico, the investment in Other Assets has been classified as Available Assets

16 COUNTRIES WITH REFORMS: Pension Fund Investment (December 1999) COMMENTS: 4In countries that have a few years since having implemented the Pension Reform, you can observe an important percentage invested in the State Sector. 4Countries with more years of experience like Chile, Argentina, Peru and Colombia reflect a greater diversification of their investment portfolios. In these countries, the process of diversification has been fit with the development of their Capital Markets, allowing them to diversify the risk and obtain a greater income-yield capacity.

17 ECONOMICAL IMPLICATIONS OF THE REFORMS The Pension Fund Investment allows development in: Ê Infrastructure. Ë Housing and Real Estate Sector. Ì The Capital Market. Í The Labor Market. Î Savings and Growth

18 Ê ANNUAL NEEDS OF INFRASTRUCTURE IN LATIN AMERICA TOTAL: MMUS$ Source: Inter-American Development Bank - BID

19 INVESTMENT OF THE PENSION FUNDS IN INFRASTRUCTURE BENEFITS: - Better Life quality for the people COUNTRY:- Higher Competitivity - Economical Growth - Long term financing alternative and in local currency (exchange rate) CONCESSIONAIRE: - Available financial resources - Additional security guarantee in front of rules and regulations changes PENSION - Risk diversification FUNDS- Long term investments - Adequate income-yield capacity

20 CHILE: Investment Experience of the Pension Funds in Infrastructure First Stage: Privatization of Companies of the Electrical and Telecommunications Sectors. Total invested to December 1998: MMUS$ (14% of P.F.) Second Stage: Investment in road and highway systems, airports, water and port facilities concessions. INVESTMENT INSTRUMENTS - Company stocks (privatizations) - Company Bonds (direct debt) - Investment Funds - Indirectly, through commercial banks: mortgage credit exchange bills, bank bonds, bonds guaranteed by banks.

21 BENEFITS: ç Stimulate this Sector. ç Finance Investment Projects. ç Finance Housing. ç Stimulate Savings habits. ç Improve life quality of the people. ç Decrease housing deficits. ç Contribute to the economical development and growth of the country. Ë PENSION FUNDS INVESTMENTS IN THE HOUSING AND REAL ESTATE SECTOR

22 LATIN AMERICA: Experience of the Pension Funds Investments in the Housing and Real Estate Sector

23 Law (Law Decree 3500) allows the Chilean Pension Funds to invest in the housing and real estate sector in: Instrument Limit A) Mortgage Exchange Bills, issued by the Banks50% B) Housing/Real Estate Investment Funds Quotas10% C) Company Bonds (Securitized Bonds)10% The Pension Funds are not allowed to invest in Mortgage Loans. CHILE: Investment Experience of the Pension Funds in the Housing and Real Estate Sector

24 Start: 28 August Circular Memorandum SBIF N° 1462 Reason of Issue: Finance the construction and buying of houses (mortgage exchange bills) Guarantees: Banker, mortgage. Amount: Not over 75% of the appraisal value or sale price, the one that is the lowest. Term: Between 8, 12, 15 and 20 years. Interest: The interest rate of each issue is freely determined by the emitting entity and in agreeement with the client. Emitting Entities: Commercial Banks, Banco del Estado, Financial Societies and the Housing and Urbanization Ministry. Valuing Unit: Unidad de Fomento (U.F.). Amortization: Monthly equal installments. Liquidity: In the secondary market. A) MORTGAGE EXCHANGE BILLS

25 Participation Evolution of the Pension Funds in the Investment of Mortgage Exchange Bills to System Level (MM US$ to December 1998) Source: Central Bank Bulletin and Chilean AFP Superintendence

26 B) HOUSING AND REAL ESTATE INVESTMENT QUOTAS Start: Year 1990 Characteristics: Integrated patrimony by contributions of natural and legal persons for their investment in assets like : real estate located in Chile, endorsed mortgage loans, stocks from housing and real estate stock companies and stocks from stock companies whose sole object is the housing and real estate business. Investment Limit: 10% of the Fund Used: M US$ 380 (1,45% of the Pension Fund). C) COMPANY BONDS Law Nº , published on the Characteristics: Instrument, whose subjacent assets are the mortgage loans. Investment Limit: 10% of the Fund Used: M US$ 10 (0,03% of the Pension Fund).

27 Ì CAPITAL MARKETS DEVELOPMENT Benefits: 4 Creation and Growth of the Market 4 Impact over the Exchange Market (Foreign Investment) 4 Risk classification Industry Development 4 Insurance Companies Industry Development 4 Appearance of new actors and instruments 4 Appearance of long term financing 4 Increase of the National Savings

28 Í LABOR MARKET DEVELOPMENT Benefits: 4 Increasing the retirement age In Latin America, the workers are beginning to increase their active period, when the individual savings and the retirement pension are tied together. 4 Increment of the Labor Forces In Chile, to December 1980, 3,64 million Chileans composed the labor forces (32,5% of the population); to December 1998, 5,85 million Chileans composed the labor forces (39,3% of the population). This represents an increase of 6,8 percentage points within 18 years. Î SAVINGS AND GROWTH Benefits: 4Increase of the Savings and Growth rates The Chilean Central Bank calculated that the social security reform was responsible for 30% of the increase of the savings rate (3,8% of the savings) and for 25% of the increase of the growth rate (0,9% of the GNP).

29 COUNTRIES IN REFORM PROCESS Latin America As of , Brazil, Costa Rica Ecuador and Dominican Republic managed funds by M US$ (99,62% concern to Brazil) from affiliates.

30 LATIN AMERICA PROJECTIONS

31 ASSETS EVOLUTION E (In Million US$) Includes: Argentina, Bolivia, Brazil, Colombia, Chile, Mexico, Peru, Uruguay. Year 1999: Data FIAP. Estimated Data (E) from Salomon Smith Barney

32 ASSETS OVER GNP E * Estimated Source: Salomon Smith Barney.

33 CHALLENGES IN LATIN AMERICA T FAVOR THE PRIVATE SAVINGS AND INDIVIDUAL CAPITALIZATION SYSTEM. Best solution found to resolve the severe economical crisis that the Pay As You Go Systems present all around the world and increase the internal savings, matter of highest importance to achieve economical growth and employment generation in the countries. T ELIMINATE DOUBLE TAXING. Generating taxing incentives, to motivate savings towards the pension system and eliminate double taxing in the countries that still have it in effect. T EXTEND COVERAGE Incorporation of independent workers, to resolve in this manner a social problem and reduce the future load on the Governments.

34 CHALLENGES IN LATIN AMERICA T FREE TRANSFER OF FUNDS Allow transfer of social security funds, owned by the workers, when these change their residence country. T CREATE A SOCIAL SECURITY CULTURE By means of educational actions, not being admisible that in the 21st Century a student changes his condition to one of a worker, without having social security formation. T PROMOTE MINIMAL PENSIONS In those countries where they still do not exist. T CREATE NEW INVESTMENT INSTRUMENTS


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