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 ECONOMY AS A % OF GNP Source: Schneider, F Size and Measurement of the Informal Economy in 100 Countries Around the World. Washington, D.C.: The World Bank.

5 Pension coverage 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

6 LAC Experience with Pension Systems’ Efficiency and Transparency  Commissions often high  50 % of contribution in Argentina and Mexico  % 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to worker wariness  Lack of good actuarial models limits systems’ responsiveness to changes in labor and gender  Outdated mortality tables inappropriate to region contribute to gender disparity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 Efficiency and transparency 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reduce acculmulation  Inadequate information disclosure  Lack of good actuarial models limits responsiveness  Outdated mortality tables inappropriate to region Chile’s Proposal  Deduct fixed commission from wage  Fund for Pension Education financed  Develop new actuarial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

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 Ability of pension system to deliver on promises 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

11 Thank you.