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Latin American Experience and its Economical Implication Mr. Pedro Corona Bozzo President International Federation of Pension Funds Administrations (FIAP)

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

3 LATIN AMERICA FIAP CARIBBEAN Countries: 20 countries 15 countries
Population: 507,93 million ,95 million E.A.P.: 202 million million G.N.P.: MM US$ MM US$ G.N.P./Pop.: US$ US$ 3.974 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 Latin America is formed by 20 countries of South and Central America (Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Cuba, Ecuador, El Salvador, Guatemala, Haiti, Honduras, Mexico, Nicaragua, Panama, Paraguay, Peru, Dominican Republic, Uruguay and Venezuela), of which 15 are members of FIAP. Latin America has a population that in total reaches 507,93 million inhabitants, of which 474,95 million correspond to the countries associated to FIAP. The E.A.P. (Economically Active Population) of the Latin American countries reaches, to December of 1999, 202 million people, of which approximately 189 million pertain to the countries associated to FIAP and 41,73 million are affiliated to private pension funds. The G.N.P. of the Latin American Countries reaches MM US$ , of which MM US$ correspond to the FIAP’s member countries. The Caribbean is formed by 25 countries (Nederlandese Antilles, Bahamas, Barbados, Belize, Dominica, Granada, Guadeloupe, French Guyana, Guyana, Jamaica, Martinique, Puerto Rico, Santa Lucia, Surinam, Trinidad and Tobago, etc.). These countries have a population of 11,99 million inhabitants,a E.A.P. of 7 million people and a G.N.P. that reaches MM US$

Number of children per countries of America Period World ,0 ,0 ,4 During the last decades, Latin America (South America and Central America) and the Caribbean have experimented a crisis within their Pay As You Go systems, which have their origin in two essential factors of demographical character: the fertility rate is declining and the life expectancy is incrementing. When analyzing the fertility rate in quinquennium blocks, it can be appreciated that between these figures reached to a 5,7 in South America, 6,9 in Central America and 5,2 in the Caribbean. Between 1990 and 1995 these figures strongly fell in all the countries of the region and the projections indicate that for the quinquennium this percentage will situate itself around 2,1 in South America, 2,2 in Central America and 2,5 in the Caribbean. Source: Population Division, United Nations.

5 INCREASE OF THE LIFE EXPECTANCY Life expectancy years by countries of
America On the other hand, the increase of life expectancy achieved by progress of the sciences, life conditions, culture, causes that the social security systems are forced to finance periods of retirement pensions that are larger every time. In South America, during the decade of the 50’s, the life expectancy when born reached an average of 52,1 years, today is of 69 years and the projections indicate that it will get to an average of 74,61 years between 2020 and Central America and the Caribbean present a similar trend. Source: Population Division, United Nations.

Demographical calculation per countries of America Population over 65 years as % of active population The above brings as a consequence an increase in the oldness dependency rate. This is to say, there exists a continuous reduction of the population in age of working that has to take care of a number always higher of people in age of retirement. In South America this rate was of 7,0 in 1960, went to 8,5 in 1995 and the trend is to get to 15,0 by year 2025. This situation caused that many countries of the region, headed by Chile in 1981, introduced reforms to their social security systems, choosing the Individual Capitalization System, and other countries still are in a process of reforms. Source::Population Division, Unites Nations.

7 PENSION FUNDS IN LATIN AMERICA Mexico 1997 Venezuela 1998 G.N.P.:
MM US$ El Salvador 1998 Colombia 1994 Total Funds: MM US$ 6,11% of G.N.P. Peru 1993 Population: In Latin America, 9 countries already have carried out reforms to their pension systems; adopting the Savings and Individual Capitalization System (Chile, Peru, Argentina, Colombia, Uruguay, Mexico, Bolivia, El Salvador and Venezuela), while countries like Brazil, Costa Rica, Ecuador, Guatemala, Honduras and the Dominican Republic are still under a process of reform. The Latin American countries that already have reformed their pension systems hold together a G.N.P. of MM US$ and a population of inhabitants, of which are part of the Economically Active Population (EAP). In these countries, the funds administrated by the Pension Funds reach to MM US$ (6,11% of G.N.P.) and the affiliates to (37,59% of E.A.P.). Bolivia 1997 E.A.P.: Uruguay 1995 Chile 1981 Total Affiliates: 37,59% of E.A.P. Argentina 1994 Countries with Reforms

8 Savings and Individual Capitalization Regime PRINCIPAL CHARACTERISTICS
The contributions are deposited in individual accounts owned by the worker. The fund is administrated by specialized societies, allowing for competence and efficiency. 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. 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 w grants minimal pensions w grants assistance welfare. Regulator and Inspector w dictates laws and regulations w supervises, controls and sanctions.

In Latin America, the countries that have already reformed their pension system, adopting the Savings and Individual Capitalization System are: Argentina, Bolivia, Chile, Colombia, El Salvador, Mexico, Peru, Uruguay and Venezuela. Chile was the first country in performing this type of reform, in 1981, replacing the Pay As You Go System, existing at the time, by a savings and individual capitalization system. Bolivia (1997), Mexico (1997) and El Salvador (1998) later carried out their reforms following this model and adopting the individual capitalization system as their unique pensioning system. Countries like Argentina (1994), Uruguay (1995) and Venezuela (1998) chose for an integrated system, this meaning, the old state (Pay As You Go) system is maintained and the new individual capitalization system is incorporated. Peru (1993) and Colombia (1994) chose for an alternative in which the Pay As You Go system and the individual capitalization system co-exist and the worker is allowed to choose between both of them to make his contributions.

11 COUNTRIES WITH REFORMS: Pension Funds (In million US$ to December 1999)
Total MM US$ To December of 1999, the Pension Funds in the Latin American countries with reforms reached to MM US$ , while in December of 1998 these were of MM US$ , registering an increase of 30,8% in the size of the funds being administrated.

12 COUNTRIES WITH REFORMS: Pension Funds (Percentage participation to December 1999)
TOTAL FUND: MM US$ In respect to the participation of the countries over the total funds being administrated, it can be observed that Chile, Argentina and Mexico are the ones that have a greater participation, due to the fact that they have been administrating private pension funds for a longer time. Additionally, Mexico and Argentina were the countries that showed a higher increase in their participation in regards to 1998; the first increased in 5,65 percentage points and the second in 2,46 percentage points.

13 COUNTRIES WITH REFORMS: Number of Affiliates (In thousands to December 1999)
Total The total number of affiliates to December of 1999 in the countries with reforms is of This total reached, in December of 1998 to affiliates, therefore an increase was registered of 11,22% in the number of affiliates during the last year.

14 COUNTRIES WITH REFORMS: Number of Affiliates (Percentage participation to December 1999)
TOTAL AFFILIATES : It is possible to observe that the countries with greater participation in the total of affiliates are Mexico, Argentina and Chile, due to the size of their population and to the fact that they have a higher quantity of years administrating private pension funds.

15 COUNTRIES WITH REFORMS: Pension Fund Inverstment (December 1999)
The investment of the Pension Funds to December of 1999, are presented classified into four sectors: - State sector (titles emitted by the Government, Treasury titles) - Private Company sector (company stocks and bonds, investment fund quotas) - Financial sector (term deposits, mortgage exchange bills, financial institution stocks and bonds) - Foreign sector (instruments issued by foreign entities) Plus a column of Available Assets. 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: In countries that have a few years since having implemented the Pension Reform, you can observe an important percentage invested in the State Sector. Countries 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.

The Pension Fund Investment allows development in: Infrastructure. Housing and Real Estate Sector. The Capital Market. The Labor Market. Savings and Growth

TOTAL: MMUS$ Source: Inter-American Development Bank - BID

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. In the case of Chile, the investment process of the Pension Funds for infrastructure gave itself in two stages. The first stage consisted in buying stocks from the privatized State owned companies (mainly the electric and telecommunication sectors) and their direct financing, with an investment that to date passes over the US$ million. The Pension Funds investments mainly correspond to a 26% of the stocks of ENDESA, a 29% of ENERSIS, a 34% of GENER. In the telecommunications sector it comprehends mainly around a 20% of CTC’s stocks and 19% of ENTEL’s. The investment percentage should increment with future investments of the social security resources into sanitary installation companies (drinking water, water treatment and sewage) and infrastructure bonds, amongst some other alternatives. In practice, the Pension Funds can only finance these types of projects through the instruments indicated on the slide.

BENEFITS: Stimulate this Sector. Finance Investment Projects. Finance Housing. Stimulate Savings habits. Improve life quality of the people. Decrease housing deficits. Contribute to the economical development and growth of the country.

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

23 CHILE: Investment Experience of the Pension Funds in the Housing and
Real Estate Sector 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 Banks 50% B) Housing/Real Estate Investment Funds Quotas 10% C) Company Bonds (Securitized Bonds) 10% The Pension Funds are not allowed to invest in Mortgage Loans.

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.

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

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).

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

Benefits: 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. 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. SAVINGS AND GROWTH Benefits: Increase 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).

Latin America Costa Rica: On 31 December, 1999 the Law Project for Worker Protection, which contemplates changes to the pensioning regimes was approved after first debate in the Legislative Power Assembly. Ecuador: In this moment there exists a Law Project to Reform the Social Security and the Pensioning System and is structured fundamentally on a system based on three pillars: obligatory solidary savings (Pay As You Go System), individual obligatory savings, and optional individual savings. At present, the project is in Congress, having since months initiated the discussions and analyses by the Congress commissions. Guatemala: At present, there exists a draft law project that establishes the creation of entities similar to the Chilean AFP’s, but which would be called Administradoras de Ahorro Previsional (Social Security Savings Administrators), if they get to be authorized by law (until now and given that there is a new government in place, it is unknown if this law will or will not pass to the Congress). Nicaragua: On 15 March of year 2000 the Pensions Savings System Law was approved. The AFP’s will start administrating the funds of some 300 thousand contributors under 43 years of age. There still is missing approval from the Pension Superintendence, which will have its own organic law. Dominican Republic: The country is at present under the process of the social security reforms, including the pensioning system. The Congress of the Republic, after a process of public discussions - without precedents in their national democratic experience - prepared an unified and consensual law project based on personal accounts for retirement. This project is still pending approval from both Chambers of the Legislative Power and it is expected that it will be approved during the present ordinary legislative period that began on February 27. As of , Brazil, Costa Rica Ecuador and Dominican Republic managed funds by M US$ (99,62% concern to Brazil) from affiliates.


31 ASSETS EVOLUTION 1999 - 2015E (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.

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. 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. EXTEND COVERAGE Incorporation of independent workers, to resolve in this manner a social problem and reduce the future load on the Governments.

FREE TRANSFER OF FUNDS Allow transfer of social security funds, owned by the workers, when these change their residence country. 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. PROMOTE MINIMAL PENSIONS In those countries where they still do not exist. CREATE NEW INVESTMENT INSTRUMENTS


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