Coverage in the Chilean Pension System

Solange Berstein– Chair IOPS Technical CommitteePensions Supervisor, Chile

IOPS Regional WorkshopAmman, JordanFebruary 2011

Content1) Main Features of the Chilean Pension System2) Coverage in a Defined Contribution System3) Latest and most important reform in Chile4) Lessons from Chile

Chilean Multi-Pillar Pension System» The Chilean Pension System is supported by three pillars:

Pillar 1: Old age poverty prevention: State financed Pillar 2: Consumption smoothing: Mandatory (defined

contributions) Pillar 3: Consumption smoothing: Voluntary savings

Coverage in a Defined Contribution System» Pensions provided by the system depend directly on

individuals contribution histories Making consistent contributions throughout the working life (high

density of contributions) The timing of those contributions (contributions when young

benefit from compound interest) Time of retirement (as benefits are based on actuarial calculations,

early retirement has a significant negative impact)» Participation is closely linked to occupational status

Mandatory participation for salaried workers – > 80% coverage Voluntary participation for self-employed – > 5% coverage

Density and Timing of ContributionsPension

Years contributed

4020

Early contributions

Late Contributions

Constant density

PAYG

Latest and Main Reforms to the Pension System

» 2008-2010 (non-comprehensive list) Creation of the basic pension (PBS) for non-contributors and a

supplementary state contribution (APS) Competitive auctions for new affiliates and for the disability and

survivorship insurance Introduction of gender-equality elements: grant per child for

women; economic compensation in case of divorce; survivorship pensions for men

Introduction of risk-based supervision for AFPs Increased flexibility of the investment regime of pension funds

Improve the level of coverage of the system by increasing personal contributions while providing a strong safety net

for individuals who are not able to contribute

Latest and Main Reforms to the Pension SystemCoverage: The 2008 Pension Reform

A More Integrated Pension System

MANDATORY CONTRIBUTIONS

VOLUNTARY PILLAR

SOLIDARITY PILLAR

Increase Coverage: Solidarity Pillar

» Diagnosis: The poverty-prevention pillar offered limited coverage to

individuals excluded of the formal labor market or with very little participation in it

A large proportion of individuals presented low density of contributions thus not qualifying for the MP-g (minimum of 240 non-consecutive contributions needed), in particular women

» Reform: Basic Solidarity Pension (PBS) for individuals who could not

contribute and belong to the least affluent 60% of the population (target will be reached in 2011, currently 55%)

Solidarity Complement (APS) for individuals who financed small pensions, designed to limit savings disincentives

Increase Coverage: Solidarity Pillar» Effects: Number of PBS beneficiaries and Average PBS

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

Sep-08 Dic-08 Mar-09 Jun-09 Sep-09 Dic-09 Mar-10 Jun-10 Sep-10 Dic-10

$ -

$ 10,000

$ 20,000

$ 30,000

$ 40,000

$ 50,000

$ 60,000

$ 70,000

$ 80,000

$ 90,000

N° of Males N° of Females Average PBS (CLP)

Increase Coverage: Solidarity Pillar» Effects: Number of APS beneficiaries and Average APS

-

50,000

100,000

150,000

200,000

250,000

Dic-08 Mar-09 Jun-09 Sep-09 Dic-09 Mar-10 Jun-10 Sep-10 Dic-10

$ -

$ 10,000

$ 20,000

$ 30,000

$ 40,000

$ 50,000

$ 60,000

$ 70,000

$ 80,000

$ 90,000

N° of Males N° of Females Average APS (CLP)

Increase Coverage: Contributive Pillar» Diagnosis:

High levels of occupational coverage (i.e. proportion of workers in work who pay contributions)

However, many individuals presented low density of contributions, meaning inadequate levels of savings for old age

Lack of contributions for self-employed along with low savings rates for this group

Poor contributory behavior and low contributions densities for young people (related to their high levels of unemployment)

» Reform: Additional tools for supervising contribution payment Default participation as of 2012 and mandatory participation

starting 2015, plus associated benefits for self-employed Subsidy on hiring and on pension contributions of young, low-

income workers

Increase Coverage: Contributive Pillar» Effects: Recovered unpaid contributions

As of August 2010 a total of 70,000 workers have been benefited with the recovery of unpaid contributions for over USD 1 million

» Effects: Voluntary affiliates As of November 2010 a total of 6,090 individuals became

voluntary affiliates These are mainly women that has been affiliated in order to get

the bonus per child of the reform, but there are also cases of affiliates with less than one year of age

Increase Coverage: Contributive Pillar» Effects: Number of subsidies for young workers

0

5,000

10,000

15,000

20,000

25,000

Mar-09

Abr-09

May-09

Jun-09

Jul-09 Ago-09

Sep-09

Oct-09

Nov-09

Dic-09

Ene-10

Feb-10

Mar-10

Abr-10

May-10

Jun-10

Jul-10

Females Males Total

Increase Coverage: Voluntary Pillar» Diagnosis:

Levels of voluntary savings seemed insufficient, especially among workers with medium and low earnings, for whom the system of tax exemptions did not represent a strong incentive

» Reform: Creation of collective voluntary pensions savings plans (APVC in

spanish) Matching contributions for low and middle income voluntary

savings

Increase Coverage: Voluntary Pillar» Effects: Number of APV accounts eligible for subsidy

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

Oct-08

Dic-08

Feb-09

Abr-09

Jun-09

Ago-09

Oct-09

Dic-09

Feb-10

Abr-10

Jun-10

Ago-10

Oct-10

Number of Deposits: Tax-Exempt upon Withdrawal

Number of Deposits: Tax-Exempt upon Contribution

Lessons from Chile Coverage cannot be measured just by the number of

people contributing in a given momentFor a defined contribution system early contributions

are very important, efforts should be made to encourage people to contribute at an early stage

There might be significant heterogeneity between individuals, this should be considered by policy makers giving the tools for different types of workers to make up their pension

Monitoring the performance of the pension system with adequate data is very important, so that reforms are based in relevant information

Coverage in the Chilean Pension System

Solange Berstein– Chair IOPS Technical CommitteePensions Supervisor, Chile

IOPS Regional WorkshopAmman, JordanFebruary 2011