monitoring pensions coverage and matching contributions in latin american countries

Monitoring pensions coverage and matching contributions in Latin American countries2011 OECD/IOPS Global Forum on Private PensionsCape Town, South Africa, 25-26 October 2011 Santiago Fernandez de Lis │Chief Economist, Financial Systems and Regulation- BBVA Research –

Monitoring Pension Coverage/IOPS/ November 2011

Section 1IntroductionSection 2The Coverage Problem in Latam Section 3The ModelSection 4Some Projections for ChileSection 5Conclusions

Index


* In this presentation we refer to the cases of Chile, Colombia, Mexico and Peru

Pension schemes in Latin AmericaSource: BBVA, FIAP, WDI

Relevant numbers of pensions systems in Latam Source: BBVA, FIAP, WDI

Section 1Pension systems in Latin America*

• There has been different adoptions of DC schemes in Latam according to idiosyncratic aspects. This situation along with structural factors in each country has generated different results.


Section 1Desired outcomes of pension reform in Latin America

• Pensions reforms in Latin America have contributed for the fiscal consolidation in the region

• There is evidence that mandatory funded schemes have a positive effect on national savings rates and economic growth

• It confirms that the reforms have contributed to the development of capital markets

• However, there are still major problems to solve, especially low coverage in some countries

Pension Funds GDP

Financing

Infrastructure

Projects

PrivateSavings

Coverage

Fiscal Deficits

Pension reforms in the 90s bring about interesting results thorough different channels. However after almost two decades of implementing structural changes, countries continue struggling to expand social protection


IndexSection 1IntroductionSection 2The Coverage Problem in Latam Section 3The ModelSection 4Some Projections for ChileSection 5Conclusions


Informality and affiliates by EAP*Source: ILO, FIAP (2007)

• Informality poses a tremendous challenge for policymakers in order to enforce a mandatory pension scheme

• The complexity of the problem also arises because of mobility between the formal and informal sectors (Jüttint and De la Iglesia, 2009; Maloney, 2010)

• The challenge is:• To create a system that includes a

large group of workers that do not belong to the formal labor market.

• Mandatory requisites to contribute alone, will not be enough.

Section 2Informality and pension coverage

* With available information from different geographies


Section 2

Informality: a phenomenon to take into account

• Research has found elements in LAC that affect coverage outcomes in contrast with developed countries:− Seasonal Employment− Informality− Low income, inequality and

poverty− Institutional and political

constraints

• The informality is a structural problem that is difficult to resolve

Perú

0

10

20

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80

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Germ

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Mac

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and

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Colombia

Mexico

Chile

Informality rate (% of GDP)Source: Schneider et al (2010)


0.0

20.0

40.0

60.0

80.0

100.0

120.0

1982

1983

1984

1985

1986

1987

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1989

1990 1991

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1993

1994

1995

1996

1997

1998

1999

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2001

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2009

Chile Colombia MéxicoPerú USA

Section 2

Participation and replacement rate: two faces of the coverage gapCoverage rate: Contributors/WorkforceSource: BBVA, FIAP, WDI

Replacement rate: Pension/Average Salary before RetirementSource: BBVA, FIAP, WDI

0%

20%

40%

60%

80%

100%

120%

140%

A B C A B C A B C A B C

Mexico Chile Peru Colombia

A: collectives with contribution densities close to 100%.B: collectives with contribution densities close to 70%C: collectives with contribution densities close to 30%

• When Latam is compared to more developed countries, the results of the lack of coverage is even more dramatic.

• Another way to see the coverage in the region is the limitation that some groups have in obtaining higher replacement rates. This target depends on the density of contributions and income levels.


Section 2 Designing a reform that absorbs a huge share of the population continue to be the pending agenda.Peru: Employed workers according to Pension statusSource: Carpio-Salazar (2010) • Some countries have not

experienced any relevant improvement in expanding pension coverage.

• Looking at the case of Peru, not covered individuals include people who are not making enough contributions (I+II) as well as people who are not saving at all (III).

• This imposes a serious social risk

0%

10%

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30%

40%

50%

60%

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80%

90%

100%

2005 2006 2007 2008 2009

Not Affiliated DC-Not ContributingDC-Contributors DB-Not ContributingDB-Contributors

I

II

III


• There were mild advances during the last four years, but still the problem of coverage remains.

• It is necessary to think about the specific characteristics of the different groups

• How to manage pension savings of seasonal and low income groups lacking basic coverage on housing, health and education?

• Pervasive informal economy makes it impossible to enforce any mandatory scheme,

• It is important to count on a detailed pension model that let us understand different projected scenarios for workers with different socio economic characteristics, and implement policies to overcome actual limitations of the systems.

Section 2

The puzzle of designing a pension system that WorksPeru: Collective of workers participating to any pension scheme as a percentage of labor forceSource: BBVA Research


Section 3

A new pension model to assess the reform of 2008•The evolution of Latin American pension systems challenges us to confront the major challenges, with particular attention to the most vulnerable collectives.

•Also, there are strong demographic transitions that can significantly alter the structure of pension systems in the future, such as the transition from education, labor market (especially women), informality, etc.

•This model allows to collect these features by increasing the heterogeneity of individual representatives of the model to the maximum permitted level of available information.


Section 3

General characteristics of the pension model30 Types of Representative Individuals

• Men and women• Three levels of education:

primary or less, secondary, and tertiary

• Ten deciles of income for each level of education

• Three densities of contribution for each salary level according to its contingency work.

• Population age groups ranging from 0 to 100

Demographics:

•Population projections from ECLAC• Use of RV2009 to calculate the old age pensions•Calculations using of the ECLAC and Mortality.org for own projections

Institutional and labour markets

•Encuesta de Protección Social of Chile•Casen•Application of data mining Provida AFP dataset.

Data Sources


Section 3

Main outputs of the pension modelOutputs

• Projected Pension Funds• Fiscal Cost• Replacement rates• Coverage rates• Net annual contributions• Income distribution• Macroeconomic and Labor

Market effects over the system

• Projections of Social Security policies

Which will be

available for

• Chile• Peru (in

progress)• Colombia

(in progress)

• Mexico (in progress)

Policies and risks that can be evaluated:

• Expand and evaluate the cost of the Solidarity Pillar

• Voluntary contributions• Longevity Risk• Labor market policies• Others


Section 3General characteristics of the pension modelLabor market transitions in MAP2Labor forceSource: BBVA Research

Formal Employed Unemployed Informal Inactive Employed Self-employedContributors x x x

Non-contributors x x

• Employed• Self-employed• Unemployed• Informal• Inactive

Five Labor Contingencies Three possibilities of contributions each with its corresponding density

• Employed• Self-employed• Unemployed

The actuarial module allows that different types of pensions be assigned based on historical selection


Section 3

Evolution of the Chilean pension system in 2008Creation of the individual capitalization system: Law 3500 of 1980Source: Report of the Advisory Board of Pension Reform

Current System: Law 20255 of 2008Source: Report of the Advisory Board of Pension Reform

Structural

ChangeCreation of the multifunds system: Law 19.795 of 2002• In 1980, a pension system based on individual

capitalization was created• The solidarity of the system is given by the

welfare pensions (PASIS) * and the minimum pension guarantee (GEPM) **

• However, a cohort with little savings remain without pensions* socioeconomic characterization requirement.** access subject to a minimum of 240 months of in order to obtain insurance

• In 2008, the solidarity pillar was integrated with the contributory pillar

• Those unable to save receive the Basic Solidarity Pension (PBS) and those with some ability to save receive the solidarity contribution (APS)

• Disadvantaged groups receive other incentives (bonus for kids)

• The reform solidifies the voluntary pillar


Section 3

Changes in the Chilean pension system in 2008

The policies implemented in 2008 aimed to increase the coverage

– Creation of a new solidarity pillar (NPS) with old-age benefits, disability and survivors benefits integrated to the contributory pillar.

– Access to the benefits of the NPS to all persons who meet specific requirements of socio economic insufficiencies.

– Subsidies to employers for hiring young workers belonging to the most vulnerable segment of the population. Potential employees also receives a subsidy.

– Creation of the voluntary contributors regime, allows the participation in the pension system of individuals disregarding of its employment situation (informal/formal; active workers/ no active workers)

– Bonus for new babies (no income level requirement).–Mandatory contribution for self employees (gradual implementation).


In this case study, we assess this new policy included in the 2008 pension reform

Some Key points:– The irregularity of income and the intermittent nature of employment, make the

current monthly contributing model, unattractive to this group.– The preference for maintaining liquidity and lack of pension culture discourage the

participation of self-employed workers' contributions.– Due to these factors, the coverage of independent workers has been low and

declining in recent years. In 2005, only 3.9% of independent workers quoted in the pension funds.

– The evidence also shows that low levels of pension savings are not replaced by another type of savings, showing little use of financial instruments.

– Along with the extension of rights involving the introduction of the solidarity pillar, pension reform and duties gives incentives to independent workers, enabling them to increase the level and quality of pension coverage.

Section 3 The case of mandatory contributions of the informal self-employed: case study


The obligation to contribute to the pension system will be implemented gradually, according to the following schedule (dates correspond to 1 January of the year)

Implementation Period

2008 -2011 Pension education process 2012 -2014 Obligation to contribute at 40%, 70% and 100% of taxable

income, respectively in each year 2015 onwards: Compulsory pension on total taxable income (80% of all gross income

taxed by Article 42 No. 2of the Law on Income Tax) 2018 onwards: It includes the obligation to contribute to health

Section 3

The case of mandatory contributions of the informal self-employed: case study

•This raises uncertainty about the ability of regulator to monitor compliance, although they rely on the verified tax culture of Chilean population.•In our scenario, we assume a success rate of 80%


Section 3Heterogeneity captured by the new model

Qualification by age Matrix (Men)Source: BBVA Research calculations using CASEN database

Qualification by age Matrix (Women)Source: BBVA Research calculations using CASEN database

- Strong heterogeneity in education across generations can change the coverage ratios and replacement rates in the future.

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15 19 23 27 31 35 39 43 47 51 55 59 63 67 71 75 79 83 87 91 95 99

Primary education Secondary education Tertiary education

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15 19 23 27 31 35 39 43 47 51 55 59 63 67 71 75 79 83 87 91 95 99

Primary Education Secondary Education Tertiary Education


Section 3Heterogeneity captured by the new model

Projections of Pension coverage rates according to education achievementFuente: Cálculos propios BBVA Research utilizando la CASEN - The highest rates of

coverage are observed in the group with higher studies.

- If measures to promote coverage and reducing informality (especially primary education) are not implemented, coverage will remain relatively stable over time.

0,4

0,45

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Primary Secondary tertiary


Sección 3Heterogeneity captured by the new model

Even within the same level of education, significant differences can be seen in the level of income from contributors

FemalesSource: BBVA Research

MalesSource: BBVA Research

0

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Decile 1 Decile 5 Decile 10

This is seen, for example, in the potential income that could be obtained by cohorts of people with primary school in deciles 1, 5 and 10


Section 3

Heterogeneity in the informal self-employed

•There is a higher percentage of informal self-employed workers in the group of men than of women.•The highest percentage of informal self-employed are concentrated in the group of people with primary studies, followed by secondary and tertiary.

Informal self employed workers by gender

21.4%

18.0%

16.0%17.0%18.0%19.0%20.0%21.0%22.0%

Men Women

Informal self employed workers by educational attainment

35.7%

15.0%

9.7%

0.0%5.0%

10.0%15.0%20.0%

25.0%30.0%35.0%40.0%

Primary Secondary Tertiary


Section 3

Reform: mandatory contribution in self-employed; women

Total coverage women rate/total population 15-64 yearsFuente: Cálculos propios BBVA Research utilizando la CASEN

•The coverage rate for women will increase significantly from 27% to 42% by improving their educational level.

•The impact of reform could achieve an increase of 7 percentage points

Total coverage women rate/workforceFuente: Cálculos propios BBVA Research utilizando la CASEN

•With regard to the workforce, there were no significant changes due to the strong increase in the labor force in the group of women.

•The impact of reform could be quantified by 14 percentage points

0,2

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w ithout reform w ith reform

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Section 3

Reform: mandatory contribution in self-employed; menTotal men coveraqe rate/total population 15-64Fuente: Cálculos propios BBVA Research utilizando la CASEN

•The coverage ratio with respect to the natural population will grow by improving the educational level from 42% today to 44.5% in 2050.

•The impact of reform could be quantified in an increase of 10 percentage points

Total men coveraqe rate/workforceFuente: Cálculos propios BBVA Research utilizando la CASEN

With regard to the workforce, there were no significant changes due to the growth of this variable.

•The impact of reform could be quantified by 13.4 percentage points

0,3

0,35

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2009

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Section 3

Reform: mandatory contribution in self-employed; educational attainment

Total primary studies coverage rate/pop 15-64Fuente: Cálculos propios BBVA Research utilizando la CASEN

•The impact of the reform would increase the coverage rate by 15.5 percentage points in workers with primary school.

•For workers with secondary education coverage would increase by 5 percentage points.

•In the collective with tertiary education, coverage would increase by 11 percentage points.

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Section 3 Reform: mandatory contribution in self-employed; Total impactTotal coveraqe rate/pop 15-64Fuente: Cálculos propios BBVA Research utilizando la CASEN

•The coverage ratio with respect to the population will grow naturally, thanks to improved educational attainment from 35% today to 43% in 2050.

•The impact of reform could be quantified in an increase of 14 percentage points

Total coveraqe rate/workforceFuente: Cálculos propios BBVA Research utilizando la CASEN

•With regard to the workforce, there were no significant changes due to the growth of this variable, especially in the group of women

•The impact of this reform could be quantified by 9 percentage points.

0,3

0,35

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0,55

0,6

2009

2013

2017

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2025

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without reform with reform

0,5

0,55

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2009

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Section 3

Reform: mandatory contribution in self-employed; the impact on informality rates

Informality rate/workforceFuente: Cálculos propios BBVA Research utilizando la CASEN

•This reform would decrease informality rate by 13 percentage points

0

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Sin reforma con reforma


Page 31

Conclusions•The phenomenon of low coverage remains a challenge in the pension systems in Latin America.• Our new pension model can capture sufficient heterogeneity from the representative agents, in order to quantify different measures of pension policies.• In the case of Chile, we performed an initial exercise based on the reform measure that makes mandatory the participation of self-employed.•The collective breakdown shows that Chile will experience major transitions in terms of educational attainment and labor market, which will impact on the structure of the system in the future.•The measure of mandatory contributions for informal self-employed can have huge effects on the Chilean pension system, increasing the coverage rate by 14 percentage points.


Page 32

Conclusions•This measure affects groups that have traditionally been auto excluded in the pension system.•Given that informal self-employed are overrepresented in the lowest social level of educational attainment this measure will improve their coverage.•On the other hand, coverage increase more in the group of males. However, it shows an important process of "catching up" between genres, given the significant increase coverage experience by females.


Monitoring pensions coverage and matching contributions in Latin American countries2011 OECD/IOPS Global Forum on Private PensionsCape Town, South Africa, 25-26 October 2011 Santiago Fernandez de Lis │Chief Economist, Financial Systems and Regulation- BBVA Research –

monitoring pensions coverage and matching contributions in latin american countries

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