Sharing experiences

The Chilean Pension System

Rafael Del CampoFormer National Director

INP

Chile

• 3 continents: America, Oceania and Antarctica.

• Total area: 2,006,096 Km2 • American Area: 756,096 Km2 • 15 Regions

• Population: 15,116,435 Inhabitants • 49.3% Male, 50.7% Female • Main region: 40.1%; 59.9% Other regions • Urban 86.6%, 13.4% Rural

• Government and State Administration • Unitary state. Decentralized Administration • Presidency of the Republic • 22 Ministries

• GDP 2005 U.S. $ 145,920 million Per capita income U.S. $ 8,875

Sharing experiences

• 85 years of Former Pension System

• 26 years of the Individual Capitalization Pension System

• 1 year of Social Protection Guaranties in the Pension System

85 years of Former Pension System

PENSIONS: PAY-AS-YOU-GO SYSTEM• 1924 Workers´ Insurance Fund, the institution which

preceded the Social Insurance Service. Coverage was extended to employees with the creation of the Private Employees´ Fund (EMPART); and Public Employees and Journalists Fund (CANAEMPU).

• Progressive increase of the coverage in social security, through the creation of different Social Security Funds over the years.

• 1979 32 Social Security Funds. This generated over a hundred different social security treatments, including Retirement, Disability, Survivorship and Welfare Pensions.

Former Pension System: Main Weaknesses (1980

diagnostic)• Financial imbalance

- The active contributors financed the pensions of the passives, but at the same time a reserve fund was created with part of the resources, for future requirements. This became increasingly difficult and no reserves were accumulated.

• Inequality in access to benefits

- Lack of uniformity.

- Different benefits corresponding to identical contributions and identical needs.

• Faults in administration

- Inefficient administration of resources.

- The incorporation of new beneficiaries was not always supported by the corresponding actuarial studies and funding.

The relationship active contributors / retirees declined from 10.8: 1 (1960) to 2.2: 1 (1980).

1980’s Reform to standardize and rationalize the systems then in

force.The First work was to establish standards in the Former System:

• Men must retire at 65 years of age and women at 60.

• The state began to collect all contributions of the different Former Funds.

• All the former Funds administrated by INP (National Pensions Institute)

• Fiscal commitments with the pensions debts in long terms (Retirement benefits Bond and Pensions).

Fiscal commitments with the pensions debts

Actually (2009) The Former Pension System is:

• Collecting only 3% of contributions.

• Paying 71% of pensions.

• Paying the Retirement Benefit Bond for those who contributed in any of the funds of the former system, but will get a pension in the Contributory Pensions Scheme.

20.246

14.301

4.695

608

49.266

42.615

37.250

29.929

37.455

31.750

49.882

34.415

43.066

444

8.946

47.257

2.338

49.47150.227

0

10.000

20.000

30.000

40.000

50.000

60.000

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032

RETIREMENT BENEFITS BOND PAYMENT SCHEDULE

Number

Year

Conditions for implementing the contributory Pension Scheme

State Participation in the System

A commitment to ensure:

The security of the resources accumulated in the Pension Funds.

That worker members will receive the benefits established by the System in due time and manner.

The relevant information.

Existence of a Capital Market with safeguards to cover Pension Funds:

A qualified supervisory and regulatory bodies for corporations, financial institutions, life insurance companies, risk-rating bodies, stock exchanges, securities custodians and other relevant agents.

A well-developed risk-rating industry.

Securities deposit companies (custody).

Existence of an Insurance Industry.

The facts: 26 years later

The Presidential Advisory Council for the Reform of the Pensions System reported in 2005:

1. The contributory pension scheme is working in accordance with how it was foreseen:

The workers contributions are paid by their employers regularly.

The PFA’s comply with their legal obligations.

The contributors have their funds safe.

Only in two years have the investments produced negative results.

After being in place for 25 years no frauds have taken place nor has any PFA gone bankrupt.

2. For workers in stable employment, who pay their contributions regularly the length of their working life, the accumulated funds enable the financing of pensions close to the amount of their income during their active life.

• 3. The contributory pension scheme has also had positive effects in the national economy. It has contributed to the growth of the capital market, the electricity and telecommunications sectors and financing for housing and it has permitted the growth of the life insurance market.

The Pension Funds have reached a figure around 75% of the GDP. This national long term savings resources makes it possible to finance productive long term investments.

These effects are not only reflected in macroeconomic indicators, but also in things much closer to the people, such as the cost of mortgages, consumer credit and credits for small businesses.

4. Workers with low wages, temporary works, self employed and an important proportion of women are not able to accumulate sufficient funds.

5. Chile is getting older. Gradually but relentlessly, the old age people are representing an increasing percentage of the population. It is natural to ask how these additional years will be lived and the future of the young people.

Designing an integrated system

The Reform covers totally the Pension System. The diagnosis that supports the changes reveals that the 3 pillars of the system were not responding to people’s needs.

It was necessary to:> Fortify the Solidarity Pillar.> Introduce improvements to the Contributive Pillar.> Extend the benefits of the Voluntary Pillar.

We took into consideration that The Pension System is one only, and what occurs in one Pillar will affect absolutely the others.

Pension Systems

Pension Scheme before 2008’s Reform,

excluding Pay as you go programs.

Prices

Pillar 2INDIVIDUAL CAPITALIZATION

ACCOUNTS

Pillar 1NON

CONTRIBUTIVE

Pillar 3VOLUNTARY

PENSIÓN

Wages

Employment

Contributions Density

Profitability Security

Capital

Labor Market

Capital Market

Public Budget

Minimum Allowance Guarantee

(20 years)

Non Contributive Pension (PASIS)

Voluntary Pension Savings

Tax Exemptions

Products Products SupplySupply

PENSION

Pillar 2INDIVIDUAL CAPITALIZATION

ACCOUNTS

Pillar 1NON

CONTRIBUTIVE

Pillar 3VOLUNTARY

PENSION

Self workers Mandatory contributions

Adjust Non Paid and Declared Contributions

Investment Flexibility

Capital

Labor Market

Capital MarketPublic

Budget

Voluntary Pension SavingsVoluntary Pension Savings Subside

Collective Collective Voluntary Voluntary SavingsSavings

Integrated Pension Scheme with Reform

Basic Solidarity Pension

Solidarity Complemen

t

Child Birth Bond

Young Workers Incentives

More competenceEducationFund

Pillar 1NON

CONTRIBUTIVE

Pillar 2 INDIVIDUAL CAPITALIZATION

ACCOUNTS

Pillar 3VOLUNTARY

17

Solidarity Pension System

• The reform creates a Solidarity Pension System that will benefit those who, for different reasons, have not been able to save enough funds to finance a dignified pension. The Reform will eliminate extreme poverty among older people and people with disabilities.

New Benefits: Basic Solidarity Pension (BSP) and Pension Solidarity Complement (PSC) for men and women ( ≥65 years old)

• The people lacking pension savings included in the 40% most vulnerable segment of the population were entitled to a Basic Solidarity Pension as of July 1,  2008. The coverage will be increased 5% per year, reaching 60% of the population in 2012

• The pensioners were granted a Solidarity Pension Contribution allowing them to increase their income since 2008. The public contribution will be increased on a yearly basis until reaching its full value in 2012.

Pension Reform will reduce the gender gap in the pension system. Without Reform 90% of women will not have access to the minimum allowance guarantee

2/3 of the benefits will be assigned to women

BSP eligibility doesn't take into account the number of contributions (in years)

• Bond per Child for women. For each child born or adopted, a women will have the right to receive an amount equivalent to 18 contributions of a minimum wage, with profitability until she reaches 65 years old.

• In the long term will have an effect of a raise of 20% in pension amount if she contributes during 10 years a minimum wage, and has two children (average)

• Separate bidding process for disability and survival insurance.

Gender Equity

Self employed: Compulsory Coverage

• Independent workers (Self employed and Employer) are 27% of the workforce, 2/3 are Services Providers.

• Equal rights and duties – Compulsory Contributions for Self employed Service Sectors.

• Access to Basic Solidarity and Family Subsidies.

• Independent workers will have access to Insurance for Injuries and Professional Illness.

• Gradual implementation:

•First step, Education Process.

•Second step, begins in 2012, Completes Compulsory Contributions gradually until 2018.

Employment Formalizationand Subside to Pension Contribution

of Young Workers A subsidy to the first 24 contributions made by workers between 18 and 35 years of

age whose income is lower than 1.5 times the established minimum wage.

The purpose of this subsidy is to promote labor participation among youths, increase employment with formal contracts and raise coverage and pension funds of young workers.

This subsidy will be made up of two kinds of contributions: A subsidy to hiring, equivalent to 50% of the contribution for a minimum wage, and a direct contribution to the worker’s pension fund account of the same amount. This instrument started to operate in October 2008, and will benefit about 300 thousand young workers in 2009.

More Competence and Corporate Governance in Pension Fund

Market• Tender process for new affiliates.

The new workers will be assigned, for up to 24 months to the Administrator that offers the lowest commission in the bidding process, which should lower the amount of the fees charged by the Pensions Funds Administrators.

• Fixed Commissions

Fixed commission on contributions, retirement and transfer of balances are eliminated in order to facilitate price comparison between pension fund managers. Management of Life Insurance and Invalidity Insurance is unbundled from fund management. A tender process being carried out for all affiliates, irrespective of the Administrators they are affiliated to.

• Service outsourcing are allowed.

• Entry of new administrators is expected.

Social Protection Network(PROTEGE)

http://www.redprotege.gov.cl/

PROTEGE is the Social Protection Network of the Chilean Government, that seeks to provide security and opportunities. It is based on a set of eight programs and benefits (including the Solidarity Pension System) that meet the needs of people throughout their life cycle.

The network is aimed at reducing vulnerability, creating opportunities for children and their families, fighting discrimination in all its forms, reducing inequality and improving social equity.

Reasons why the Reform is a success

• Population consensus public and private contributions.

• Presidential Leadership: 10 final goals of the Reform.

• Task Force (Ministers: Finance, Work, Planning) dedicated. The political leadership in the Minister of Work.

• Law passed unanimously in Congress.

• Funding secured in international reserves.

• The role of the public administration is to accompany the exercising of rights.

• Solid Technological Platform (monitoring on-line; 34 entities progressively integrates a common data model, digital forecast records)

Conclusions.• Pension systems affect the long term. The contributory pension

scheme created in 1981 has not yet reached full maturity. – Ensure policy consistency and avoid reversals based on short term concerns– Gradual and stepwise approach to solving problems and think about long term

effects• The contributory pension scheme is working in accordance with how

it was foreseen and only within another 20 years will have matured sufficiently so as to reflect the majority of the pensioners. The system is transparent and prevents frauds.

• The focus of Chilean Policy is the reduction of the risk of poverty in old age and the generating of minimum universal benefits, in an integrated Pension Scheme.

• The identity of people, individual accounts of contributions and records of pensions have to interact to achieve confidence of all society in the Pension System.

• We established strong ways of education, communication and evaluation of the attention level and all the operational processes in the private and public sectors with the same quality standards audited by third parties and common database modeling.

• The development of any pension system needs for macroeconomic stability and the contributory pension system helps to reach macroeconomic stability (savings, investment, employment, development of the capital market and insurance).

• An essential condition is to separate the resources to cover the Retirement benefits. Everyone contributes to finance pensions, thru the individual savings and/or taxes (private and public financing).

– In a Federal System like Nigeria, the three levels of Government must reach an agreement of how to reach a common goal of contributions and finance all the accrued pension liabilities

Conclusions…cont’d

Sharing experiences

The Chilean Pension System

Rafael Del CampoFormer National Director

INP