CHILEAN PENSION SYSTEM: OVERVIEW
FICCI’s CONFERENCE
NEW DELHI, 18-19 OCTOBER 2004 Hernan L. Fuenzalida-Puelma, Esq., LL.M BearingPoint Consultant
October 2004
HLFuenzalida-Puelma
1
Chilean Health Insurance Experience
CHILE: BASIC PROFILE - 1
(2004)
POPULATION: 15.8 million POPULATION GROWTH: 1.01% GDP:$155 billion (ppp) GDP per capita: $9,990 (ppp) INFLATION RATE: 2.8% PUBLIC DEBT: 14.8% GDP EXTERNAL DEBT; $43.15 billion
AREA: 756.950 KM2 LABOR FORCE: 6 million Agriculture (13.6%), Industry (23.4%), Services (63%) UNEMPLOYMENT: 8.5% AVERAGE EC. GROWTH (1990s): 7.9%
LITERACY: 96.2% HUMAN DEVELOPMENT AVERAGE SCHOOLING YEARS: INDEX: 43rd in the world 10
October 2004 HLFuenzalida-Puelma 2
Chilean Health Insurance Experience
CHILE: BASIC PROFILE - 2
(2004)
BIRTH RATE: 15.77/1000 DEATH RATE:5.71/1000 INFANT MORTALITY RATE: 9.05/1000
TOTAL FERTILITY RATE: 2.06 born/woman SEX RATIO: 0.98 male/female LIFE EXPECTANCY AT BIRTH: Male (73.09), Female (79.82)
AGE STRUCTURE: 0-14 (25.8%), 16-64 (66.3%), 65+ (7.8%)
HEALTH CARE EXPENDITURE: 6 % GDP; $315 PER CAPITA
October 2004
MEDIAN AGE: Male (28.9), female (30.7)
EPIDEMIOLOGICAL TRANSITION:
Chronic diseases and communicable diseases; elderly and not only on maternal/child; prevention & early detection programs
HLFuenzalida-Puelma 3
Chilean Pension Reform
OLD & NEW PENSION SYSTEMS
Old System System Financing Management Options PAYGO State Rigid New System Individual capitalization Private, competitive Multiple (pension fund, contributions over legal minimum, type of fund (in multi-funds) Supervision, regulation, subsidiary
Role of State
Administrator, selfregulation
Benefits
Old age pension
Old age pension, annuities, programmed withdrawals
4
October 2004
HLFuenzalida-Puelma
Chilean Pension Reform
POLICY IMPLICATIONS
INSTITUTING FUNDED PENSIONS IS NOT AN
ISOLATED POLICY DECISION CHILE’S PENSION REFORM WAS PART OF A HOLISTIC ECONOMIC AND LEAGL/INSTITUTIONAL TRANSFORMATION (labor law, commercial law, capital market, regulatory superintendencies) IT TOOK PLACE IN A MATURE, IF IMPERFECT, INSTITUTIONAL SETTING (stock market 1893, regulated 1924, Commercial Code 1867, Civil Code 1857, Insurance Superintendency 1927, amended 1931 and 1980, Pension Funds Superintendency 1980)
October 2004
HLFuenzalida-Puelma
5
Chilean Pension Reform
ROLE OF THE STATE
ESTABLISH LEGISLATIVE &
INSTITUTIONAL FRAMEWORK (Laws, Regulations, and Institutions (capital markets, supervision) ENSURE MACRO-ECONOMIC STABILITY SET UP AUTONOMOUS STATE SUPERVISION (Superintendency) FULFILL SUBSIDIARY FUNCTION (minimum pension, minimum yield)
October 2004
HLFuenzalida-Puelma
6
Chilean Pension Reform
MAIN FEATURES: STRUCTURAL
PENSION SAVINGS BASED ON INDIVIDUAL
ACCUMULATION ACCOUNTS PRIVATELY MANAGED BY PENSION FUNDS WITH SINGLE EXCLUSIVE CORPORATE PURPOSE :
MANAGEMENT OF PENSION FUNDS
INVESTMENTS REGULATED THROUGH FORMAL
CAPITAL MARKET MINIMUM YIELD LEGAL OBLIGATION TIGHT STATE SUPERVISION BY AUTONOMOUS SPECIALIZED SUPERINTENDENCY
October 2004
HLFuenzalida-Puelma
7
Chilean Pension Reform
MAIN FEATURES: FINANCING
MANDATORY PENSION SAVINGS:
10% of taxable gross wage MANDATORY DISABILITY AND SURVIVORSHIP INSURANCE AND FEES/COMMISSIONS: 3%of taxable gross wage RECOGNITION BOND
October 2004 HLFuenzalida-Puelma 8
Chilean Pension Reform
MAIN FEATURES: MANAGEMENT
STATE LICENSED PENSION FUNDS EXCLUSIVE CORPORATE PURPOSE REGULATED DIVERSIFIED INVESTMENTS
IN FORMAL CAPITAL MARKET REGULATED STRUCTRE OF FEES AND COMMISIONS UNDER STRICT SUPERVISION FROM PENSION FUNDS SUPERINNTENDENCY
October 2004
HLFuenzalida-Puelma
9
Chilean Pension Reform
MAIN FEATURES: INVESTMENTS
MADE BY PENSION FUNDS IN FORMAL CAPITAL MARKET REGULATED INVESTMENT OPTIONS RETURNS: 10,5% AVERAGE HIGHER THAN
REAL WAGES AND PER CAPITA INCOME DIVERSIFICATION IS CRITICAL FOR PORTFOLIOS PERFORMANCE
STATE SECURITIES, CORPORATE, SECURITIES,
INVESTMENT ABROAD MULTIFUNDS
October 2004
HLFuenzalida-Puelma
10
Chilean Pension Reform
MAIN FEATURES: BENEFITS
EET REGIME: EXEMPT CONTRIBUTIONS EXEMPT REVENUES TAXABLE PENSION INCOME OLD AGE PENSION: At legal age Early retirement SURVIVORSHIP DISABILITY PENSION Total October 2004 HLFuenzalida-Puelma Partial
11
Chilean Pension Reform
MAIN FEATURES:PENSION PAYMENTS
LIFE ANNUITY (with an Insurance
Company) PROGRAMED WITHDRAWALS (with the Pension Fund) TEMPORARYWITHDRAWAL AND DEFERRED LIFE ANNUITY (with Pension Fund and an Insurance Company)
October 2004 HLFuenzalida-Puelma 12
Chilean Pension Reform
RESULTS
FUND UNDER PENSION FUND
MANAGEMENT (31 March 2004):
48.78 Billion Dollars
CONTRIBUTORS TO PENSION FUNDS
(31 march 2004):
7 million (out of a total population of 15
million and an active work force of 6 million)
October 2004
HLFuenzalida-Puelma
13
Chilean Pension Reform
OUTSTANDING ISSUES
OBTAIN/SECURE CONTROL
UNIVERSAL COVERAGE REDUCE MARKETING COSTS REDUCE FREQUENT TRANSFER OF FUNDS AMONG PENSION FUNDS
ADMINISTRATIVE COSTS REDUCE HIGH COSTS OF ANNUITIES BETTER REGULATION & TRANSPARENCY OF ANNUITIES MARKET
October 2004
HLFuenzalida-Puelma
14
Chilean Pension Reform
LESSONS
CAPITALIZATION/FUNDED PENSION SYSTEM IS
POSSIBLE IN A WELL DESIGNED AND REGULATED INSTITUTIONAL ENVIRONMENT A DEFICITARY PAYGO PENSION SYSTEM IS REPLACEABLE CAPITAL MARKET & INVESTMENTS: REGULATED PENSION FUND MANAGEMENT: PRIVATE COMPETITIVE DIVERSIFIED INVESTMENTS OPPORTUNITIES CONTRIBUTOR’ CHOICES (Pension Fund, type of multi-fund, contributions above minimum, age & mode of retirement),
HLFuenzalida-Puelma 15
October 2004
Chilean Pension Reform
LESSONS
PRIVATE FINANCIAL SECTOR (development of
custodian banks, pension funds, capital market) ROLE OF THE STATE: CLEARLY DEFINED STATE SUPERVISION: AUTONOMOUS, PROFESSIONAL AND TECHNICAL PENSION REFORM IS NOT AN ISOLATED POLICY DECISION; IT IS PART OF A COMPLEX OF DECISIONS (macroeconomic, institutional, legal, labor market, capital market, and opening the economy)
October 2004
HLFuenzalida-Puelma
16
Chilean Pension Reform
WORLD-WIDE REFORM TREND
1980’s Chile - 1881 1990’s Peru - 1993 Argentina - 1994 Colombia - 1994 Uruguay - 1995 Bolivia - 1997 Mexico - 1997 El Salvador - 1998 Kazakhstan - 1998 Poland - 1999 2000’s Costa Rica Latvia - 2001 Estonia - 2002 Bulgaria - 2002 Croatia - 2002 Dominican Rep - 2003 FYR Macedonia - 2003 Lithuania - 2003 Ukraine - 2003 Slovakia - 2004
October 2004
HLFuenzalida-Puelma
17
Chilean Pension Reform
IMPLICATIONS FOR INDIA
OPTION TO REFORM PROVIDENT FUNDS OPTION FOR VOLUNTARY PENSION SAVINGS FOR
MIDDLE- AND UPPER-INCOMES OPPORTUNITY FOR FURTHER DEVELOPMENT OF CAPITAL MARKET POOL OF RESOURCES OFFERS INVESTMENT OPTIONS WITH RISK RETURN AND DIVERSIFICTION ENCOURAGES CREATION OF NEW PUBLIC AND PRIVATE MID- AND LONG-TERM FINANCIAL INSTRUMENTS. OPPORTUNITY FOR DEVELOPMENT OF PENSIONRELATED INSURANCE PRODUCTS
HLFuenzalida-Puelma 18
October 2004
Chilean Pension Reform
THANK YOU VERY MUCH FOR YOUR ATTENTION
October 2004 HLFuenzalida-Puelma 19