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SAVINGS AND INDIVIDUAL CAPITALIZATION SOCIAL SECURITY REGIME Latin American Experience and its Economical Implication

SAVINGS AND INDIVIDUAL CAPITALIZATION SOCIAL SECURITY REGIME Latin American Experience and its Economical Implication. Mr. Pedro Corona Bozzo President International Federation of Pension Funds Administrations (FIAP). CONTENTS. Background:Latin America and the Caribbean

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SAVINGS AND INDIVIDUAL CAPITALIZATION SOCIAL SECURITY REGIME Latin American Experience and its Economical Implication

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  1. SAVINGS AND INDIVIDUAL CAPITALIZATION SOCIAL SECURITY REGIME 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 1999 - 2015 • Challenges

  3. LATIN AMERICA FIAP Countries: 20 countries 15 countries Population: 507,93 million 474,95 million E.A.P.: 202 million 189 million G.N.P.: MM US$ 1.910.256 MM US$ 1.887.564 G.N.P./Pop.: US$ 3.761 US$ 3.974 CARIBBEAN Countries: 25 countries. Population: 11,99 million. E.A.P.: 7 million G.N.P.: MM US$ 67.310 G.N.P./Pop.: US$ 5.612

  4. DECLINE OF THE FERTILITY RATE Number of children per countries of America • Period World • 1950-1955 5,0 • 1990-1995 3,0 • 2020-2025 2,4 Source: Population Division, United Nations.

  5. INCREASE OF THE LIFE EXPECTANCY Life expectancy years by countries of America Source: Population Division, United Nations.

  6. INCREASE OF THE OLDNESS DEPENDENCY RATE Demographical calculation per countries of America Population over 65 years as % of active population Source::Population Division, Unites Nations.

  7. PENSION FUNDS IN LATIN AMERICA Mexico 1997 Venezuela 1998 G.N.P.: MM US$ 1.136.212 El Salvador 1998 Colombia 1994 Total Funds: MM US$ 69.429 6,11% of G.N.P. Peru 1993 Population: 236.003.323 Bolivia 1997 E.A.P.: 98.428.306 Uruguay 1995 Chile 1981 Total Affiliates: 37.003.313 37,59% of E.A.P. Argentina 1994 • Countries with Reforms

  8. Savings and Individual Capitalization Regime PRINCIPAL CHARACTERISTICS • The contributions are deposited inindividual accounts owned by the worker. • The fund is administrated by specialized societies, allowing forcompetence and efficiency. • There exists a separation between the patrimony of the pension fund and the one of the administrating society. This guaranteessecurity of the resourcesin order to offer an adequate protection to the worker and his family group. • The worker has libertyin 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 Inspectorw dictates laws and regulations w supervises, controls and sanctions.

  10. COUNTRIES WITH REFORMS

  11. COUNTRIES WITH REFORMS: Pension Funds(In million US$ to December 1999) Total MM US$ 69.429

  12. COUNTRIES WITH REFORMS: Pension Funds (Percentage participation to December 1999) TOTAL FUND: MM US$ 69.429

  13. COUNTRIES WITH REFORMS: Number of Affiliates(In thousands to December 1999) Total 37.003.313

  14. COUNTRIES WITH REFORMS:Number of Affiliates(Percentage participation to December 1999) TOTAL AFFILIATES : 37.003.313

  15. COUNTRIES WITH REFORMS: Pension Fund Inverstment(December 1999) 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.

  17. ECONOMICAL IMPLICATIONS OF THE REFORMS • The Pension Fund Investment allows development in: • Infrastructure. • Housing and Real Estate Sector. • The Capital Market. • The Labor Market. • Savings and Growth

  18. ANNUAL NEEDS OF INFRASTRUCTURE IN LATIN AMERICA TOTAL: MMUS$ 68.000 Source: Inter-American Development Bank - BID

  19. INVESTMENT OF THE PENSION FUNDS IN INFRASTRUCTURE 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$ 4.211 (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.

  21. PENSION FUNDS INVESTMENTS IN THE HOUSING AND REAL ESTATE SECTOR 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.

  24. A) MORTGAGE EXCHANGE BILLS Start: 28 August 1977 - 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

  26. B) HOUSING AND REAL ESTATE INVESTMENT QUOTAS 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 19.623, published on the 26.08.99. 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).

  27. CAPITAL MARKETS DEVELOPMENT • 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

  28. LABOR MARKET DEVELOPMENT • 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).

  29. COUNTRIES IN REFORM PROCESS Latin America As of 12.31.99, Brazil, Costa Rica Ecuador and Dominican Republic managed funds by M US$ 69.449 (99,62% concern to Brazil) from 4.730.468 affiliates.

  30. LATIN AMERICA PROJECTIONS 1999 - 2015

  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 1999 - 2015E * Estimated Source: Salomon Smith Barney.

  33. CHALLENGES IN LATIN AMERICA • 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.

  34. CHALLENGES IN LATIN AMERICA • FREE TRANSFER OF FUNDSAllow transfer of social security funds, owned by the workers, when these change their residence country. • CREATE A SOCIAL SECURITY CULTUREBy 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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