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Conditions for Successful Pension Reforms Comments

Conditions for Successful Pension Reforms Comments. Seminar “Pension Reform in Eastern Europe: Experiences and Prospects” Kiev, Ukraine, 27 – 28 May, 2004. Guillermo Arthur E. President of FIAP May, 2004. Countries with reforms: many experiences to be analyzed. * Only public employees

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Conditions for Successful Pension Reforms Comments

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  1. Conditions for Successful Pension ReformsComments Seminar “Pension Reform in Eastern Europe: Experiences and Prospects” Kiev, Ukraine, 27 – 28 May, 2004. Guillermo Arthur E. President of FIAP May, 2004

  2. Countries with reforms: many experiences to be analyzed... * Only public employees ** Not yet implemented

  3. Results of the Reforms • Impact on pensions Differential Standard Real Real Differential Real rate of return/ deviation growth of growth in of return/ of return growth wages per capita growth since inwages start-up % income per capita % % Argentina 11.7 13.4 -0.8 12.5 -0.4 12.1 Bolivia 16.2 n.d. 8.8 7.6 0.4 15.8 Colombia 11.8 2.6 1.4 10.4 -0.3 12.1 Chile 10.5 9.3 1.8 8.7 4.5 6.0 El Salvador 11.3 3.6 -0.2 11.5 0.5 10.8 Mexico 10.6 n.d. 0.0 10.6 2.8 7.8 Peru 5.7 7.5 1.8 3.9 2.4 3.3 Uruguay 9.5 n.d. 3.6 5.9 -0.3 9.8 Source: Palacios (2003)

  4. Impact on the economy • QUALITATIVE EFFECTS: • Offers investors the possibility of combining risk (best risk/return combination and diversification). • Reduces intermediation costs. • Encourages the creation of innovative, long-term financial instruments. • Improves transparency and corporate governance: • Formal markets • Public Offering of Shares • Valuation • Energizes the custody and risk-rating industries, etc.

  5. Some examples: Corporate bonds CHILE PERU MEXICO Note for Chile: Average life to maturity of bonds in the first half of the 1990s: between 10 and 15 years. Currently between 15 and 20 years. Some have been issued at 30 years.

  6. Stocks PERU BULGARIA CHILE

  7. Mortgage-backed securities and bank bonds CHILE Stock of Housing Financed with MBS

  8. Investment fund shares CHILE (*) Information as of September 2003

  9. Impact on political economics • The system of individual accounts has a lower relative political risk • Pressures on the system: - Fiscal • - Redistributive • Resistence of the Individual Capitalization system: • - Individual accounts. • > one has to act on the stock, not on the flow • > more visibility • - Property rights • - Private management rather than State organisms – Conflict of interests. • Political economics of adjustment: • - Market versus political system (example: increase in life expectancies). • - Visibility. • Two examples: Chile and Argentina.

  10. There are also lessons to be underlined ... • Lesson Nº1: Certain elements of basic design are essential for the success of the system: • Individual savings accounts (ownership of the funds); • De-centralized, competitive management; • Adequate portfolio diversification; • Freedom of choice for members; • Professional supervision. (Continued)

  11. Lesson Nº2: Don’t give in to “second-best” technical solutions. Faults which seem minor in the initial design may have serious consequences in the medium and long term. It is important to guarantee the “consistency” of the model chosen. Lesson Nº3: Pension systems, whatever their type, are never isolated from the rest of the social and economic institutions. To ensure the success of pension reforms, these must be accompanied by the reforms that may be needed to regulate the capital market, taxation system and labour market. However, do not wait for “optimum conditions” before starting the reforms. (Continued)

  12. Lesson Nº4: Ensure that the reform is a “Government project” (and not only a project of certain sectors –Ministries- of the Goverment). Ensure that the reform effort is directed by a top-level technical group, working with political support. Give the same importance and care to the implementation of the law as to the law itself. Lesson Nº5: Respect – as far as is reasonable and possible- the rights acquired by members of the old system. Lesson Nº6: Accompany the pension reform with a vigourous public education campaign (and keep that campaign going over time).

  13. However, not everything has been done and there are still important challenges pending... • To extend coverage • To continue bringing down operation costs • To diversify portfolios • To create greater social security culture

  14. 15 Key Elements for Good Social Security Design • Capitalization in Individual Accounts • Correspondence between Contributions and Benefits • Workers’ Absolute Ownership of their Funds • Freedom of Choice • Portability of Social Security Savings • Defined Contributions • Common Rules (uniformity) • Net Worth Separation (AFP - Funds) • Private Management within a Competitive Framework • Diversification and Freedom to Invest • Single Corporate Purpose • The State as Guarantor of the System Technical Supervision • Tax Treatment to Stimulate Saving • Avoid Co-existence with State Systems (universality)

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