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Annuities in Latin America

Annuities in Latin America. Rafael Rofman NACION AFJP Argentina. Annuities in Latin America are directly linked to funded pension systems. Funded pension systems now exist in 9 countries: Chile, Peru, Colombia, Argentina, Uruguay, Bolivia, Mexico, El Salvador and Costa Rica

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Annuities in Latin America

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  1. Annuities in Latin America Rafael Rofman NACION AFJP Argentina

  2. Annuities in Latin America are directly linked to funded pension systems. • Funded pension systems now exist in 9 countries: Chile, Peru, Colombia, Argentina, Uruguay, Bolivia, Mexico, El Salvador and Costa Rica • These systems are very young, the oldest is Chile (1981) and the rest have less that 8 years of operation

  3. As a result, the number of retirees is low. • As of mid 2001, there were 276.000 retirees in the region (87% of them in Chile), for a ratio of 1 retiree per 183 fund members.

  4. Retirees/Fund Members (thousands)

  5. When we consider other benefits, as survivors and disability, the number of beneficiaries is almost twice. • Still, it is clear that the systems are immature and markets should grow in the future.

  6. Benefit options • Scheduled Withdrawal: • Funds remain property of pensioner. • Monthly withdrawal is defined annually, with limits • Annuities: • Funds are transferred to an annuity provider. • The provider becomes responsible for payment until death.

  7. Scheduled Withdrawals • Protect retirees from weak annuities markets • Allows bequest motivation • Risks declining benefits over time • Risk of adverse selection effects

  8. Annuities • Protects against longevity • May protect against financial risks • Allows for survivors benefits • May protect against inflation • Serious marketing problems, increasing costs.

  9. Combined alternatives • In Chile & Peru, it is possible to choose a temporary withdrawal, followed by annuitization

  10. Options in annuities Choice is limited in Argentina, where retiree select provider and currency In the other extreme, in Peru there are more than 100 different annuities schemes to be selected from different providers, depending on: • Survivors benefit guarantee and period of guarantee • Deferment of annuitization • Ratio of annuity benefit to temporary withdrawal • Currency

  11. Different rules... • Life tables • Interest rates • Indexation • Survivors benefits

  12. … different benefits

  13. Most serious problems • Low diversification in assets • Unfair and non transparent competition • Risks linked to capital markets • Lack of actual data increases risks and costs.

  14. Some policy recommendations… • Mandatory indexed annuities (but first pillar size should be taken into account) • Assess whether a competitive annuity market is feasible • Strong supervision of marketing/sales force strategies • Maintain individual choices, but simplify them!

  15. Thank you! Annuities in Latin America Rafael Rofman NACION AFJP Argentina

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