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Sergio Baeza Chairman of the Board of SCOMP S.A. May 2010

Reducing the transaction costs of retirement annuities in Chile. Sergio Baeza Chairman of the Board of SCOMP S.A. May 2010. 3. Organizational setup. 4. Results. 2. Goals of the reform. 1. Conditions prior to the reform. Agenda. 1. Conditions prior to the reform.

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Sergio Baeza Chairman of the Board of SCOMP S.A. May 2010

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  1. Reducing the transaction costs of retirement annuities in Chile Sergio Baeza Chairman of the Board of SCOMP S.A. May 2010

  2. 3 Organizational setup 4 Results 2 Goals of the reform 1 Conditions prior to the reform Agenda

  3. 1. Conditions prior tothereform • Assimetrical information between affiliates and sales agents leading to overweight of agents in the pension decision and choice of annuity company • High sales commissions to the detriment of pensions giving agents the resources to financially influence the individual’s choice of annuity company

  4. 1. Conditions prior tothereform • Agents only earned commissions paid by annuity companies having no incentive to present their clients with the option of installment withdrawals from the pension company • Therefore little competition between these two options of retirement

  5. 2. Goals of thereform • Provide CLEAR and COMPARABLE information of the two basic retirement options, annuities and installment withdrawals • REDUCTION OF COMMISSIONS puting a ceiling to them at 2.5%

  6. 2. Goals of thereform • INCREASE PRICE COMPETITION through a simultaneous biding process • EMPHASIZE SOLVENCY by demanding a claims payment rating no less than BBB • PREVENT PAYMENTS FOR RETIREE INFORMATION by the official disclosure of data on candidates for retirement

  7. 3. Organizationalsetup • By Law in 2004 pension and life insurance company were required to put in place a system to provide information to affiliates on the values of the different pension options • Similarly affiliates were mandated to make inquiries through this system as a requisite for retirement • Thus a corporation was set up, SCOMP S.A., to provide this information system; its owners are the pension companies 50% and the life annuity companies 50%

  8. 3. Organizationalsetup • Access to SCOMP is given to the Pension Companies, the Life Annuity Companies and the Pension Advisors • The system is under the surveillance of both the pension and the annuity regulators • To develop and operate the information system SCOMP hires a systems provider through an open biding process • SCOMP finances itself by charging a fee for each information request and for each closing of a pension decision

  9. 3. Organizatioalsetup - retirementoptions • At retirement affiliates have to choose between different pension options: • Installement withdrawals from the retirement account • Immediate Life Annuity with or without guaranteed term • Installment withdrawals plus deferred annuity • Immediate Annuity plus Installment Withdrawals

  10. 3. Organizationalsetup - process • The most relevant processes in the system are: • Issue of Balance Certificate • Request for Pension Offers • Issue of Pension Offers Certificate • Selection of Pension Option

  11. 3. Organizationalsetup - process

  12. 3. Organizationalsetup - process

  13. 3. Organizationalsetup - process

  14. 4. Results • Increase in price competition • Decrease in Agent’s Commisision with the corresponding increase in pensions • Affiliates easily have all relevant information to benefit from good pension advice to make a right choice of pension mode and carrier • The official disclosure of retiree candidates has added transparency to the marketing of pension offers

  15. 4. Results – lowercommissions Source: SVS

  16. 4. Results – PensionOffersRequests

  17. 4. Results - Closings

  18. 4. Results - Capitalstransacted

  19. 4. Results – Savingsoncommissions Averagecommissionbefore SCOMP: 4,40% ( 1991 - 2003) Averagecommissionsinceinception of SCOMP: 2,07% ( 2004 - 2009) Lowercommissions of 2,33% onaverage OnCapitals of US$ 1.760 million per yearonaverageRepresentsavings of US$ 41 million per year

  20. 4. Results – Servicefees

  21. 4. Results - Balance Sheet

  22. 4. Results - Profit and Loss

  23. CONCLUSIONS SCOMP produces commission savings of US$ 41 million per year which divided into 17 thousand annuity closings per year represent savings of US$ 2.400 per closing This is achieved with a low initial investment in systems development of US$ 500 thousand The operational cost is very moderate, some US$ 35 per closing Efficiency per closing is great : spending US$ 35 to produce savings of US$ 2.400.

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