“ Accomplishments and Challenges in the Chilean Pension System ”
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Transcript of “ Accomplishments and Challenges in the Chilean Pension System ”
“Accomplishments and Challenges in the Chilean Pension System”
Francisco SilvaSuperintendencia de Valores y Seguros of Chile
IAIS Annual Conference9 October 2002
Santiago de Chile
Table of Contents
I. Objectives of the Chilean Pension System
II. Structure of Incentives for the Chilean Model
III. Dilemma and Coordination of Objectives in the Regulation
IV. Conceptual Elements of the Latest Amendments to the System
V. Proposals of Improvements to the Chilean Pension System
General Objectives of the System
To minimise the Government risk in paying Pensions (subsidiary role of the Government).
Coordination of objectives in the regulation. To assure pensioners a fair pension when retiring
(Private sector role). To strengthen the Chilean capital market.
Structure of the Chilean System
CompulsorySaving
Affiliates
PensionFunds
Mutual Funds
Investment Funds
Insurance
AccumulatedFund
ScheduleWithdrawal
Labour Cycle RetirementDate
AfterRetirement
Annuity
VoluntarySaving
Incentives Scheme
Incentives Scheme for Competing among Pension Funds Managers
Profitability No. AffiliatesElements
• Portfolio Analysis
• Flexibility to assume risk and differentiation
• Attract affiliates through better profitability and lower management costs
Analysis Structure
Pensioners
Pension FundManagers
Funds
FinancialMarket
1 Efficiency
6 Competition
3 Interest
2 Efficient Contract
4 Low Costs
5 Strengthening
7 Knowledge
(Specifics Objectives of the System)
Relation between Regulation Objectives
Maximisation of Social Security
Efficient Regulation of the Capital Market
1 2
• Minimise Government risk
• Reduce competition from profits
• Diminish Risk
• Promote the use of securities
• To generate competition profits
• Risk Diversification
Asymmetry of Interests
Regulation Dilemma
rs
s
r
Regulation based on social standard
21
r2
r1
(Asymmetry of Interests from Regulators)
U2
U1
Usocial
Solution to Conflict of Regulation(Nash Equilibrium)
Two Conditions: 1) Minimise Government Risk
2) Maximise Institutional Investors Profits
Government Risk
Y (Income)
(Risk)
Y min
= (Y)+
Zone of Personal Risk or by Group
Pillars of the Pension System
Pension System
SocialSecurity
Government assure a minimum pension.
Minimise Government risk, increasing the effort of individual saving.
Pillars of the Pension System
Pension System
CompulsorySaving
Require a minimum individual saving to finance the pension.
Minimise the government risk, increasing the effort of individual saving.
Pillars of the Pension System
Pension System
VoluntarySaving
Improve replace rate. Align incentives so people
increase individual saving. Minimise government risk,
increase individual saving.
Opening Voluntary Pension Saving
Participation of insurance companies, mutual and investment funds managers, and for housing funds in the Voluntary Pension Saving Scheme Market.
Collective Regulation.
Analysis Structure
Pensioners
Pension FundManagers
Funds
FinancialMarket
1 Efficiency
6 Competition
3 Interests
2 Efficient Contract
4 Low Costs
5 Strengthening
7 Knowledge
(Specifics Objectives of the System)Improve with Amendments
Creation of Multi-funds for Pension Funds Managers.
Increase the number of type of Funds in the Pension Fund System, from two to five (Types A, B, C, D y E).
Maximum and Minimum Investment Limits in variable income securities.
Maximum
Limit
Allow
Compulsory
Minimum
Limit
Fund A 80 % 40 %
Fund B 60 % 25 %
Fund C 40 % 15 %
Fund D 20 % 5 %
Fund E Not Allow Not allow
Analysis Structure
Pensioners
Pension FundManagers
Funds
FinancialMarket
1 Efficiency
6 Competition
3 Interests
2 Efficient Contract
4 Low Costs
5 Strengthening
7 Knowledge
(Specifics Objectives of the System)Improve with Amendments
Proposed Third Pillar Amendment
Amendment based on the US 401(k) plans. Main characteristics:
Employer contribution in proportion to employee contribution.
Tax incentives for employer and employee. Fairness conditions as an increasing
incentive.
Analysis Structure
Pensioners
Pension FundManagers
Funds
FinancialMarket
1 Efficiency
6 Competition
3 Interests
2 Efficient Contract
4 Low Costs
5 Strengthening
7 Knowledge
(Specifics Objectives of the System)Improve with Amendments
Proposed Second Pillar Amendment To limit the compulsory contribution of each person,
among the minimum of: (a) 10% salary with a maximum of 6 UF, and (b) a projected salary percentage that added to
his/her accumulate fund, would allow to reach a minimum saving to obtain X time a minimum pension, Y years before his/her retirement age (x>1; Y>5).
In the case that (b) < (a), the difference (a)-(b) must be saved using any pension plan, including voluntary saving managers.
Nash equilibrium is maintained within objectives of regulation: Increasing competition in the financial market
and the pensions market, partially opening actual compulsory saving to other fund managers and to insurance companies (voluntary pension saving model).
Setting boundaries to Government risk.
Proposed Second Pillar Amendment
Analysis Structure
Pensioners
Pension FundManagers
Funds
FinancialMarket
1 Efficiency
6 Competition
3 Interests
2 Efficient Contract
4 Low Costs
5 Strengthening
7 Knowledge
(Specifics Objectives of the System)Improve with Amendments
Align incentives to avoid herd behaviour. The effective correction in the difference regarding average
profitability, allows the reduction of risk, however generating an herd behaviour that decreases competition (another example of conflicting objectives in regulation).
Analyse the convenience of providing vertically integrated functions of collecting, account management and portfolio management. The effective economies of scale in the first two functions
could produce a strong concentration, damaging competition in portfolio management.
Second Pillar:Increasing Efficiency
Proposed First Pillar Amendment
Change actual Government subsidy that assures minimum monthly pension for system pensioners, for a one time subsidy given at the moment of retirement, for the necessarily amount to finance a annuity equivalent to the minimum pension.
Allows the elimination of a contingency that nowadays is assumed by the State, transferring it to the market.
If the private sector is more efficient than the State in the portfolio and risk management, this subsidy should constitute a minor government burden than the actual system, ceteris paribus the coverage.
Summarizing…
First Pillar: Reduce government risk transferring contingencies
to the private sector. Segundo Pillar:
Increase competition, opening compulsory saving to other agents of the financial market, reducing government risk.
Third Pillar: Increase coverage, introducing a model similar to
the 401(k) plans.