SAVINGS AND INDIVIDUAL

CAPITALIZATION SOCIAL SECURITY REGIME

Latin American Experience and its Economical

Implication

Mr. Pedro Corona BozzoPresident

International Federation of Pension Funds Administrations (FIAP)

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

LATIN AMERICA FIAPCountries: 20 countries 15 countriesPopulation: 507,93 million 474,95 million E.A.P.: 202 million 189 millionG.N.P.: MM US$ 1.910.256 MM US$ 1.887.564G.N.P./Pop.: US$ 3.761 US$ 3.974

CARIBBEANCountries: 25 countries.Population: 11,99 million.E.A.P.: 7 millionG.N.P.: MM US$ 67.310G.N.P./Pop.: US$ 5.612

DECLINE OF THE FERTILITY RATENumber of children per countries of America

6,9

3,2

5,7

5,25,0

6,9

3,12,8

2,52,8

3,4

2,7

2,1 2,1 2,1 2,1 2,22,5

1

2

3

4

5

6

7

Mexico Argentina CHILE SouthAmerica

CentralAmerica

Caribbean

Period World 1950-1955 5,0 1990-1995 3,0 2020-2025 2,4

Source: Population Division, United Nations.

INCREASE OF THE LIFE EXPECTANCYLife expectancy years by countries of

America

50,7

62,5

54,852,1

49,252,0

72,174,5

67,870,5 68,5

76,7 77,6 78,574,6 76,0 74,4

71,5

30

40

50

60

70

80

90

100

110

Mexico Argentina CHILE SouthAmerica

CentralAmerica

Caribbean

1950-1955 1990-1995 2020-2025

World 46,5 64,3 72,1

Source: Population Division, United Nations.

INCREASE OF THE OLDNESS DEPENDENCY RATE

9,1 8,7 8,67,0

8,2 8,37,1

15,2

10,38,5

7

10,6

13,8

18,8 19,5

15,012,5

16,7

5

10

15

20

25

30

35

40

Mexico Argentina CHILE SouthAmerica

CentralAmerica

Caribbean

1960

1995

2025

%World 9,2 %

10,5 %

15,2 %

Demographical calculation per countries of AmericaPopulation over 65 years as % of active population

Source::Population Division, Unites Nations.

Colombia1994

Peru1993

Chile1981

Argentina1994

Mexico1997

Uruguay1995

Bolivia1997

PENSION FUNDS IN LATIN AMERICA

Venezuela1998

E.A.P.: 98.428.306

El Salvador1998

Total Affiliates: 37.003.31337,59% of E.A.P.

Countries with Reforms

Total Funds:MM US$ 69.4296,11% of G.N.P.

Population:236.003.323

G.N.P.: MM US$ 1.136.212

Savings and Individual Capitalization RegimePRINCIPAL CHARACTERISTICS

The contributions are deposited in individual accounts owned by the worker.

The fund is administrated by specialized societies, allowing for competence and efficiency.

There exists a separation between the patrimony of the pension fund and the one of the administrating society. This guarantees security of the resources in order to offer an adequate protection to the worker and his family group.

The worker has liberty in order to choose and transfer to another Administrator, and to decide when and how to retire.

Savings and Individual Capitalization RegimeSTATE ROLE

The Government has the Role of:

Warrantor guarantees everyone the right of social security.

Subsidiary grants minimal pensions

grants assistance welfare.

Regulator and Inspector dictates laws and regulations

supervises, controls and sanctions.

COUNTRIES WITH REFORMS

COUNTRIES Unique Integrated Mixed(Individ.Capital) (PAYG & Indiv.Cap) (PAYG & Indiv.Cap.)

Argentina Bolivia Chile Colombia El Salvador Mexico Peru Uruguay Venezuela

SAVINGS AND INDIVIDUAL CAPITALIZATION SYSTEM

COUNTRIES WITH REFORMS: Pension Funds (In million US$ to December 1999)

16.787

535

2.887

34.501

213

11.509

2.406591

500

5.500

10.500

15.500

20.500

25.500

30.500

Argentina Bolivia Colombia Chile El Salvador Mexico Peru Uruguay

Total Total MM US$ MM US$ 69.42969.429

COUNTRIES WITH REFORMS: Pension Funds (Percentage participation to December 1999)

Peru3,47%

Uruguay0,85%

Mexico16,58%

El Salvador0,31%

Chile49,69%

Argentina24,18% Bolivia

0,77% Colombia4,16%

TOTAL FUND: MM US$ 69.429TOTAL FUND: MM US$ 69.429

COUNTRIES WITH REFORMS: Number of Affiliates (In thousands to December 1999)

7.854

511

3.443

6.106

736

15.595

2.222

536

500

2.500

4.500

6.500

8.500

10.500

Argentina Bolivia Colombia Chile El Salvador Mexico Peru Uruguay

Total Total 37.003.313 37.003.313

COUNTRIES WITH REFORMS: Number of Affiliates (Percentage participation to December 1999)

Colombia9,31%

Bolivia1,38%

Argentina21,23%

Chile16,50%

El Salvador1,99%

Mexico42,14%

Uruguay1,45%

Peru6,01%

TOTAL AFFILIATES : 37.003.313TOTAL AFFILIATES : 37.003.313

COUNTRIES WITH REFORMS:Pension Fund Inverstment (December 1999)

State Company Financ. Foreign Available

Sector Sector Sector Sector Assets

Argentina 53,71 22,67 22,28 0,37 0,97Bolivia 69,50 0,30 30,20 0,00 0,00Colombia 40,15 17,75 40,20 0,00 1,90Chile 34,59 18,26 33,70 13,42 0,03El Salvador 64,60 3,70 31,70 0,00 0,00

Mexico 95,50 2,56 0,00 0,00 1,94

Peru 7,09 44,94 45,66 0,00 2,31

Uruguay 58,56 7,58 28,17 0,00 5,69

NOTE: For the cases of Colombia and Mexico, the investment in Other Assets has been classified as Available Assets

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.

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

ANNUAL NEEDS OF INFRASTRUCTURE IN LATIN AMERICA

28.000

2.900

12.700

18.000

2.900 3.500

05000

1000015000200002500030000

Brasil Chile Argentina Mexico Peru Colombia

TOTAL: MMUS$ TOTAL: MMUS$ 68.00068.000

Source: Inter-American Development Bank - BIDSource: Inter-American Development Bank - BID

INVESTMENT OF THE PENSION FUNDS IN INFRASTRUCTURE

BENEFITS:

- Better Life quality for the peopleCOUNTRY: - Higher Competitivity

- Economical Growth- Long term financing alternative and inlocal currency (exchange rate)

CONCESSIONAIRE: - Available financial resources- Additional security guarantee in front ofrules and regulations changes

PENSION - Risk diversificationFUNDS - Long term investments

- Adequate income-yield capacity

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.

BENEFITS:BENEFITS:

Stimulate this Sector. Stimulate this Sector.

Finance Investment Projects.Finance Investment Projects.

Finance Housing.Finance Housing.

Stimulate Savings habits.Stimulate Savings habits.

Improve life quality of the people.Improve life quality of the people.

Decrease housing deficits.Decrease housing deficits.

Contribute to the economical development and growth of the Contribute to the economical development and growth of the countrycountry. .

PENSION FUNDS INVESTMENTS IN THE HOUSING AND REAL ESTATE SECTOR

Country Instrument Type Allowed Invested SpanArgentina -Mortgage Exchange Bills 28% 0,08% 27,92%

-Negotiable Obligations 40% 2,13% 37,87%

-Trusteeships 14% 2,68% 11,32%

-Direct Investment Funds 10% 0,19% 9,81%Colombia -Mortgage Exchange Bills 30% 1,52% 28,48%

-Entitlements 30% 7,85% 22,15%Chile (1) - Mortgage Exchange Bills 50% 15,10% 34,90%

-Housing/RE Inv.Funds Quotas 10% 1,45% 8,55%

-Securitized Bonds (*) 10% 0,03% 9,97%Peru -Mortgage Exchange Bills 40% 0,19% 39,81%

-Entitled Assets 10% 0,45% 9,55%

-Housing/RE Inv.Funds Quotas 12% 0,58% 11,42%

-F. Rental Bonds 25% 10,82% 14,18%

Data to 31.12.99 (1) To 30.09.99(*) Specific instrument limit. Also depends of the kind of emitting entity and risk classification.

LATIN AMERICA: Experience of the Pension Funds Investments 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.

CHILE: Investment Experience of the Pension Funds in the Housing and

Real Estate Sector

Start:Start: 28 August 1977 - Circular Memorandum SBIF N° 1462 28 August 1977 - Circular Memorandum SBIF N° 1462

Reason of IssueReason of Issue:: Finance the construction and buying of houses Finance the construction and buying of houses (mortgage exchange bills)(mortgage exchange bills)

Guarantees:Guarantees: Banker, mortgage. Banker, mortgage.

Amount:Amount: Not over 75% of the appraisal value or sale price, the one Not over 75% of the appraisal value or sale price, the one that is the lowest.that is the lowest.

Term:Term: Between 8, 12, 15 and 20 years. Between 8, 12, 15 and 20 years.

Interest: The interest rate of each issue is freely determined by the Interest: The interest rate of each issue is freely determined by the emitting entity and in agreeement with the client.emitting entity and in agreeement with the client.

Emitting Entities:Emitting Entities: Commercial Banks, Banco del Estado, Financial Commercial Banks, Banco del Estado, Financial Societies and the Housing and Urbanization Ministry.Societies and the Housing and Urbanization Ministry.

Valuing Unit:Valuing Unit: Unidad de Fomento (U.F.). Unidad de Fomento (U.F.).

Amortization:Amortization: Monthly equal installments. Monthly equal installments.

Liquidity:Liquidity: In the secondary market. In the secondary market.

A) MORTGAGE EXCHANGE BILLS

Participation Evolution of the Pension Funds in the Investment of Mortgage Exchange Bills to System Level

(MM US$ to December 1998)

0

1.500

3.000

4.500

6.000

7.500

9.000

10.500

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998

Fund System

Source: Central Bank Bulletin and Chilean AFP Superintendence

B) HOUSING AND REAL ESTATE INVESTMENT QUOTAS

Start:Start: Year 1990 Year 1990

CharacteristicsCharacteristics:: Integrated patrimony by contributions of natural Integrated patrimony by contributions of natural and legal persons for their investment in assets like : real estate and legal persons for their investment in assets like : real estate located in Chile, endorsed mortgage loans, stocks from housing located in Chile, endorsed mortgage loans, stocks from housing and real estate stock companies and stocks from stock companies and real estate stock companies and stocks from stock companies whose sole object is the housing and real estate business. whose sole object is the housing and real estate business.

Investment Limit:Investment Limit: 10% of the Fund 10% of the Fund

Used:Used: M US$ 380 (1,45% of the Pension Fund). M US$ 380 (1,45% of the Pension Fund).

C) COMPANY BONDS

Law Nº 19.623, published on the 26.08.99.

Characteristics:Characteristics: Instrument, whose subjacent assets are the Instrument, whose subjacent assets are the mortgage loans. mortgage loans.

Investment Limit:Investment Limit: 10% of the Fund 10% of the Fund Used:Used: M US$ 10 (0,03% of the Pension Fund). M US$ 10 (0,03% of the Pension Fund).

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

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 ForcesIn 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 ratesThe 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).

COUNTRIES IN REFORM PROCESSLatin America

LATIN AMERICA In preparation

Waiting for Approval

Approved (Legislated)

Brazil

Costa Rica

Ecuador

Guatemala

Honduras

Nicaragua

Dominican Republic

REFORM PROGRESS STATUS

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.

LATIN AMERICA PROJECTIONS1999 - 2015

ASSETS EVOLUTION 1999 - 2015E (In Million US$)

132.342

303.172

848.949

50.000

150.000

250.000

350.000

450.000

550.000

650.000

750.000

850.000

950.000

Includes: Argentina, Bolivia, Brazil, Colombia, Chile, Mexico, Peru, Uruguay.

Year 1999: Data FIAP.

Estimated Data (E) from Salomon Smith Barney

ASSETS OVER GNP1999 - 2015E

1999 2005* 2015*Argentina 5,6% 12,8% 26,1%

Bolivia 39,8% 32,0% 41,8%Brazil 7,1% 15,3% 26,4%Colombia 4,0% 11,2% 30,0%Chile 42,7% 49,0% 54,8%Mexico 2,4% 12,4% 28,6%Peru 4,3% 8,9% 18,9%Uruguay 2,7% 4,5% 7,8%Total 8,7% 15,5% 28,6%

* Estimated

Source: Salomon Smith Barney.

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.

CHALLENGES IN LATIN AMERICA

FREE TRANSFER OF FUNDS Allow transfer of social security funds, owned by the workers, when these change their residence country.

CREATE A SOCIAL SECURITY CULTURE By 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