PENSION REGIMES IN LATIN AMERICAN EMERGING COUNTRIES:...

PENSION REGIMES IN LATIN AMERICAN EMERGING COUNTRIES: DO AND CAN

PAYG AND INDIVIDUAL CAPITALIZATION SYSTEMS COEXIST?

ERNESTO REZK

Instituto de Economía y Finanzas Facultad de Ciencias Económicas

Universidad Nacional de Córdoba, Argentina

SUMMER SCHOOL IN DEVELOPMENT ECONOMICS

SALERNO UNIVERSITY, Ascea Marina, 27 June 2014 13

PENSION REGIMES IN LATIN AMERICAN EMERGING COUNTRIES: DO AND CAN PAYG AND INDIVIDUAL CAPITALIZACION SYSTEMS COEXIST?

Pension fund systems with mandatory contributions

Taxable returns

Liquidity constraints


There are capital market imperfections

There are restrictions for borrowing


PENSION SYSTEM VARIANTS

Single System: affiliation is mandatory for all workers. Funds are either

channeled to the PAYG regime or administered by private firms (pension fund

administrators).

Integrated Mixed System: PAYG and individual capitalization regimes coexist.

Workers´s contributions are distributed between both regimes.

Mixed System in Competence: individual capitalization and PAYG compete for

affiliations and contributions are totally directed to the chosen regime.


OPERATING PENSION SYSTEMS

COUNTRIES YEAR SINGLE SYSTEM

MIXED INTEGRATED

SYSTEM

MIXED IN COMPETITION

OTHERS

Argentina 1994 2008

X

X

Bolivia 1997 2010

X

X

Brasil 1991 X

Chile 1981 X

Colombia 1993 X

México 1997 X

Perú 1993 X

Uruguay 1995 X


ARGENTINA

Period 1994-2008

Mixed in competence component (workers chose the regime) and Mixed

integrated component (labours mandatorily contributed to the chosen regime

and employers to the PAYG system). Voluntary contributions allowed in the

capitalization system.

Capitalization regime: individuals paid 7% of their wages: 4.58% to the fund,

1.42% to the insurance company and 1% to the Pension Fund Association.

Employers contributed 16% to finance the PAYG regime.

Retirement Age: 65 for male and 60 for female.

PAYG system: individuals paid 11% and employers 16%.

Benefits: pensions for the elderly, disability and death pensions.


ARGENTINA

Period 1994-2008

Pensions for the elderly (in both regimes) included:

A Universal Basic Benefit equal to 2.5 times an annually estimated social

security unit.

A Compensatory Benefit accounting for contributions paid to the PAYG regime

before the Law 24241.

An Additional Benefit for Permanence amounting to 0.85% per year of

contribution, beyond 1994. As of 2008, the whole Pension Schem was restated by finishing the Mixed

Integrated System and returning to the previous state- managed PAYG Regime.

There is a minimum legal pension (assumedly falling in line with the minimum

legal wage) whereas the value of pensions are updated twice a year using an

ad-hoc index for social security.

PENSION REGIMES IN LATIN AMERICAN EMERGING COUNTRIES: DO AND

CAN PAYG AND INDIVIDUAL CAPITALIZACION SYSTEMS COEXIST?

ARGENTINA: PAYG´S FINANCING SOURCES

Social Security Taxes; (58%)

Employers´ contribution on wages 16% (4.9% pib)

Employees´ contribution on wages 11% (3.4% pib)

Tax revenues: (42%)

Transfers from VAT yield 11% (1.0% pib)

Transfers from Income Tax yield1 20% (1.2% pib)

Transfers from taxes on petrol and gas 21% (0.25% pib)

Transfers from the simplified regime

for small taxpayers 70% (0.12% pib)

Internal taxes on diesel cars 100%

Revenue sharing regime (coparticipación) 15% (3.2% pib)

1. Plus $ 120.000.000 per year


ARGENTINA: THE PAYG´S SUSTAINABILITY GUARANTEE FUND

(as of 2008)

AIMS

1. To lessen negative financial impacts upon PAYG that may stem from the

evolution of economic and social variables.

2. To contribute to preserve the value and profitability of PAYG´s resources.

3.To face eventual PAYG´s financing shortages that may endanger the

quantum of benefits.



(as of 2008)

SOURCES

1. PAGY´s proven available annual resources (that is, net of liabilities

represented by the year´s quantum of pensions and benefits).

2. Financial resources transferred from the previous individual capitalization

system.

3. Returns on carried out investments.

4. Any other budgetary transfer from the central government.



(as of 2008)

ACCUMULATION LIMITS AND USE

1. Fund´s accumulated resources can not exceed the amount of the annually

authorized spending in pensions and benefits.

2. The Fund may be used to finance pension expenditures whenever

contingencies come about preventing PAYG´S annual budgetary

obligations to be met.



(as of 2008)

CRITERIA AND GUIDELINES TO INVEST

Based on criteria of safety, profitability and transparency, fund´s resources may

be invested in:

Public debt bonds

Domestic and foreign bonds, stocks and securities of acknowledged

Solvency

Fixed term deposits

Any other habitual investment in instruments of financial markets

Economic projects and infrastructure


0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2007 2008 2011 2013

ARGENTINA: FORMER PRIVATE FUNDS PORTFOLIO (2007-2008) AND PAYG SUSTAINABILITY GUARANTEE FUND (2011-2013)

State Corporate Financial Foreign Other Assets Productive Projects+Infraestructure Liquid Assets


BOLIVIA, 1997-2010 The Mixed in Competence dual regime legislated in 1993 included the Average

Premium Regime (PAYG) operated by the Institute of Social Insurances (ISS)

and the Individual Capitalization scheme runned by Pension Fund

Administrators (AFP). Labour and self employed workers had the possibility of

changing regime.

Retirement Age: 62 for male and 57 for female.

Contributions to the RPM: 16%, (12% to finance pensions and 4% to defray the

system´s administrative costs.

Contributions to the capitalization system: 16% in the case of workers (11.5% to

the individual capitalization account,1.6% as a fee for pension

associations,1.4% to the insurance premium and 1.5% for the Minimum

Pension Guarantee Fund; self employed workers contribute 16%. Voluntary

contributions were permitted.


BOLIVIA, SITUATION AS OF 2010

CONTRIBUTIVE REGIME (DEFINED CONTRIBUTION)

Pensions for the elderly financed with employees´ contributions and the Fund

for the Elderly (composed of transferred accumulated balances from the

previous individual capitalization regime)

Employees´ contributions: 12.71% (10% of wages or income, 0.50% for the

Solidarity Fund, 1,71% risk premium, 0.50% administration).

Required conditions: a minimum age of 58 for men and 55 for women and no

less than 120 contributions that can finance a pension higher than the solidarity

pension corresponding to the years of contribution.



SEMI CONTRIBUTIVE REGIME

Solidarity pensions for the elderly financed with employees´ contributions, the

Solidarity National Contribution (additional tax for higher income earners), 3%

employers´ contributions, a 0,50% solidary contribution by the insured and 20%

of risk premia.

Required conditions: a minimum age of 58 and no less than 120 contributions.

NON CONTRIBUTIVE REGIME

Dignity Pensions for individuals over 60 years (or more) with o without

contributions to the Contributive or Semi Contributive Regimes.



The Long Run Social Security Managing Body administers:

The PREVISIONAL SAVING FUND (workers´ individual saving accounts)

The FUND FOR THE ELDERLY (already retired´s accumulated balances)

The SOLIDARITY FUND (for the financing of Solidarity Pensions)

Investment Guidelines

Only financial institutions´ public bids

Focus on productive firms

Maximum 10% per bond issuer

Maximum funds´ revenue allocation in foreign investment: 50%

Maximum funds´ revenue allocation in unqualified small firms: 5%


BRASIL

The 1988 Constitution ruled that key parameters should be met, with regards to

Pensions, Health and Social Assistance, as for instance:

- Universal coverage (including self employed workers).

- Lowest benefits linked to the minimum legal wage.

- Indexation of pension benefits to the minimum legal wage.

- Pension benefits extended to the rural population.

- Selectivity and distributive features: individual needs should determine social

services and benefits.

- Equitable financing share.

- Diversity of financing bases in order that contributions may fall upon various

sectors and salary types.

- Administration bodies with participation of the government, employers, workers

and the retired.


Social Security General Regime (RGPS)

PAYG (retirement age: 60 and 55 for male and female respectively)

Urban and rural systems

Social Security Specific Regimes (RPPS)

PAYG (retirement age: 60 and 55 for male and female respectively)

Including federal, state and municipal civil servants and the military

Supplementary Social Security (PS)

Capitalization (Including open and closed funds)

Social Welfare Regime

Non contributive pensions granted to the elderly under the poverty line


General Regime (RGPS)

Specific Regimes (RPPS)

Supplementary Regime

Beneficiaries Private labour Civil servants All individuals

Affiliation Mandatory

(Capitalization

admitted)

Mandatory

(Capitalization

admitted)

Voluntary

Regime type Defined benefits Defined benefits Capitalization

Contributions 22% employers

11% employees

22% employers

11% employees

Variable

Limits to benefits Yes, fixed amount Yes, variable

Indexation of ben. Past Inflation Expected

inflation

Regulated by MPS MPS MPS

Supervised by MPS MPS MPS, CGPC, CMN

Administered by INSS Resp. Gov. levels Private companies


CHILE A fully funded mandatory single capitalization system replaced in 1981 the

PAYG regime.

Individuals may have voluntary contributions.

Contributions: 12.37% (10% to the capitalization account, 1.04% to finance

disability and death premia, 1.33% to finance operation costs by pension fund

associations. Employers do not contribute.

Benefits: pensions for the elderly, disability and death pensions.

Perception of benefits: Immediate annuities, temporal rents combined with

differed annuities, programmed retirement.

Minimum pension guaranteed to individuals showing contribution during 20

years, minimum pension guaranteed to those whose accumulated funds fall

short of minimum required for the benefit.

Welfare type pensions to individuals under the poverty line.

Recognition Government bond por those coming from the PAYG system.


CHILE

A thorough revision and modification of the regime took place in 2008

whereby an unfunded non contributory regime was introduced,

financed out of general revenues.

It also stated that individual capitalization beneficiaries would be

supplemented had they not reached an minimum level for their

retirement benefits.

For individual capitalization, there exist five categories depending on

the maximum and minimum levels each fund can invest in equities.


CHILE

FUND MAXIMUM LIMIT MINIMUM LIMIT

A 80% 40%

B 60% 25%

C 40% 15%

D 20% 5%

E 0% 0%



CHILE

Variable

Rent

Government

Bonds

Investment

Funds and

National

Mutuals

Deposits and

financial

institution

Bonds

Type

E: More

conservative:

0%/5% 50%/80% 5% 80% 15%/35%

D:

Conservative

5%/20% 40%/70% 10% 70% 20%/45%

C:

Intermediate

15%/40% 35%/50% 20% 50% 30%/75%

B: Risky 25%/60% 30%/40% 30% 40% 40%/90%

A: More

riskier

40%/80% 30%/40% 40% 40% 45%/100%


CHILE

PORTFOLIO COMPOSITION OF THE PRIVATE INDIVIDUAL

CAPITALIZATON SYSTEM

(April 2012) Variable Fixed Foreign Foreign Others

Rent -Local Rent-Local Variable Rent Fixed Rent

16.1% 46.5% 25.6% 11.6% 0.2%

Source: Pension Superintendence , Chile.


COLOMBIA

Mixed in competence dual regime legislated in 1993:

Average Premium Regime (PAYG) runned by COLPENSIONES and the

Individual Capitalization scheme (RAIS) runned by Pension Fund

Administrators (AFP). Labour and self employed workers have the possibility of

changing regime.

Retirement Requirements; 62 for male and 57 for female, contributions for a

minimum of 1275 weeks (24.5 years).

Contributions to the RPM: 16%, (12% to finance pensions and 4% to defray the

system´s administrative costs. Employers 75%, employees 25%.

Contributions to the capitalization system: 16.5% in the case of workers (12% to

the individual capitalization account,1.6% as a fee for pension

associations,1.4% to the insurance premium and 1.5% for the Minimum

Pension Guarantee Fund; self employed workers contribute 16.5%. Voluntary

contributions are permitted.



COLOMBIA: EVOLUTION OF AFFILIATIONS


COLOMBIA: FUNDS AND INVESTMENT LIMITS Type Shares, Bonds Shares, Bonds Government Bonds

and Equities and Equities Bonds issued

Global (local + Local Abroad

external ones)

Conservative 0%/20% 15% 50% 40%

Moderate 20%/45% 35% 50% 60%

Riskier 45%/70% 45% 50% 70%

Source: Financial Superintendence , Colombia


COLOMBIA: MANDATORY FUND PORTFOLIOS (February 2013)

Moderate Conservative Riskier Scheduled

Retirement

Government

Bonds 47,5% 76,3% 32,0% 78,4%

Shares, Bonds

and Equities 34,8% 11,9% 37,3% 13,0%

Shares and Bonds

issued Abroad 14,3% 7,9% 28,3% 7,4%

Other investments

and operations 3,4% 4,0% 2,4% 1,2%

Source: Financial Superintendence , Colombia.


MEXICO The Social Insurance Law replaced in 1997 the PAYG System by a mandatory

Individual Capitalization Regime. Voluntary contributions are allowed. Workers

may choose between two investment funds specialized in pension funds

(SIEFORE, Multifund System).

Contributions: 6.5% (5.3% goes to the individual capitalization accounts and

1.2% to fees perceived by the AFORES).

The State adds to social accounts a social quota (solidarity contribution) of

5.5% of salaries.

Retirement requirements: (2014-2015) 53 for men (contributing period 30 years)

and 51 women (contributing period 28 years), increasing gradually to 60 and 58,

respectively, in 2028.

There is also a pension for the elderly (above 60 years of age and a minimum of

10 years of contributions)


MEXICO Basic 1 SIEFORE

Assets invested in domestic and foreign fixed interest securities

International permitted bonds and securities from government and

qualified firms.

Basic 2 SIEFORE

Investment in equities is also permitted up to a maximum participation of 15%

of total.

Basic SB3, SB4 and SB4 created in 2008 raised equities participation to 20%,

25% and 40% respectively.


PERU

Mixed in competence system started in June 1993.

Contributions to the PAYG System: 13% of salaries.

Retirement requirements: 65 years of age and 20 years of contribution,

minimum.

Contributions to the fully funded pension regime: 13.12% (10% goes to

individual capitalization accounts and the rest is distributed between the

insurance premium and pension fund associations´ fees. Individuals can have

voluntary additional contributions.

Pension perceptions´ possibilities: programmed retirement, family annuities,

temporal rents, temporal rents with differed annuities.


PERU

As of 2005 there exists a multifund scheme for mandatory defined contribution

pension plans

Fund Type Equities Derivatives Short Term Fixed Interest

Securities Securities

Type 1 10% 10% 40% 100%

Type 2 45% 10% 30% 75%

Type 3 80% 20% 30% 70%


PERU: FUNDS AND INVESTMENT LIMITS

Type Variable Fixed Derivatives Fixed -Term Foreign

Rent Rent Deposits Instruments

1:Preservation 10% 100% 10% 40% 36%

2:Mixed1 45% 75% 10% 30% 36%

3:Growth 80% 70% 20% 30% 36% 1. It embodies 90% of affiliates.

PORTFOLIO COMPOSITION OF THE PRIVATE INDIVIDUAL CAPITALIZATON SYSTEM

(June 2012)

Local Investments Investments Abroad Temporary Operations 71.5% 27.7% 0.8

Source: Bank, Insurance and Pension Funds Superintendence, Perú


URUGUAY

The mixed integrated systems started operations in 1996.

Affiliation to the corresponding regime is determined in function of three salary

levels:

1. Retirement Regime for Intergenerational Solidarity (PAYG): for monthly

incomes equal or smaller than 5.000 uruguayan pesos.

A recent modification allowed workers earning up to 5000 uruguayan

pesos to allot 50% to the individual capitalization system.

2. Individual Capitalization System: monthly incomes above 5.000 till 15.000

uruguayan pesos.

3. Voluntary Individual Capitalization Regime: for all individuals, for amounts

exceeding compulsory upper limits.


URUGUAY

Contributions to the PAYG system: 15% of earned salaries.

Contributions to the Individual Capitalization Regime: 15% (12.16% goes to

individual accounts, 1.854% corresponds to the administrator´s fee, 0.988%

covers the insurance premim).

Employers´ contribution (7.5%) totally goes to the PAYG regime.

Pension fund assets managed by Prevision Save Funds Administration

Bank of Social Prevision administers PAYGO

The Central Bank supervises the Individual Capitalization Scheme.


URUGUAY

Pension benefits (PAYG) depend on the retirement age and years of

contribution:

Replacement Rate

30≤ n ≤ 35; 60≤ age ≤ 65 → 60%

35≤ n ≤ 40; 60≤ age ≤ 65 → 65%

≤ 40; 60≤ age ≤ 65 → 70%

≤ 40; 65≤ age ≤ 70 → 75%

≤ 40; 70≤ age → 80%

Minimun pension benefit: 85% of minimum legal wage

Maximum pension benefit: 7 times the minimum legal wage (15 times for

multiple affiliations)

Contributive pensions exist for individuals of 70, or above, and contributions for

at least 15 years). Relief pensions are granted to individuals over 70 without

income and contributions.


0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Bolivia Chile Colombia Mexico Peru Uruguay Argentina(2011)

STRUCTURE OF PENSION FUND IN SOME LATIN AMERICAN COUNTRIES, 2010

State Corporate Financial Foreign Other Assets Productive Projects+Infraestructure Liquid Assets


EMPLOYED INDIVIDUALS, OVER 15, EFFECTIVELY CONTRIBUTING TO PAYG

OR INDIVIDUAL CAPITALIZATION REGIMES

Total Civil Private Sector Self Employed People over 65

Servants Workers Workers earning pensions

__________________________________________________________________

Argentina 68.7% 92.6% 77.2% 32.7% 90.7%

Bolivia 32.4% 74.6% 32.5% 2.1% 91.0%

Brasil 75.9% 93.6% 84.0% 24.3% 84.7%

Chile 81.7% 86.0% 86.5% 26.3% 84.2%

Colombia 57.2% 97.2% 77.2% 10.5% 44.0%

México 41.3% 69.2% 59.3% … 44.0%

Perú 50.4% 89.0% 59.5% 14.0% 25.4%

Uruguay 84.7% 99.9% 91.5% 39.4% 85.6%

Latin America 55.4% 90.4% 65.5% 12.4% 41.9% Source: ECLAC, Figures for 2011, México 2010.


PENSION FUNDS GROSS CONTRIBUTORS, 2010

REGISTERED EFFECTIVELY

CONTRIBUTING

Argentina1 10,972,000 40.9%

Brazil … …

Bolivia 515,159 39,3%

Chile 4,487,843 51,7%

Colombia 4,080,088 45,3%

México 13,440,855 33,0%

Perú 1,923,466 42,4%

Uruguay 624,093 65,5%

1. Argentine figures correspond to 2008, as the regime was stopped that year.


LATIN AMERICAN COUNTRIES: COVERAGE RATES PREVIOUS TO

TO FULLY FUNDED SCHEMES (BEFORE) AND IN 2002 (AFTER)

0

13

63

36

21

63

29

11

58

32

12

56

0

10

20

30

40

50

60

70

Argentina Bolivia Colombia México Perú Uruguay

Before

After

Source: Mesa –Lago (2005), Rofman and Lucchetti (2006), AIOS (2004)


INDIVIDUAL CAPITALIZATION FUNDS IN PERCENTAGE OF GDP


ADMINISTERED ASSETS BY DEFINED CONTRIBUTION PLANS IN SOME

LATIN AMERICAN COUNTRIES, 2012

Million dollars GDP Average Annual

Real Return3

Argentina1 28,400 9.5%

Brasil2 232,373 17.0%

Bolivia 7,875 29.2% 5.8%

Chile 159,190 58.5% 8.7%

Colombia 71,205 18.8% 9.5%

México 143,898 10,3% 6.9%

Perú 35,547 19.2% 8.1%

Uruguay 9,120 17.4% 9.0%

1. Argentine figures correspond to 2008, as the regime was ended that year.

2. Brazilian figures are for 2007 and they correspond to closed pension funds; open funds represented 3%-4%

of GDP

3. As of the year the regime was started.



REPLACEMENT RATES IN MAIN LATIN AMERICAN COUNTRIES

Argentina (2011) 55% (average) 75% 43% (retired with moratoria)

Brasil

Bolivia up to 100% of workers´ referent wages

Colombia (2012) 65% - 85% over average salaries of the last 10 years

Chile (OCDE, 2013) 52% M 42% W (AFP) 88% M 64% W

72% M 37% W

México (OCDE, 2013) 28.5%

Perú (2007) 50% but expected to gradually decrease

Uruguay 30≤ n ≤ 35; 60≤ age ≤ 65 → 60%

35≤ n ≤ 40; 60≤ age ≤ 65 → 65%

≤ 40; 60≤ age ≤ 65 → 70%

≤ 40; 65≤ age ≤ 70 → 75%

≤ 40; 70≤ age → 80%



SOCIAL SECURITY AGENDA FOR EMERGING LATIN AMERICAN

COUNTRIES

Non contributory pensions will be necessary, on grounds of distributional, solidarity and

equity goals, to work in connection to programmes aimed at checking poverty and

structural unemployment.

Coverage and tax compliance needs to be expanded, both in fully funded and unfunded

regimes, one obvious sector to aim at is in this regard that of self employed workers.

Individual capitalization may be improved and turned more attractive in various ways: as

for instance by reducing administrative and commercial costs for allowing rates of return

to increase and by offering a more varied portfolio composition both in term of financial

instruments and of levels of risk.

Competition between fully funded and unfunded regimes, by permitting affiliates to switch

from one to another, could at the end be favourable in terms of efficiency.

Financial sustainability of PAYG regimes may be deepened by resorting to ad-hoc reserve

funds, as for instance the Sustainability Guarantee Fund in Argentina.

1.

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