INTERNATIONAL PERSPECTIVES: INTERNATIONAL PERSPECTIVES: DEVELOPMENT AND PROSPECTS OF DEVELOPMENT AND PROSPECTS OF MANDATORY FUNDED PENSION SYSTEMS IN MANDATORY FUNDED PENSION SYSTEMS IN LATIN AMERICA AND EASTERN EUROPE LATIN AMERICA AND EASTERN EUROPE * Guillermo Arthur E. Guillermo Arthur E. FIAP FIAP April, 2003 April, 2003 * Presented at the Annual Conference of the World Pension Association - “The Impact on Pension Fund of Major Global Exchange”. Dublin, Ireland, April, 2003.
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INTERNATIONAL PERSPECTIVES: INTERNATIONAL PERSPECTIVES: DEVELOPMENT AND PROSPECTS OF DEVELOPMENT AND PROSPECTS OF
MANDATORY FUNDED PENSION MANDATORY FUNDED PENSION SYSTEMS IN LATIN AMERICA AND SYSTEMS IN LATIN AMERICA AND
EASTERN EUROPE EASTERN EUROPE **
Guillermo Arthur E.Guillermo Arthur E.FIAP FIAP
April, 2003April, 2003
* Presented at the Annual Conference of the World Pension Association - “The Impact on Pension Fund of Major Global Exchange”. Dublin, Ireland, April, 2003.
INTERNATIONAL PERSPECTIVES: DEVELOPMENT AND PROSPECTS OF
MANDATORY FUNDED PENSION SYSTEMS IN LATIN AMERICA AND EASTERN
EUROPE
IV Conferencia Internacional de Fondos de Pensiones
Dublín, IrlandaAbril 2003
Guillermo Arthur E., Presidente FIAP
Autor: Asociación de AFP de Chile
I. The “reformist” countriesI. The “reformist” countries
COUNTRY YEAR OF REFORM
CHILE 1981PERU 1993ARGENTINA 1994COLOMBIA 1994URUGUAY 1996BOLIVIA 1997MEXICO 1997EL SALVADOR 1998COSTA RICA 2000DOMINICAN REPUBLIC (* )ECUADOR (* )NICARAGUA (* )
LATIN AMERICA
(*) Not yet implemented
Source: FIAP
COUNTRY YEAR OF REFORM
HUNGARY 1997KAZAKHSTAN 1998POLAND 2000BULGARIA 2002CROATIA 2002
MACEDONIA (* )
EASTERN EUROPE
PENSION REFORM IN LATIN AMERICA AND PENSION REFORM IN LATIN AMERICA AND EASTERN EUROPEEASTERN EUROPE
(as of December 2002)(as of December 2002)
COUNTRY AFFILIATES (number)
PENSION FUND (MMUS$)
PENSION FUND/GDP
(%)POLAND 10,888,067 6,674 1.4%KAZAKHSTAN (1) 4,968,961 1,431 17.2%HUNGARY (2) 2,239,000 1,443 n.d.BULGARIA (2) 1,280,818 55 0.4%
MEXICO 29,421,202 31,748 5.4%ARGENTINA 9,106,349 11,409 4.8%CHILE (3) 6,708,491 35,515 52.8%COLOMBIA 4,715,948 5,482 7.7%PERU 2,993,782 4,527 8.0%EL SALVADOR 992,824 1,088 7.8%BOLIVIA 760,959 1,144 14.0%URUGUAY 616,664 893 7.3%TOTAL 74,693,065 101,409
(1) as of june 2002(2) as of september 2002(3) GDP as of december 2001
Source: FIAP
PENSION FUND IN LATIN AMERICAPENSION FUND IN LATIN AMERICA
Source: FIAP
0
5000
10000
15000
20000
25000
30000
35000
40000
81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 '00 '01 '02
Chile
México
Argentina
Colombia
Perú
El Salvador
BoliviaUruguay C. Rica
0
5000
10000
15000
20000
25000
30000
35000
40000
81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 '00 '01 '02
Chile
México
Argentina
Colombia
Perú
El Salvador
BoliviaUruguay C. Rica
MM US$
Accumulated FIAP: MMU$ 101.409
II. The impacts of pension reformII. The impacts of pension reform
• Although it may be too soon to make a complete Although it may be too soon to make a complete assessment of pension reform, some remarkable assessment of pension reform, some remarkable results can already be observed:results can already be observed:
1.1. High rates of return of pension funds investment.High rates of return of pension funds investment.
2.2. Positive impact on capital markets development.Positive impact on capital markets development.
3.3. Positive impact on savings and economic growth. Positive impact on savings and economic growth.
4.4. In some countries social security debt did stop growing In some countries social security debt did stop growing after pension reform. In others, social security debt after pension reform. In others, social security debt growth rates did decrease.growth rates did decrease.
4.4. Lower social security debtLower social security debt
• When a new funded pension system substitutes an When a new funded pension system substitutes an existing pay-as-you-go system, the growth rate of the existing pay-as-you-go system, the growth rate of the implicit social security debt will first decrease and implicit social security debt will first decrease and afterwards it will stop.afterwards it will stop.
• When a funded pension system partially substitutes a When a funded pension system partially substitutes a pay-as-you-go system, the growth rate of the implicit pay-as-you-go system, the growth rate of the implicit social security debt will decreasesocial security debt will decrease
(There are transitory negative effects on fiscal deficit flows (There are transitory negative effects on fiscal deficit flows because: because:
• Revenue of the old pensions system will decrease (as Revenue of the old pensions system will decrease (as contributors move to the new system).contributors move to the new system).
• Obligations of the old system with workers who switch to Obligations of the old system with workers who switch to the new system are usually recognized and paid.)the new system are usually recognized and paid.)
Implicit Social Implicit Social SecuritySecurity (Pension) Debt (ISSD) (Pension) Debt (ISSD)and Public Debt (%GDP)and Public Debt (%GDP)
COUNTRY ISSD * Public Debt
ARGENTINA 85% 53%BOLIVIA 73% 56%CHILE 60% 9%COLOMBIA 56% 24%PERU 40% 43%MEXICO 65% 19%URUGUAY 214% 45%
LATIN AMERICA
Source: Holzmann; Palacios; Zviniene (2002)
* 4% discount rate
COUNTRY ISSD * Public Debt
HUNGARY 203% 59%POLAND 261% 43%MACEDONIA 291% 41%CROATIA 201% 33%
EASTERN EUROPE
III. Prospects of mandatory III. Prospects of mandatory pension fundspension funds
1.1. ChallengesChallenges• In some reformist countries, the new pension In some reformist countries, the new pension
systems are under some criticism because of systems are under some criticism because of political reasons; because the impact of pension political reasons; because the impact of pension reform on the cash flow fiscal deficit; and reform on the cash flow fiscal deficit; and because some groups of workers which did because some groups of workers which did receive privileged pension conditions in the old receive privileged pension conditions in the old system, lost their privileges with pension system, lost their privileges with pension reform.reform.
• The weakness of the world economy has a The weakness of the world economy has a negative impact on pension fund returns. This negative impact on pension fund returns. This situation could strengthen opposition to pension situation could strengthen opposition to pension reform.reform.
(Continue)
III. Prospects of mandatory III. Prospects of mandatory pension fundspension funds
• In some countries pension fund In some countries pension fund investment rules do not allow fund investment rules do not allow fund managers to diversify the portfolio in the managers to diversify the portfolio in the most efficient way.most efficient way.
• In many countries it’s difficult to extend In many countries it’s difficult to extend the coverage of the new funded pension the coverage of the new funded pension systems because the relatively large size systems because the relatively large size of the informal sector.of the informal sector.
III. Prospects of mandatory III. Prospects of mandatory pension fundspension funds
1.1. OpportunitiesOpportunities
• In most reformist countries the results of the In most reformist countries the results of the new mandatory pension funds are encouraging. new mandatory pension funds are encouraging. This should help to give momentum to the This should help to give momentum to the reform impulse in other countries (Slovakia, reform impulse in other countries (Slovakia, Czech Republic, Dominican Republic, Nicaragua, Czech Republic, Dominican Republic, Nicaragua, etc.).etc.).
• The practical experience of reformist countries The practical experience of reformist countries should help other countries which are should help other countries which are considering pension reform, to improve the considering pension reform, to improve the design of their own new systems.design of their own new systems.
III. Prospects of mandatory III. Prospects of mandatory pension fundspension funds
1.1. ConclusionConclusion
• Pension funds are playing a growing role within Pension funds are playing a growing role within social security system. This trend opens great social security system. This trend opens great opportunities for the industry.opportunities for the industry.
• However the new mandatory funded pension However the new mandatory funded pension systems are facing a tough world economic systems are facing a tough world economic scenario and pension reform is been challenged scenario and pension reform is been challenged by their opponents.by their opponents.
• To overcome this situation the industry must To overcome this situation the industry must show discipline, creativity and a strong show discipline, creativity and a strong compromise with the principles of the new compromise with the principles of the new pension system .pension system .
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