Impact of the Financial Crisis on Pension Systems in LAC

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Impact of the Financial Crisis on Pension Systems
in LAC
Waldo TapiaLabor Market Unit Inter-American
Development Bank (IDB) OECD/IOPS GLOBAL FORUM
ON PRIVATE PENSIONS PENSION REFORM AND
DEVELOPMENTS IN LATIN AMERICA Rio Janeiro,
Brazil14-15 October, 2009
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Agenda

• Introduction
• Private pensions in LAC and the financial crisis
• Evaluating the impact (assets, returns)
• Asset allocation
• Coverage
• Putting the crisis into a pension context
• Conclusions

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Introduction

• The financial crisis has affected many aspect of
  the economy, including private pension
  arrangements.
• In Latin America private pensions play an
  important role in mandatory pension provision.
• In Latin America 11 have implemented mandatory
  individual account pension systems.
• Private pensions leaves workers retirement
  income vulnerable to investment risk.
• In DC pensions, benefits depend directly on
  accumulated contributions and investment returns.

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Market value of pension assets
By December 2008, the total assets of pension
funds in LAC had decline by about US 52 billion,
or nearly 14 relative to December 2007
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Which countries were affected?

• Some of the countries most affected were Chile,
  Argentina, Peru.
• This lower value of the investment should not be
  interpreted as a loss, particularly where
  long-term savings are concerned

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Assets as of GDP

• As a of the economy mandatory private pension
  funds in LAC fell from 16 in 2007 to 14 2008
• In OECD countries the ratio for pension funds
  decreased from 76 of GDP in 2007 to 63 of GDP
  in 2008

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The impact on investment returns

• Almost all countries experienced a negative
  return in real terms over January to December
  2008
• Some of the countries most affected are those
  where equities represent a higher proportion of
  total assets invested

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The experience in OECD countries
2008 pension fund nominal and real returns in
selected countries () Pension funds in OECD
countries experienced during 2008 a negative real
return of 17.4 (unweighted average) 23.0
(weighted average)
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Shifts in asset allocation
Gov. bonds
Investments by group of instruments (as of
total asset)
Domestic equities
Foreign instruments
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Impact on coverage

• The decline in the value of pension funds is not
  the only problem. It is also necessary to address
  the drop in coverage that will result from the
  economic slowdown.
• The unemployment persons will increase between
  2.8 3.9 millions

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Putting the crisis into pension context

• Pensions are, by their nature, long-term and so
  their performance must be evaluated over a
  lengthy horizon.
• A temporarily lower value is note the same as a
  real loss
• Pension systems in LAC are relatively young
• Younger workers can hope for some good years to
  make up the recent falls in asset value.
• Some countries in the region have implemented
  investment choice or multiples portfolios
• Multiples portfolios include conservative options
  for workers close to retirement.

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The markets are recovering.
Chile
.and, with them, the value of the investments.
Mexico
Peru
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Long-term investment

• Performance should be evaluated in a long time
  horizon
• Evaluating the results of a short period may
  distort the perception of their performance

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Pension systems in LAC are relatively young

• A major drop in asset values may not matter much
  to younger workers who can expect the markets to
  recover overall in the long term
• The proportion of the elderly experiencing major
  declines in pension income is relatively small in
  most LAC

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Investment choice

• Multiples portfolios shield workers close to
  retirement from most of the losses in asset
  values

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Investment choice

• A multifund model linked to the affiliates life
  cycle has been an important element in
  strengthening the pension fund system
• Provide a default options that involves a switch
  to less risky investment as people get closer to
  retirement
• Restrict investment choices for older workers to
  lower risk options

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Conclusions

• The impact on pension funds is clearly negative
  over the last 12 months
• The consequences of the crisis on the pension
  systems are important in LAC (mandatory and DC
  systems)
• Pension funds work with a long time horizon
• Negative investment return cannot be interpreted
  directly as a loss
• Pension fund performance has been positive over
  the last 10-15 years
• Pension systems in LAC are relatively new
• For younger workers, pensions are long term
  savings

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Conclusions

• Some countries have implemented individual choice
• Financial education is necessary to ensure that
  members understand the risk they are exposed to
• It is also to address the drop in coverage that
  will result from the economic slowdown
• Diversify retirement schemes
• The balance between public and private schemes
  should not be framed solely around the crisis
• Government should resist to reactions that
  threaten the long term stability of retirement
  income provision

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