Transition Issues and Deepening Reforms

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Transition Issues and Deepening Reforms
Carolin A. Crabbe Pension Reform Forum Inter
American Development Bank December 6,
2004 Washington, D.C
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Transition Issues and Deepening Reforms

• Results of Background Studies Reforms in four
  countries
• Argentina
• Bolivia
• Chile
• Mexico
• Experience with the new pension system
• Positive and negative outcomes
• Underscores the need for an appropriately
  designed savings pillar for workers with mid - or
  high incomes, which would supplement minimum
  pensions.

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Transition Issues and Deepening Reforms Lessons
Learned

• Design and Implementation
• Special Considerations in the Four Countries
• Low-income groups who may not qualify for the
  private pension system because they cannot afford
  the contribution level of this pillar
• Gender - Women who dropped out of the workforce
  to raise children and when they returned, they
  often received lower salaries. This meant that
  they either would not satisfy the criteria of
  years of contributions, or their contributions
  would be too low to provide an adequate income in
  old age.
• Consideration of poverty and gender would thus
  be an area of focus in the second-generation of
  reforms

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Design and Implementation

• Sound Data
• Actuarial evaluation
• Good record keeping
• In Argentina and Bolivia fiscal costs increased
  greatly as the parameters of the reform were
  changed.
• It was not possible to test the repercussions of
  these changes a priori, in the absence of a good
  actuarial model.
• Sound data, actuarial model and good record
  keeping would greatly enhance future reforms.

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Design and Implementation

• Country Characteristics
• Labor force
• Size of the economy
• Strengthening the Institutional Structure for
  Reform
• Assessment of Existing Institutions
• It is essential to undertake an assessment of
  existing institutions and their strengths and
  weaknesses with a plan for improving them based
  on their new responsibilities.
• E.g. Argentinas Administración Nacional de
  Seguridad Social (ANSES), Mexicos Instituto
  Mexicano de Seguro Social (IMSS) and Bolivias
  Dirección Nacional de Pensiones which all
  experienced difficulties with their expanded
  roles).

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Design and Implementation

• Strengthening the institutional structure for
  reform
• Developing New Institutions
• It is also important to develop a plan for
  creating institutions to manage the new pension
  system such as the market regulators.
• One positive aspect of the reforms in all four
  countries is that the institutional arrangements
  for supervision and regulation of the new pension
  fund industry have made financial services more
  transparent.
• The supervisory and regulatory frameworks have
  evolved since the reforms were introduced, they
  have been extensively fine-tuned, and while there
  have been some difficulties the framework is
  working well.

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Fiscal discipline

• Need to adhere ot parameters of original model
• Experience in the four countries highlights the
  need to adhere to the original reform model.
  Fiscal costs in both Argentina and Bolivia turned
  out to be far greater than anticipated, because
  they departed from their original plans and made
  numerous changes without a good analysis of the
  fiscal implications.
• Second, pension reforms need to be accompanied
  by a well-thought out fiscal plan to increase
  revenues and control expenditures.
• Chile got high marks in both areas and in
  particular, its fiscal discipline is something
  that would merit further study.
• Finally, the region could consider providing
  fiscal incentives for savings. Such fiscal
  incentives deserve serious consideration for the
  second-generation reforms in all countries.

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Impact on Markets
Financial Markets There was a positive
impact on financial markets in all four countries
in terms of growth and transparency. Capital
Markets Impact on capital markets has been
less than expected, namely with respect to growth
in equities. Market capitalization has increased
but the listed companies.
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Size of Capital Markets in Selected Countries of
Latin America
2 This data refers to 2002.

1 This data refers to 1996.
2 This data refers to 2002.
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Impact on Markets (cont.)

• Market capitalization has increased.
• Fewer Listed companies
• Few new listed companies in the case of Chile,
  while in Argentina and Mexico, the number of
  listed companies has actually declined.
• Impact on Equities Less Than Anticipated
• Our assessment indicates that the reasons for
  this go beyond the pension reforms. The reasons
  are associated with corporate governance,
  contract law, globalization, difficult economic
  scenarios and other factors, which have still to
  be tackled.

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Investment Diversification of Pension Fund
Portfolios
Pension funds are one of the largest
purchasers of government debt with the exception
of Chile.
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Need for Investment liberalization
Sovereign Exposure This has meant that the
portfolios are not diversified and heavily
exposed to sovereign risk. The importance of
diversifying the pension portfolios is
illustrated by the experiences in Bolivia and
Argentina where adverse economic circumstances
ended up drastically reducing the real value of
the government debt. Confidence Confidence in
the pension system has been undermined Restoring
confidence is a theme that needs to be addressed
in the context of the second-generation reforms.
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Commissions Structure
There is considerable discussion that the
commissions are too expensive, and in general in
all four countries, they are not cost based.
While high commissions might provide an
incentive for the fund managers, they reduce the
amount of the workers contribution that is
actually invested. Conclusion A review of
the commissions structure should be included in
the list of topics to be addressed.
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Declining Contributions and Coverage

• Participation rates have increased since the
  reforms.
• But, the level of contributors has not kept pace.

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Declining Contributions and Coverage
Contribution Rates First, the contribution
rates may be too high, particularly for
low-income workers, leaving many workers and
their families without old age coverage. For
instance in the four countries the contribution
rate is about 12 percent of salary. Confidence
and its link to contributing Second, there is a
general lack of confidence created by many years
of macroeconomic instability.