Developing Annuities Markets: The Experience of Chile

1
Developing Annuities Markets The Experience of
Chile

• Roberto Rocha
• rrocha_at_worldbank.org

2
Why the book was written

• The role of the private sector in the provision
  of retirement income has been enhanced
• New second pillars and expanded third pillars
• Most countries unprepared for the payout phase
• Deficient regulatory framework, lack of
  instruments
• Insufficient research on the payout phase
• Most of the pension research had focused on the
  accumulation phase
• Payout research limited to a few countries,
  topics
• Little knowledge of good institutional
  arrangements and regulatory practices in the
  payout phase

3
Recent World Bank Project Addresses Basic
Questions

• Can a market for retirement products be created
  from a low initial base?
• What are the weak/strong aspects of different
  institutional and regulatory arrangements?
• Countries selected for the project
• Australia, Chile, Denmark, Sweden, Switzerland
• Large pension systems, different payout
  arrangements
• Chile one of the most relevant cases
• Large annuities market created from a low initial
  base
• Good performance overall
• Positive evolution of the regulatory framework

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The Chilean Experience (1)

• Workers accumulate savings in individual accounts
• At retirement workers can choose
• Restricted access to lump-sums
• Phased withdrawals (PWs) with regulated formula
• Annuities (indexed, some choices allowed)
• Fast growth of the market since 1981
• Number of retirement products in 2005
• Phased withdrawals 215,00
• Annuities 360,000
• Assets of life insurance companies 20 of GDP

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Payment Paths for a 55 Year Old Chilean Pensioner
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The Chilean Experience (2)

• Annuities represent 63 of the market
• High degree of annuitization
• Most workers choose annuities, value protection
  against investment, inflation, and longevity
  risks
• PWs are chosen primarily by low-income or very
  high-income workers
• Guaranteed annuities became very popular
• 80 of annuity contracts guaranteed for 10 years
• Workers also value risk-sharing, bequests

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The Chilean Experience (3)

• Chilean annuitants get today a better deal for
  their premiums than annuitants in most countries,
  especially comparing indexed annuities
• Average moneys worth ratios (MWR) higher than
  one
• Annuity rate higher than risk-free rate
• Moderate profits of insurance companies
• What explains good market performance
• Competitive market
• Supply of indexed instruments with long
  durations, higher yields
• Positive evolution of regulatory framework

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Lessons For Other Countries

• Feasibility of Developing the Market for
  Retirement Products from Low Initial Base
• Market can be developed from low initial base in
  most reforming countries
• Product menu should comprise PWs and annuities
• Market development requires supportive regulatory
  framework
• Market development requires supportive capital
  market agenda

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Lessons For Other Countries Product Regulation

• Restrictive menu justified in Chilean case
• Optimal menu will depend on the countrys
  characteristics
• Countries where second pillar plays central role
  may need to maintain more restrictions, like
  Chile
• Restrictions on lump-sums, PWs more regulated,
  restrictions on variable annuities, mandatory
  indexation
• Countries with multi-pillar systems and generous
  first pillar benefit may allow more options
• Partial lump-sums, PWs with more liberal design,
  variable annuities from the start, no mandatory
  indexation

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Lessons For Other Countries Marketing Regulation

• Need to ensure a transparent market, ensure
  well-informed decisions on products and providers
• Chiles experience shows the value of a
  transparent annuities quotation system to
• Ensure access to best annuity quotes
• Allow easy comparison with PWs, both initial
  values and time path
• Prevent excessive broker commissions

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Lessons For Other Countries Intermediary
Regulation/Capital Market

• Need for a sound capital rule for annuity
  providers
• Adoption of cohort mortality table
• Capital rule that penalizes mismatches between
  assets and liabilities
• Need to develop financial instruments for annuity
  providers
• Government debt management strategy must include
  role for indexed paper with long durations
• Development of indexed private debt markets
  possible, although more challenging