Pension Plans:Key Factors for
Success:
Lic. Recaredo AriasSecretary GeneralFIDES
Índex• Context
▫Pension Plans Current Situation▫Pension Products
• Key Factors for Success▫Market size▫Marketing schemes▫Additional benefits and services▫Regulation▫ Investment regulations▫Mortality tables▫Operational processes▫Sector statistics
▫Problems, Limitations and Proposed Solutions
2
Context
Pension Plans Current Situation
4
Life Expectancy at Birth
5
Source: ONU
Life Expectancy at Birth
6
Source: OECD
Longevity Risk (Spain)
7
Source: BBVA
Pension Plans Current Situation
8
Pension Plan Reforms
9
Pension Plans Current Situation
10
Pension Plans Current Situation
11
Monthly Taxable Income
12
LATIN AMERICA 2007 2006 2005 2004 2003ARGENTINA 675 566 460 430 360BOLIVIA 546 520 480 440 440COLOMBIA n.d n.d n.d n.d 196COSTA RICA 5,837 7,411 7,503 4,193 4,056CHILE 793 682 670 610 529EL SALVADOR 474 303 304 298 313MEXICO 583 578 558 469 450PERU n.d n.d 828 808 n.dDOMINICAN REPUBLIC n.d n.d n.d n.d n.dURUGUAY n.d n.d n.d n.d n.dEUROPE & ASIA 2007 2006 2005 2004 2003BULGARIA 360 261 204 KAZAKHSTAN n.d n.d n.d n.d n.dPOLAND n.d 851 730 766 n.d
Dollars in current terms
Source: FIAP
Retirement Products
13
Lump Sum
14
Countries where full lump sum payment is allowed
15
As the only retirement benefit:•Hong Kong•India•Tailandia•Filipinas
As an alternative:•Australia•Belgium
•China•Czech Republic
•Greece•Hungary
•Indonesia•Japan
•Malaysia•New Zealand•South Africa
•Spain•Turkey
•USA
Phased Withdrawals
16
Calculation examples for Phased Withdrawals
17
Life Annuities
18
Countries with mandatory annuitization
19
•Austria•Bolivia•Colombia•Croatia•Hungary•Netherlands•Norway•Poland•Sweden•Uruguay
Mandatory annuitization in the event of early
retirement•Argentina•Chile•El Salvador•Perú
Product comparison
20
Protect against
Flexibility / Liquidity
Longevity Risk
Investment Risk
Bequest
Lump Sum
Phased Withdrawals
Life Annuities
Retirement payments over time
21
Retirement products
22
RECOMMENDATIONS:
Key Factors for Success
Market size estimation
24
Retirement products’ market
25
Accelerated increase in annuitization rate due to:
Population over 65 years (in %)
26
Latin America Europ
e
Source: CIA – The World Factbook, 2008 est.
Market for Life Annuities in Chile
27
Source: OECD
Affiliates to the Pension Fund Management System
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LATIN AMERICA Sep. 2008ARGENTINA 9,513,134BOLIVIA 1,143,559COLOMBIA 8,403,715COSTA RICA 1,720,116CHILE 8,308,264EL SALVADOR 1,772,276MEXICO 38,987,711PANAMA 347,689PERU 4,259,889DOMINICAN REPUBLIC 1,795,791URUGUAY 822,663EUROPE AND ASIA Sep. 2008BULGARIA 2,986,177RUSSIAN FEDERATION -KAZAKHSTAN 9,486,211POLAND 13,740,047ROMANIA 4,362,878FIAP Mandatory Systems 107,650,120
Source: FIAP
Affiliates vs. Total Population
29
Source: FIAP –ONU (World Factbook) - FIDES
Contributors vs. Affiliates
30
Source: FIAP – CIA (World Factbook) - FIDES
Commercialization scheme
31
Commercialization schemes
32
Examples
Retirement Pensions
33
Number of Old Age Pensions
34
LATIN AMERICA 2007 2006 2005 2004 2003
ARGENTINA 245,895 142,702 98,346 76,487 55,711
BOLIVIA 13,320 8,722 4,950 1,313 n.d.
COLOMBIA 4,836 3,652 3,234 2,861 2,198
COSTA RICA n.d n.d n.d n.d n.d.
CHILE 179,146 163,223 148,096 134,207 118,839
EL SALVADOR n.d n.d n.d n.d 1,388
MEXICO 255,279 251,394 259,358 251,588 241,076
PERU 14,252 13,776 11,143 9,677 n.d.
URUGUAY 717 566 420 342 240
Phased Withdrawals and Life Annuities
Source: FIAP
% of retirees vs. contributors
35
Source: FIAP –ONU (World Factbook) - FIDES
Additional benefits and services
36
Investment and Capital Regulations
37
Investment rates of return
38
The differential margin of rates of return, used to cover operational expenses, special funds and profits decreased form 3.24% in 2000 to 0.16% in December 2006.
Source: Banco de México
Investment and Capital Regulations
39
Managed Funds
40
LATIN AMERICA Sep. 2008ARGENTINA 30,171BOLIVIA 3,641COLOMBIA 25,870COSTA RICA 1,592CHILE 92,329EL SALVADOR 4,473MEXICO 81,534PANAMA 562PERU 17,975DOMINICAN REPUBLIC 1,253URUGUAY 3,739EUROPE AND ASIA Sep. 2008BULGARIA 1,327KAZAKHSTAN 11,549POLAND 59,180ROMANIA 192FIAP Mandatory Systems 335,387
In millions of US Dlls
Source: FIAP
Managed Funds vs. GNP41
53
2320
17 1715 14 13 12
9 8
3 3 20
CHILE
BOLIVIA
EL S
ALVA
DOR
URUG
AY
PERÚ
COLO
MBIA
POLO
NIA
KAZA
JSTÁ
N
ARGE
NTIN
A
MÉX
ICO
COST
A RICA
PANAM
Á
BULG
ARIA
REP.
DOM
INIC
ANA
RUMAN
IA
SOURCE.- FIDES WITH DATA FROM WORLD ECONOMIC FORUM 2008 – WORLD BANK 2009 – SWISS RE 2008
28 118 79 75 83 74 53 66 88 60 59 58 76 98 68
GLOBAL COMPETITIVITY
RANK INDEX 2008
42
Mortality Tables
Mortality tables – Active employees
43
Margins due to improvements are being reduced.
Mortality tables - Disability
44
The tendency observed is due in great measure to criteria changes on behalf of the Social Security in disability rulings as of the second semester of 2002.
Operational Processes
45
Operational Processes
46
Statistics
47
Public Social Security System Regulation
48
Regulation
49
To be able to face it, it is compulsory to direct actions towards
Promoting and mantainig a solid Insurance Market
that can satisfy the future needs of
the Consumer and the Insurance Business
• EFFICIENT
• FAIR
• SAFE
• STABLE
• TRUST WORTHY
•COVERAGE
•PROTECTION
• INNOVATION
• CAPACITY OF ATTRACTING AND RETAINING FUNDS
SOURCE: G-20; PRINCIPLES FOR PROMOTING SOUND INSURANCE MARKETS (AMIS ADAPTATION)
Challenges for Pension Regulators
50
Share a wide vision on the viability of the Pension Plan market
Principles to promote a sound insurance market:
Source: AMIS, with support from G20 arguments
Strategical View of the Judicial Frame
51
52
Critical aspects needed for the correct functioning of a supervising and regulatory regime:
Strategical View of the Judicial Frame
Source: AMIS, with support from G20 arguments
Market
Credit
Casualty
Life
Health
Financial
Insurance
Operational
Company
Concerning Economic Capital, the distribution of the varying types of individual risks are combined to determine the capital requirements, in order to constitute the sufficient Economic Capital for the company.
Source: Emphasis 2009/1 Towers Perrin
Determination of Solvency Capital
53
Risk Management: Economic Capital
Supported by:
Precautions:
54
Sectorial Situation Analysis• Collaboration between international
organisms• Historically economically solvent
sector• Intensive use of intellectual
resources• Replicable experiences at an
international level, within a continual process stationed in different stages according to the maturity level of each market
• Increasing conscience of a corporative government
• In the majority of markets, low rate of annuitization
• International trend towards risk based supervision
• More knowledgeable, demanding and sensible consumer
• Lack of long term investment instruments
• Limited technical statistics• Limited sistemic exchange of
information• Distorted public image• Duality of perceptions for outsiders• Lack of uniformity within statutory
regulations• Absence of a risk management
culture
• Crisis that may boost stricter regulations
• Other intermediaries’ regulations forced upon the insurance sector
• Financial convergence• Competition against other
intermediaries• Identity loss• Uneven distribution of income and
wealth• Possible reversion of pensions
derived from social security• Loss of capital attractivity
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Strengths Opportunities
Weaknesses Threats
¡Thank you!
Regulation for Reserve Investment
57
Contributors
58
LATINOAMERICA 2007 2006 2005 2004 2003
ARGENTINA 4,391,847 4,563,768 4,283,242 3,541,146 3,331,437
BOLIVIA 624,681 473,861 411,925 732,936 435,507
COLOMBIA 3,596,565 3,059,661 2,458,094 2,240,698 2,538,688
CHILE 4,329,412 3,956,992 3,784,141 3,571,864 3,618,995
EL SALVADOR 566,693 538,370 505,637 489,328 497,303
MEXICO 14,503,855 13,929,389 13,263,788 12,751,029 12,577,265
PERU 1,651,191 1,412,001 1,318,135 1,313,878 1,295,222
DOMINICAN REPUBLIC 853,526 755,436 601,554 552,512 689,071
URUGUAY 452,601 415,016 381,619 346,240 335,316