Monitoring pensions
coverage and matching
contributions in Latin
American countries
2011 OECD/IOPS Global Forum on Private Pensions
Cape Town, South Africa, 25-26 October 2011
Santiago Fernandez de Lis │Chief Economist, Financial Systems and Regulation- BBVA Research –
Monitoring Pension Coverage/IOPS/ November 2011
Index
Section 1
Introduction
Section 2
The Coverage Problem in Latam
Section 3
The Model
Section 4
Some Projections for Chile
Section 5
Conclusions
Page 2
Monitoring Pension Coverage/IOPS/ November 2011
Section 1
Pension systems in Latin America*
Pension schemes in Latin America
Source: BBVA, FIAP, WDI
Relevant numbers of pensions systems in Latam
Source: BBVA, FIAP, WDI
• There has been different adoptions of DC schemes in Latam according to idiosyncratic aspects. This
situation along with structural factors in each country has generated different results.
* In this presentation we refer to the cases of Chile, Colombia, Mexico and Peru
Page 3
Monitoring Pension Coverage/IOPS/ November 2011
Section 1
Desired outcomes of
pension reform in Latin America
• Pensions reforms in Latin America have
contributed for the fiscal consolidation in
the region
Private
Savings
Financing
Infrastructur
e Projects
Pension
Funds
Fiscal
Deficits
• There is evidence that mandatory funded
GDP
schemes have a positive effect on
national savings rates and economic
growth
• It confirms that the reforms have
Coverage
contributed to the development of capital
markets
• However, there are still major problems to
Pension reforms in the 90s bring about interesting
results thorough different channels. However after
almost two decades of implementing structural
changes, countries continue struggling to expand
social protection
solve, especially low coverage in some
countries
Page 4
Monitoring Pension Coverage/IOPS/ November 2011
Index
Section 1
Introduction
Section 2
The Coverage Problem in Latam
Section 3
The Model
Section 4
Some Projections for Chile
Section 5
Conclusions
Page 5
Monitoring Pension Coverage/IOPS/ November 2011
Section 2
Informality and pension coverage
• Informality poses a tremendous challenge for
Informality and affiliates by EAP*
Source: ILO, FIAP (2007)
120%
policymakers in order to enforce a mandatory
pension scheme
Chile
• The complexity of the problem also arises
100%
because of mobility between the formal and
informal sectors (Jüttint and De la Iglesia,
2009; Maloney, 2010)
Mexico
Affiliates/EAP
80%
60%
• The challenge is:
40%
Peru
Colombia
•
To create a system that includes a
large group of workers that do not
belong to the formal labor market.
•
Mandatory requisites to contribute
alone, will not be enough.
20%
0%
0
20
40
60
80
Informality
* With available information from different geographies
Page 6
Monitoring Pension Coverage/IOPS/ November 2011
Section 2
Informality: a phenomenon to take into
account
Informality rate (% of GDP)
• Research has found elements in LAC
Source: Schneider et al (2010)
that affect coverage outcomes in
contrast with developed countries:
80
Perú
70
60
50
40
30
− Seasonal Employment
− Informality
Colombia
− Low income, inequality and poverty
− Institutional and political constraints
Mexic
o
Chile
• The informality is a structural problem
that is difficult to resolve
20
0
Georgia
Tanzania
Uruguay
Honduras
Russian Federation
El Salvador
Gabon
Angola
Ethiopia
Tajikistan
Latvia
Estonia
Malawi
Guinea
Cote d'Ivoire
Romania
Albania
Algeria
Venezuela, RB
Bosnia and Herzegovina
Namibia
Lesotho
Malaysia
Bhutan
Slovenia
Yemen
Hungary
Belgium
Jordan
Indonesia
Norway
Denmark
Germany
Macao. China
New Zealand
Luxembourg
10
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Monitoring Pension Coverage/IOPS/ November 2011
Section 2
Participation and replacement rate: two faces of the
coverage gap
Replacement rate: Pension/Average
Salary before Retirement
Coverage rate: Contributors/Workforce
Source: BBVA, FIAP, WDI
Source: BBVA, FIAP, WDI
120.0
140%
100.0
120%
100%
80.0
80%
60.0
60%
40.0
40%
20%
20.0
0%
A
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
0.0
Chile
Perú
Colombia
USA
México
B
C
A
Mexico
B
Chile
C
A
Peru
B
C
A
B
C
Colombia
A: collectives with contribution densities close to 100%.
B: collectives with contribution densities close to 70%
C: collectives with contribution densities close to 30%
• When Latam is compared to more developed countries, the results of the lack of coverage is
even more dramatic.
• Another way to see the coverage in the region is the limitation that some groups have in
obtaining higher replacement rates. This target depends on the density of contributions and
income levels.
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Monitoring Pension Coverage/IOPS/ November 2011
Section 2
Designing a reform that absorbs a huge share of the
population continue to be the pending agenda.
Peru: Employed workers according to Pension status
Source: Carpio-Salazar (2010)
• Some countries have not
100%
I
90%
80%
experienced any relevant
improvement in expanding
pension coverage.
70%
II
60%
50%
40%
III
30%
20%
10%
0%
2005
2006
Not Affiliated
DC-Contributors
DB-Contributors
2007
2008
DC-Not Contributing
DB-Not Contributing
2009
• Looking at the case of Peru, not
covered individuals include
people who are not making
enough contributions (I+II) as
well as people who are not
saving at all (III).
• This imposes a serious social
risk
Page 9
Monitoring Pension Coverage/IOPS/ November 2011
Section 2
The puzzle of designing a pension system that
Works
Peru: Collective of workers participating to any pension
scheme as a percentage of labor force
• There were mild advances during the last four
Source: BBVA Research
•
•
•
•
years, but still the problem of coverage
remains.
It is necessary to think about the specific
characteristics of the different groups
How to manage pension savings of seasonal
and low income groups lacking basic coverage
on housing, health and education?
Pervasive informal economy makes it
impossible to enforce any mandatory scheme,
It is important to count on a detailed
pension model that let us understand
different projected scenarios for workers
with different socio economic
characteristics, and implement policies to
overcome actual limitations of the
systems.
Page 10
Monitoring Pension Coverage/IOPS/ November 2011
Index
Section 1
Introduction
Section 2
The Coverage Problem in Latam
Section 3
The Model
Section 4
Some Projections for Chile
Section 5
Conclusions
Page 11
Monitoring Pension Coverage/IOPS/ November 2011
Section 3
A new pension model to assess the reform of
2008
•The evolution of Latin American pension systems challenges us to confront the
major challenges, with particular attention to the most vulnerable collectives.
•Also, there are strong demographic transitions that can significantly alter the
structure of pension systems in the future, such as the transition from education,
labor market (especially women), informality, etc.
•This model allows to collect these features by increasing the heterogeneity of
individual representatives of the model to the maximum permitted level of
available information.
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Monitoring Pension Coverage/IOPS/ November 2011
Section 3
General characteristics of the pension
model
30 Types of Representative
Individuals
Data Sources
Demographics:
• Men and women
• Three levels of education: primary
or less, secondary, and tertiary
• Ten deciles of income for each
level of education
• Three densities of contribution for
each salary level according to its
contingency work.
• Population age groups ranging
from 0 to 100
•Population projections from ECLAC
• Use of RV2009 to calculate the old
age pensions
•Calculations using of the ECLAC
and Mortality.org for own projections
Institutional and labour markets
•Encuesta de Protección Social of
Chile
•Casen
•Application of data mining Provida
AFP dataset.
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Monitoring Pension Coverage/IOPS/ November 2011
Section 3
Main outputs of the pension model
Outputs
• Projected Pension Funds
• Fiscal Cost
Policies and risks that can
be evaluated:
• Expand and evaluate the cost
of the Solidarity Pillar
• Replacement rates
• Voluntary contributions
• Coverage rates
• Longevity Risk
• Net annual contributions
• Labor market policies
• Income distribution
• Others
• Macroeconomic and Labor
Market effects over the
system
Which will
be
available
for
• Chile
• Peru (in
progress)
• Colombia
(in
progress)
• Mexico (in
progress)
• Projections of Social Security
policies
Page 14
Monitoring Pension Coverage/IOPS/ November 2011
Section 3
General characteristics of the pension model
Labor market transitions in MAP2
Labor force
Source: BBVA Research
Contributors
Non-contributors
Formal Employed
Employed
Self-employed
x
x
Five Labor Contingencies
•
•
•
•
•
Employed
Self-employed
Unemployed
Informal
Inactive
Unemployed
Informal
Inactive
x
x
x
Three possibilities of contributions each with its
corresponding density
• Employed
• Self-employed
• Unemployed
The actuarial module allows that different types of pensions be assigned based on
historical selection
Page 15
Monitoring Pension Coverage/IOPS/ November 2011
Index
Section 1
Introduction
Section 2
The Coverage Problem in Latam
Section 3
The Model
Section 4
Some Projections for Chile
Section 5
Conclusions
Page 16
Monitoring Pension Coverage/IOPS/ November 2011
Section 3
Evolution of the Chilean pension system in
2008
Creation of the individual capitalization system:
Law 3500 of 1980
Current System: Law 20255 of 2008
Source: Report of the Advisory Board of Pension Reform
Source: Report of the Advisory Board of Pension Reform
Structural
Change
Creation of the
multifunds system:
Law 19.795 of 2002
• In 1980, a pension system based on individual
capitalization was created
• The solidarity of the system is given by the welfare
pensions (PASIS) * and the minimum pension
guarantee (GEPM) **
• However, a cohort with little savings remain
without pensions
* socioeconomic characterization requirement.
** access subject to a minimum of 240 months of in order to obtain
insurance
• In 2008, the solidarity pillar was integrated with the
contributory pillar
• Those unable to save receive the Basic Solidarity
Pension (PBS) and those with some ability to save
receive the solidarity contribution (APS)
• Disadvantaged groups receive other incentives (bonus
for kids)
Page 17
• The reform solidifies the voluntary pillar
Monitoring Pension Coverage/IOPS/ November 2011
Section 3
Changes in the Chilean pension system in
2008
The policies implemented in 2008 aimed to increase the coverage
– Creation of a new solidarity pillar (NPS) with old-age benefits, disability and survivors
benefits integrated to the contributory pillar.
– Access to the benefits of the NPS to all persons who meet specific requirements of socio
economic insufficiencies.
– Subsidies to employers for hiring young workers belonging to the most vulnerable
segment of the population. Potential employees also receives a subsidy.
– Creation of the voluntary contributors regime, allows the participation in the pension
system of individuals disregarding of its employment situation (informal/formal; active
workers/ no active workers)
– Bonus for new babies (no income level requirement).
–Mandatory contribution for self employees (gradual implementation).
Page 18
Monitoring Pension Coverage/IOPS/ November 2011
Section 3
The case of mandatory contributions of the
informal self-employed: case study
 In this case study, we assess this new policy included in the 2008 pension
reform
 Some Key points:
– The irregularity of income and the intermittent nature of employment, make the current
monthly contributing model, unattractive to this group.
– The preference for maintaining liquidity and lack of pension culture discourage the
participation of self-employed workers' contributions.
– Due to these factors, the coverage of independent workers has been low and declining in
recent years. In 2005, only 3.9% of independent workers quoted in the pension funds.
– The evidence also shows that low levels of pension savings are not replaced by another type
of savings, showing little use of financial instruments.
– Along with the extension of rights involving the introduction of the solidarity pillar, pension
reform and duties gives incentives to independent workers, enabling them to increase the
level and quality of pension coverage.
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Monitoring Pension Coverage/IOPS/ November 2011
Section 3
The case of mandatory contributions of the
informal self-employed: case study
The obligation to contribute to the pension system will be implemented gradually,
according to the following schedule (dates correspond to 1 January of the year)
Implementation Period
 2008 -2011
Pension education process
 2012 -2014
respectively in each year
Obligation to contribute at 40%, 70% and 100% of taxable income,
 2015 onwards: Compulsory pension on total taxable income (80% of all gross income taxed by
Article
42 No. 2of the Law on Income Tax)
 2018 onwards: It includes the obligation to contribute to health
•This raises uncertainty about the ability of regulator to monitor compliance,
although they rely on the verified tax culture of Chilean population.
•In our scenario, we assume a success rate of 80%
Page 20
Monitoring Pension Coverage/IOPS/ November 2011
Section 3
Heterogeneity captured by the new model
- Strong heterogeneity in education across generations can change the coverage
ratios and replacement rates in the future.
Qualification by age Matrix (Men)
Source: BBVA Research calculations using CASEN database
Qualification by age Matrix (Women)
Source: BBVA Research calculations using CASEN database
100%
100%
90%
90%
80%
80%
70%
70%
60%
60%
50%
50%
40%
40%
30%
30%
20%
20%
10%
10%
0%
0%
15 19 23 27 31 35 39 43 47 51 55 59 63 67 71 75 79 83 87 91 95 99
Primary Education
Secondary Education
Tertiary Education
15 19 23 27 31 35 39 43 47 51 55 59 63 67 71 75 79 83 87 91 95 99
Primary education
Secondary education
Tertiary education
Page 21
Monitoring Pension Coverage/IOPS/ November 2011
Section 3
Heterogeneity captured by the new model
Projections of Pension coverage rates according to
education achievement
 - The highest rates of coverage
Fuente: Cálculos propios BBVA Research utilizando la CASEN
are observed in the group with
higher studies.
 - If measures to promote coverage
and reducing informality
(especially primary education) are
not implemented, coverage will
remain relatively stable over time.
0,7
0,65
0,6
0,55
0,5
0,45
Primary
Secondary
2049
2047
2045
2043
2041
2039
2037
2035
2033
2031
2029
2027
2025
2023
2021
2019
2017
2015
2013
2011
2009
0,4
tertiary
Page 22
Monitoring Pension Coverage/IOPS/ November 2011
Sección 3
Heterogeneity captured by the new model
Even within the same level of education, significant differences can be seen in the
level of income from contributors
Males
Source: BBVA Research
Source: BBVA Research
25.000.000
25.000.000
20.000.000
20.000.000
Potential Income (Annual)
Potential Income (Annual)
Females
15.000.000
10.000.000
5.000.000
15.000.000
10.000.000
5.000.000
0
0
15
25
35
45
55
65
15
25
35
Age
Decile 1
Decile 5
Decile 10
45
55
65
Age
Decile 1
Decile 5
Decile 10
This is seen, for example, in the potential income that could be obtained by cohorts of
people with primary school in deciles 1, 5 and 10
Page 23
Monitoring Pension Coverage/IOPS/ November 2011
Section 3
Heterogeneity in the informal self-employed
Informal self employed workers
by educational attainment
Informal self employed workers
by gender
22.0%
40.0%
21.4%
35.7%
35.0%
21.0%
30.0%
20.0%
25.0%
19.0%
18.0%
18.0%
20.0%
15.0%
15.0%
17.0%
9.7%
10.0%
16.0%
Men
Women
5.0%
0.0%
Primary
Secondary
Tertiary
•There is a higher percentage of informal self-employed workers in the group of men than of
women.
•The highest percentage of informal self-employed are concentrated in the group of people with
primary studies, followed by secondary and tertiary.
Page 24
Monitoring Pension Coverage/IOPS/ November 2011
Section 3
Reform: mandatory contribution in self-employed; women
Total coverage women rate/total
population 15-64 years
Total coverage women rate/workforce
Fuente: Cálculos propios BBVA Research utilizando la CASEN
Fuente: Cálculos propios BBVA Research utilizando la CASEN
0,75
0,55
0,7
0,5
0,45
0,65
0,4
0,6
0,35
0,3
0,55
0,25
w ith reform
•The coverage rate for women will increase
significantly from 27% to 42% by improving their
educational level.
•The impact of reform could achieve an increase of
7 percentage points
w ithout reform
2048
2045
2042
2039
2036
2033
2030
2027
2024
2021
2018
2015
2012
2048
2045
2042
2039
2036
2033
2030
2027
2024
2021
2018
2015
2012
2009
w ithout reform
2009
0,5
0,2
w ith reform
•With regard to the workforce, there were no
significant changes due to the strong increase in the
labor force in the group of women.
•The impact of reform could be quantified by 14
percentage points
Page 25
Monitoring Pension Coverage/IOPS/ November 2011
Section 3
Reform: mandatory contribution in self-employed;
men
Total men coveraqe rate/total
population 15-64
Total men coveraqe
rate/workforce
Fuente: Cálculos propios BBVA Research utilizando la CASEN
Fuente: Cálculos propios BBVA Research utilizando la CASEN
0,6
0,75
0,55
0,7
0,5
0,65
0,45
0,6
0,4
0,55
0,35
w ith reform
w ithout reform
2048
2045
2042
2039
2036
2033
2030
2027
2024
2021
2018
2015
2012
2048
2045
2042
2039
2036
2033
2030
2027
2024
2021
2018
2015
2012
2009
w ithout reform
2009
0,5
0,3
w ith reform
•The coverage ratio with respect to the natural
population will grow by improving the educational
level from 42% today to 44.5% in 2050.
With regard to the workforce, there were no
significant changes due to the growth of this
variable.
•The impact of reform could be quantified in an
increase of 10 percentage points
•The impact of reform could be quantified by 13.4
percentage points
Page 26
Monitoring Pension Coverage/IOPS/ November 2011
Section 3
Reform: mandatory contribution in self-employed;
educational attainment
Total primary studies coverage rate/pop
15-64
Fuente: Cálculos propios BBVA Research utilizando la CASEN
0,7
•The impact of the reform would
increase the coverage rate by 15.5
percentage points in workers with
primary school.
0,6
0,5
0,4
0,3
•For workers with secondary
education coverage would increase
by 5 percentage points.
0,2
0,1
w ithout reform
w ith reform
2048
2045
2042
2039
2036
2033
2030
2027
2024
2021
2018
2015
2012
2009
0
•In the collective with tertiary
education, coverage would increase
by 11 percentage points.
Page 27
Monitoring Pension Coverage/IOPS/ November 2011
Section 3
Reform: mandatory contribution in selfemployed; Total impact
Total coveraqe rate/pop 15-64
Total coveraqe rate/workforce
Fuente: Cálculos propios BBVA Research utilizando la CASEN
Fuente: Cálculos propios BBVA Research utilizando la CASEN
0,6
0,75
0,55
0,7
0,5
0,65
0,45
0,6
without reform
with reform
w ithout reform
2048
2045
2042
2039
2036
2033
2030
2027
2024
2021
2018
2015
2009
2049
2045
2041
2037
2033
2029
2025
2021
0,5
2017
0,3
2013
0,55
2009
0,35
2012
0,4
w ith reform
•The coverage ratio with respect to the population
will grow naturally, thanks to improved educational
attainment from 35% today to 43% in 2050.
•With regard to the workforce, there were no
significant changes due to the growth of this
variable, especially in the group of women
•The impact of reform could be quantified in an
increase of 14 percentage points
•The impact of this reform could be quantified by 9
percentage points.
Page 28
Monitoring Pension Coverage/IOPS/ November 2011
Section 3
Reform: mandatory contribution in selfemployed; the impact on informality rates
Informality rate/workforce
Fuente: Cálculos propios BBVA Research utilizando la CASEN
•This reform would decrease
informality rate by 13
percentage points
0,5
0,45
0,4
0,35
0,3
0,25
0,2
0,15
0,1
0,05
Sin reforma
2048
2045
2042
2039
2036
2033
2030
2027
2024
2021
2018
2015
2012
2009
0
con reforma
Page 29
Monitoring Pension Coverage/IOPS/ November 2011
Index
Section 1
Introduction
Section 2
The Coverage Problem in Latam
Section 3
The Model
Section 4
Some Projections for Chile
Section 5
Conclusions
Page 30
Monitoring Pension Coverage/IOPS/ November 2011
Conclusions
•The phenomenon of low coverage remains a challenge in the pension systems in
Latin America.
• Our new pension model can capture sufficient heterogeneity from the representative
agents, in order to quantify different measures of pension policies.
• In the case of Chile, we performed an initial exercise based on the reform measure
that makes mandatory the participation of self-employed.
•The collective breakdown shows that Chile will experience major transitions in terms
of educational attainment and labor market, which will impact on the structure of the
system in the future.
•The measure of mandatory contributions for informal self-employed can have huge
effects on the Chilean pension system, increasing the coverage rate by 14
percentage points.
Page 31
Monitoring Pension Coverage/IOPS/ November 2011
Conclusions
•This measure affects groups that have traditionally been auto excluded in the
pension system.
•Given that informal self-employed are overrepresented in the lowest social level of
educational attainment this measure will improve their coverage.
•On the other hand, coverage increase more in the group of males. However, it shows
an important process of "catching up" between genres, given the significant increase
coverage experience by females.
Page 32
Monitoring Pension Coverage/IOPS/ November 2011
Monitoring pensions
coverage and matching
contributions in Latin
American countries
2011 OECD/IOPS Global Forum on Private Pensions
Cape Town, South Africa, 25-26 October 2011
Santiago Fernandez de Lis │Chief Economist, Financial Systems and Regulation- BBVA Research –
Page 33