Sharing experiences
The Chilean Pension System
Rafael Del Campo
Former National Director INP
Chile
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3 continents: America, Oceania and
Antarctica.
Total area: 2,006,096 Km2
American Area: 756,096 Km2
15 Regions
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Population: 15,116,435 Inhabitants
49.3% Male, 50.7% Female
Main region: 40.1%; 59.9% Other regions
Urban 86.6%, 13.4% Rural
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Government and State Administration
Unitary state. Decentralized Administration
Presidency of the Republic
22 Ministries
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GDP 2005 U.S. $ 145,920 million
Per capita income U.S. $ 8,875
Sharing experiences
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85 years of Former Pension System
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26 years of the Individual Capitalization Pension System
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1 year of Social Protection Guaranties in the Pension System
85 years of Former Pension System
PENSIONS: PAY-AS-YOU-GO SYSTEM
• 1924  Workers´ Insurance Fund, the institution which
preceded the Social Insurance Service. Coverage was extended
to employees with the creation of the Private Employees´ Fund
(EMPART); and Public Employees and Journalists Fund
(CANAEMPU).
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Progressive increase of the coverage in social security, through
the creation of different Social Security Funds over the years.
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1979  32 Social Security Funds. This generated over a
hundred different social security treatments, including
Retirement, Disability, Survivorship and Welfare Pensions.
Former Pension System:
Main Weaknesses (1980 diagnostic)
• Financial imbalance
- The active contributors financed the pensions of the
passives, but at the same time a reserve fund was created
with part of the resources, for future requirements. This
became increasingly difficult and no reserves were
accumulated.
• Inequality in access to benefits
- Lack of uniformity.
- Different benefits corresponding to identical contributions
and identical needs.
• Faults in administration
- Inefficient administration of resources.
- The incorporation of new beneficiaries was not always
supported by the corresponding actuarial studies and
funding.
The relationship active contributors / retirees declined from
10.8: 1 (1960) to 2.2: 1 (1980).
1980’s Reform to standardize and
rationalize the systems then in force.
The First work was to establish standards in the
Former System:
• Men must retire at 65 years of age and women at
60.
• The state began to collect all contributions of the
different Former Funds.
• All the former Funds administrated by INP (National
Pensions Institute)
• Fiscal commitments with the pensions debts in long
terms (Retirement benefits Bond and Pensions).
Fiscal commitments with the pensions
debts
Actually (2009) The Former Pension System is:
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Collecting only 3% of contributions.
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Paying 71% of pensions.
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Paying the Retirement Benefit Bond for those who contributed in any
of the funds of the former system, but will get a pension in the
Contributory Pensions Scheme.
RETIREMENT BENEFITS BOND PAYMENT SCHEDULE
60.000
Number
49.471
50.000
49.266
50.227
49.882
47.257
43.066
42.615
40.000
37.455
37.250
34.415
31.750
30.000
29.929
20.000
20.246
14.301
10.000
8.946
4.695
2.338 608
444
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Year
Conditions for implementing the contributory Pension Scheme
State Participation in the System
A commitment to ensure:
The security of the resources accumulated in the Pension
Funds.
That worker members will receive the benefits established by
the System in due time and manner.
The relevant information.
Existence of a Capital Market with safeguards to cover
Pension Funds:
A qualified supervisory and regulatory bodies for
corporations, financial institutions, life insurance companies,
risk-rating bodies, stock exchanges, securities custodians
and other relevant agents.
A well-developed risk-rating industry.
Securities deposit companies (custody).
Existence of an Insurance Industry.
The facts: 26 years later
The Presidential Advisory Council for the Reform
of the Pensions System reported in 2005:
1. The contributory pension scheme is working in
accordance with how it was foreseen:
The workers contributions are paid by their
employers regularly.
The PFA’s comply with their legal obligations.
The contributors have their funds safe.
Only in two years have the investments
produced negative results.
After being in place for 25 years no frauds have
taken place nor has any PFA gone bankrupt.
2. For workers in stable employment, who pay their contributions
regularly the length of their working life, the accumulated funds
enable the financing of pensions close to the amount of their income
during their active life.
• 3. The contributory pension scheme has also had positive effects in
the national economy. It has contributed to the growth of the capital
market, the electricity and telecommunications sectors and
financing for housing and it has permitted the growth of the life
insurance market.
The Pension Funds have reached a figure around 75% of the GDP.
This national long term savings resources makes it possible to
finance productive long term investments.
These effects are not only reflected in macroeconomic indicators,
but also in things much closer to the people, such as the cost of
mortgages, consumer credit and credits for small businesses.
4. Workers with low wages, temporary works, self employed and an important
proportion of women are not able to accumulate sufficient funds.
5. Chile is getting older. Gradually but relentlessly, the old age people are
representing an increasing percentage of the population. It is natural to ask how
these additional years will be lived and the future of the young people.
Designing an integrated system
The Reform covers totally the
Pension System. The diagnosis
that supports the changes reveals
that the 3 pillars of the system
were not responding to people’s
needs.
It was necessary to:
> Fortify the Solidarity Pillar.
> Introduce improvements to the
Contributive Pillar.
> Extend the benefits of the
Voluntary Pillar.
We took into consideration that
The Pension System is one only,
and what occurs in one Pillar will
affect absolutely the others.
Pension Systems
Pension Scheme before 2008’s Reform,
excluding Pay as you go programs.
Pillar 1
NON
CONTRIBUTIVE
Public
Budget
Minimum
Allowance
Guarantee
Pillar 2
INDIVIDUAL CAPITALIZATION
ACCOUNTS
Labor
Market
Capital
Market
Wages
Profitability
Employment
Security
Contributions
Density
(20 years)
Capital
Non
Contributive
Pension
(PASIS)
PENSION
PENSIÓN
Prices
Pillar 3
VOLUNTARY
Voluntary
Pension
Savings
Tax
Exemptions
Products
Supply
Integrated Pension Scheme with Reform
Pillar 1
NON
CONTRIBUTIVE
Public
Budget
Basic
Solidarity
Pension
Pillar
Pillar 22
INDIVIDUAL
INDIVIDUALCAPITALIZATION
CAPITALIZATION
ACCOUNTS
ACCOUNTS
Labor
Market
Self workers
Mandatory
contributions
Solidarity
Complement
Adjust Non
Paid and
Declared
Contributions
Child Birth
Bond
Young
Workers
Incentives
Capital
Market
Investment
Flexibility
More
competence
Education
Fund
Capital
PENSION
Pillar 3
VOLUNTARY
Voluntary
Pension
Savings
Voluntary
Pension
Savings
Subside
Collective
Voluntary
Savings
Solidarity Pension System
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The reform creates a Solidarity Pension System that will benefit those who, for
different reasons, have not been able to save enough funds to finance a
dignified pension. The Reform will eliminate extreme poverty among older
people and people with disabilities.
 New Benefits: Basic Solidarity Pension (BSP) and Pension Solidarity
Complement (PSC) for men and women ( ≥65 years old)
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The people lacking pension savings included in the 40% most vulnerable
segment of the population were entitled to a Basic Solidarity Pension as of
July 1, 2008. The coverage will be increased 5% per year, reaching 60% of
the population in 2012
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The pensioners were granted a Solidarity Pension Contribution allowing
them to increase their income since 2008. The public contribution will be
increased on a yearly basis until reaching its full value in 2012.
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Gender Equity
 Pension Reform will reduce the gender gap in
the pension system. Without Reform 90% of
women will not have access to the minimum
allowance guarantee
 2/3 of the benefits will be assigned to women
 BSP eligibility doesn't take into account the
number of contributions (in years)
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Bond per Child for women. For each child born
or adopted, a women will have the right to
receive an amount equivalent to 18
contributions of a minimum wage, with
profitability until she reaches 65 years old.
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In the long term will have an effect of a raise
of 20% in pension amount if she contributes
during 10 years a minimum wage, and has two
children (average)
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Separate bidding process for disability and
survival insurance.
Self employed: Compulsory Coverage
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Independent workers (Self employed and
Employer) are 27% of the workforce, 2/3
are Services Providers.
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Equal rights and duties – Compulsory
Contributions for Self employed Service
Sectors.
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Access to Basic Solidarity and Family
Subsidies.
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Independent workers will have access to
Insurance for Injuries and Professional
Illness.
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Gradual implementation:
•First step, Education Process.
•Second step, begins in 2012,
Completes Compulsory Contributions
gradually until 2018.
Employment Formalization
and Subside to Pension Contribution
of Young Workers
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A subsidy to the first 24 contributions made by workers between 18 and 35 years of age
whose income is lower than 1.5 times the established minimum wage.
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The purpose of this subsidy is to promote labor participation among youths, increase
employment with formal contracts and raise coverage and pension funds of young workers.
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This subsidy will be made up of two kinds of contributions: A subsidy to hiring, equivalent to
50% of the contribution for a minimum wage, and a direct contribution to the worker’s
pension fund account of the same amount. This instrument started to operate in October
2008, and will benefit about 300 thousand young workers in 2009.
More Competence and Corporate
Governance in Pension Fund Market
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Tender process for new affiliates.
The new workers will be assigned, for up to 24 months
to the Administrator that offers the lowest commission
in the bidding process, which should lower the amount
of the fees charged by the Pensions Funds
Administrators.
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Fixed Commissions
Fixed commission on contributions, retirement and
transfer of balances are eliminated in order to facilitate
price comparison between pension fund managers.
Management of Life Insurance and Invalidity Insurance
is unbundled from fund management. A tender process
being carried out for all affiliates, irrespective of the
Administrators they are affiliated to.
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Service outsourcing are allowed.
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Entry of new administrators is expected.
Social Protection Network
(PROTEGE)
PROTEGE is the Social Protection Network of the Chilean Government, that seeks to
provide security and opportunities. It is based on a set of eight programs and
benefits (including the Solidarity Pension System) that meet the needs of people
throughout their life cycle.
The network is aimed at reducing vulnerability, creating opportunities for children
and their families, fighting discrimination in all its forms, reducing inequality and
improving social equity.
http://www.redprotege.gov.cl/
Reasons why the Reform is a success
• Population consensus public and private
contributions.
• Presidential Leadership: 10 final goals of
the Reform.
• Task Force (Ministers: Finance, Work,
Planning) dedicated. The political leadership
in the Minister of Work.
• Law passed unanimously in Congress.
• Funding secured in international reserves.
• The role of the public administration is to
accompany the exercising of rights.
• Solid Technological Platform (monitoring
on-line; 34 entities progressively integrates
a common data model, digital forecast
records)
Conclusions.
• Pension systems affect the long term. The contributory pension
scheme created in 1981 has not yet reached full maturity.
– Ensure policy consistency and avoid reversals based on short term concerns
– Gradual and stepwise approach to solving problems and think about long term
effects
• The contributory pension scheme is working in accordance with how
it was foreseen and only within another 20 years will have matured
sufficiently so as to reflect the majority of the pensioners. The system
is transparent and prevents frauds.
• The focus of Chilean Policy is the reduction of the risk of poverty in
old age and the generating of minimum universal benefits, in an
integrated Pension Scheme.
• The identity of people, individual accounts of contributions and
records of pensions have to interact to achieve confidence of all
society in the Pension System.
Conclusions…cont’d
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We established strong ways of education, communication and evaluation of
the attention level and all the operational processes in the private and
public sectors with the same quality standards audited by third parties and
common database modeling.
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The development of any pension system needs for macroeconomic stability
and the contributory pension system helps to reach macroeconomic stability
(savings, investment, employment, development of the capital market and
insurance).
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An essential condition is to separate the resources to cover the Retirement
benefits. Everyone contributes to finance pensions, thru the individual
savings and/or taxes (private and public financing).
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In a Federal System like Nigeria, the three levels of Government must reach an agreement of
how to reach a common goal of contributions and finance all the accrued pension liabilities
Sharing experiences
The Chilean Pension System
Rafael Del Campo
Former National Director INP