Chilean beacon for pension reform in Latin America

The Chilean social security system has become the foundation for the development of similar systems throughout Latin America. Jonathan Callund reports

The ideas explored in Chile at the end of the 1960s took over ten years to come to fruition in the form of the AFP system, as it was implemented on Labour Day, 1981. Then, amazingly enough, it took a further 12 years, and considerable deliberation on the part of other countries in the region, before the first of the second wave of reforms came about (in Peru).

In the meantime, the system in Chile has become the motor for domestic investment, increasing the levels of pensions and encouraging the development of private savings. It is likely that this experience will be repeated across the region.

Today, there are over 14.5m members and a total of $37bn under management in the five systems implemented by the end of 1996. With the arrival of Mexico and Bolivia this year, the total funds managed by state mandated non-state pension funds are projected to rise to $98bn by the year 2000# (Salomon Brothers: Private Pension Funds in Latin America, Nov 1996). This does not take into account the impact of voluntary private occupational pension funds in Brazil, which currently amount to $70bn and are, in turn expected to grow to over $103bn by the end of the decade.

The ten guidelines (see table) of the Chilean Adiminstradora de Fondos de Pensiones (AFP) system introduced over 16 years ago, known as El Ladrillo, have become the foundation for the development of similar systems in other countries.

Peru introduced what was virtually a carbon copy of the Chilean pension legislation in December 1992, to come into force in July 1993, although membership of the system has not been mandatory and the old system (SNP) is projected to continue. The cost of the new system was actually higher marginally than the old one - contributions are 12.5% of salary - which meant that the initial development of the system was slow. However, there are now five competing AFPs and over 1.6m members which makes up 16% of the workforce. Total funds under management at the end of 1996 amounted to over $1bn. The Peruvian system can be said to follow nine of the ten principles set out in El Ladrillo, the report released in 1973, which laid the foundations of what became the modern AFP system. Where it really differs is that contributions are not treated as a pre-tax deduction from salary.

Colombia introduced a mixed system in April 1994 and opted to keep the 'old', pay-as-you-go formula and introduce AFPs as a voluntary alternative to the State scheme. The main differences from the Chilean model are that the Colombian AFPs also administer the employees' special termination indemnity accounts. The contribution level is similar at 13.5%, but, unlike Chile, three quarters of this is paid for by the employer. There are eight AFPs managing around 2.2m accounts with an approximate total of $750m in funds. Looking back to El Ladrillo, Colombia appears to comply with all ten principles, although it is dubious if there is yet a full commitment to winding down the State aparatus.

After considerable parliamentary and trade union debate, Argentina introduced the Admistradora de Fondos de Jubilación y Pensiones (AFJP) system in July 1994. This time, the structure was more complex, involving the restructuring (but not the prospective winding-up) of the state scheme, to provide everyone with a basic state pension. In addition, employees of all ages have been allowed to remain in the 'old' system. Despite this, there are currently 20 AFJPs in operation, managing 5.5m individual accounts and with a total of $4.5bn in funds at the end of last year.

Although Uruguay went a different root to the rest, when it introduced its mixed system in April last year, by obliging only employees below age 40 and on an annual salary of around $10,000 to become a member of an AFAP#, the rest of the conditions are very closely based on the Chilean model. Those who did not switch to one of the six AFAPs remain in the Banco de PrevisiÛn Social (BPS), paying the same employee contribution of 15%. Employers, on the other hand pay a contribution of 12.5% to the BPS, to assist with financing the existing pensioners.

The reform in Bolivia was implemented only in January this year, with the announcement of the two winners of the international tender who will administer the AFP business exclusively for a period of five years. With this, all citizens over the age of 18 will be assigned an individual savings account to receive the proceeds of the Plan de Capitalización - the result of the government's share-out of monies raised from the sell-off of the six nationalized industries - and all future pension contributions. Given these special circumstances, the Bolivian system will start off with around $1.5bn in funds under management, but will grow at a more leisurely pace, given that total membership is not expected to exceed half a million members.

Despite the six-month set back, after over five years of debate, the Mexican system is set to begin on 1 July this year, obliging all employees to switch from the pay-as-you-go system to one of the new Admistradora de Fondos de Ahorro Provisional (AFORE)#. One of the key differences between this system and the Chilean model is that the disability and survivors pension cover is insured by the state, though the Instituto Mexicana de Seguridad Social (IMSS).#

Combined with the fact that the entire Mexican population is obliged to switch to the new system, there will be an instant demand for annuities - the volumes of premiums in the first six months are projected at over $500m. Another difference, which is also found in Argentina, is the state's involvement in collecting the contributions. In Chile and the majority of the systems, each AFP is responsible for collection. However, despite these administrative differences, the Mexican system meets all ten of the principles of El Ladrillo.

Jonathan Callund is general manager of Callund y Compatila in Chile.

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