The pension revolution in Latin American started in Chile in 1981 when the Pinochet government replaced the pay-as-you-go public pension system with fully funded mandatory (except for the self-employed) privately managed individual pension accounts, financed by employee contributions. This defined contribution (DC) scheme was the first of its kind in the world.
The role of the state was reduced from provider of retirement security to regulator, supervisor and guarantor of the private pension sector. Administration is carried out by the Administradoras de Fondos de Pensiones (AFPs), investment management companies allowed to manage only pension fund assets. AFPs are regulated and supervised by a specialist ‘superintendency’ body.
Retirement capital managed by an AFP is a separate legal entity and must be held by an independent custodian.
When the system was implemented existing affiliates had the option of remaining in the old system or joining the new one.
Those choosing to switch systems obtained recognition bonds for previous contributions. A 17% gross salary increase to compensate for the abolition of employer contributions, were strong incentives for people to join the new system.
Workers are free to choose an AFP to invest with. Employers are not allowed to influence this decision. Contributions equal 10% of earnings, subject to a ceiling, with an additional 3% for disability and survivors’ insurance on top of fund management commission fees averaging 2% of basic salary.
Investment regulation is strict in both limits and the financial instruments to be used.
According to figures from the AFP Superintendency, the size of the pension fund market in Chile at the end of 1991, 10 years after the reform, was more than $10bn. The figure has increased significantly during the past decade, representing nearly $35bn as of December 1999.
More than 6m Chileans were affiliated to the system at the end of last year.


Peru introduced a privately managed DC scheme (SPP) as an alternative to its old public pension system (IPSS) in 1993. Following the Chilean model, the system is managed by private fund management houses (AFPs). Under the new system, regulated and supervised by the government, members pay contributions into individual accounts and can switch between companies.
Unlike Chile, however, the Peruvian reform involves the co-existence of pension systems. Affiliates in the old system and new entrants to the labour force can opt either for the public DB system or the new private plans. Membership of either system is mandatory, though, except for the self-employed.
According to figures from the Peruvian Superintendency of AFPs (SAPF), the SSP had more than 2m affiliates at the end of 1999, although only half contribute regularly.
To guarantee the success of the transition process, Peru financed the change through a number of different instruments. One was the issuance of government debt to ‘recognise’ past contributions to the old system. Another involved using public savings to pay off debt and establish a fund financed through privatisations.
Extensive post-reform publicity campaigns attracted a significant number of people to the private plans, but monthly affiliation rates have declined since then, due to, among other reasons, high contribution rates (14%) required by the new system, implementation problems and lack of information on the reform itself. Total pension fund assets under management at end-1999 accounted for $2.4bn.
In terms of asset allocation, APF portfolios are well diversified. The proportion invested in equities had risen to more than 35% by the end of 1999.
Investment in foreign securities is limited theoretically to 10% of assets. Foreign investments have to be permitted and risk-rated before AFPs can invest. Not many permitted foreign investment instruments have been identified.


Colombia launched its privately managed pensions system in 1994. As with the Peruvian model, workers are given a choice between the public and private system – although affiliation to one or the other is mandatory.
Significantly, workers are allowed to switch back and forth between the two systems every three years.
The oil sector, teaching profession and the armed forces have their own pension schemes.
Like Chile and Peru, Colombia uses ‘recognition bonds’ to compensate workers switching systems. The recognition bond is calculated according to the net present value of the future pension an employee would have received from the former system.
Overall coverage of both systems, however, is relatively low, partly due to the large size of the informal economy in Colombia, but also a high degree of evasion on the part of employers.
To extend coverage Colombia has introduced an element of redistribution in the private pillar. Workers earning more than four times minimum wage are required to contribute an extra 1% of income – matched by the government – to a solidarity pension fund (Fondo de Solidaridad Pensional).
Colombia’s public pension system, which only started in 1965, is a DB pay-as-you-go (PAYG) system, with relatively favourable dependency ratios.
In order to equalise contribution rates between the public and private systems, rates for the public system were upped from 6.5% to 13.5% of salary and by 1997 the system was in surplus with total assets of $2.4bn. The majority is invested in government bonds.
Retirement age is currently set at 55 years for women and 60 for men.
Around 3.5m Colombians were members of mandatory private pension plans by end 1999, according to figures from Asofondos de Colombia. In 1999 total assets in the private system reached approximately $2.9bn.
Management companies for these funds (Administradoras de Fondos de Pensiones Obligatorias – AFPs) can also manage voluntary pension funds. Licensing, regulation and supervision is the job of the Superintendia Bancaria – the banking, insurance and finance regulator. AFPs, which numbered eight last year, must establish compulsory reserves.
Investment regulations in Colombia are relatively relaxed with public debt securities limited to 50% of assets under management. Equity and foreign investment is permitted, although most AFPs show a strong preference for fixed-income assets.


Although founded in 1944, Argentina’s social security system was preceded by occupational pension schemes set up at the beginning of the century, initially covering only public sector employees and the military.
However, Argentina suffers from many of the same demographic indicators as Europe – an ageing population and a relatively high dependency ratio.
Legal moratoria for the payment of pension debt coupled with periods of high inflation meant that contributions eventually soared in the 1980s, finally culminating in a state of social security emergency called by the Argentine government in 1986. Collapse of the system paved the way for systemic reform, implemented in 1994.
The present system consists of a public pay-as-you-go pillar complimented by a mandatory second pillar where workers can choose between privately managed individual accounts or a publicly managed defined benefit scheme. Affiliates may switch from the latter to the former, but not vice versa.
Participation is mandatory except for the police and military, which continue to enjoy more generous pensions.
Argentina’s basic pension (PBU) was again amended in 1997 with introduction of pension ‘modules’ meaning that a flat rate pension set by the government and based on payroll over 30 years acts as the minimum first pillar pension. For every further year of employment a small increase is made. The public system (ANSeS) also pays the supplementary pension to workers choosing the public option for the second pillar.
Retirement age is 65 and 60 for men and women, respectively.
The private second pillar consists of a system of fund management companies (Administradoras de Fondos de Jubilaciones y Pensiones – AFJPs). Last year 13 companies participated in the system. These can manage one fund each and are regulated by the Superintendencia de AFJPs (SAFJP). Banks, insurance companies and other financial institutions may own AFJPs, of which the largest in Argentina are joint ventures between foreign and local groups.
Workers choosing the private option pay 11% of salaries to a preferred manager. While members have the right to switch funds from one to another this has led to an aggressive market of selling agents and the number of transfers has proved costly for the AFJPs.
There are no minimum limits on investment rules in Argentina. Foreign securities are restricted to a maximum of 10% issuance from states and organisations and 7% from corporates.
At December 1999 there were around 8m private fund members with assets of approximately $16.8bn.


Uruguay has the oldest mandatory pension system in Latin America - founded in 1896. In 1996 it established a new pension fund regime and revamped the rules of the older one.
Because of high youth migration rates to neighbouring countries, the ageing of the population and maturing of the pension system have been faster than in other countries in the region.
The Uruguayan reform was the least radical and most gradual of the pension system re-evaluations on the continent.
The new three pillar structure operates according to the contributors’ income level. The first pillar is a publicly managed funded scheme with individual accounts to which all workers must contribute. The second is a privately managed funded scheme with individual accounts – mandatory for all workers earning between $800 and $2,400 at the time of reform.
Workers earning less than $800 can join the second pillar on a voluntary basis. Teachers, doctors and bank employees were excluded from the reforms, remaining in their own more generous pension systems.
Supervision of Uruguayan pension funds is carried out by the Central Bank.
All transactions and investments are controlled by strict regulation and contributions are deductible from income taxes up to a ceiling of 20% of earnings.
The new pension system had more than 500,000 affiliates at the end of 1999, of which around 300,000 were contributing regularly to their accounts. Affiliates are allowed to switch fund managers (Administradoras de Fondos de Ahorro Previsional - AFAPs) up to twice a year. The number of AFAPs has risen to six, with the three largest, República, Comercial and Integración, managing more than 75% of private pension assets.
Investment rules in Uruguay are more restrictive than anywhere else in Latin America. AFAPs are required to invest at least 60% in government bonds and investment in foreign securities is not permitted.
According to figures from República AFAP the size of the pension fund market in Uruguay was almost $600m at December 1999.


Mexico’s pension system was founded in 1944 and consists of several institutions for private and public sector employees.
The largest of these is the Mexican Social Security Institute (IMSS) which provides old age, disability, survivors and health insurance benefits. However, diminishing assets over time for reasons of low-yielding investments and cross-subsidisation of health programmes, mean that IMSS has effectively turned from a quasi-funded arrangement into a PAYG system.
Low contribution rates and a high number of evasions led to the need for reform. A first attempt was undertaken in 1992. The launch of a new system in July 1997 stipulated the mandatory affiliation of all private sector workers to managed individual accounts. Pension fund management companies began operations in February 1997.
As in Chile, the PAYG system is closed to new labour force entrants. Transfer from the old system to the new is also relatively ungenerous. Furthermore the new Mexican system has a complex structure with 6.5% payable to the individual retirement account, which is complemented by a flat government subsidy amounting to 5.5% of the minimum wage per day – corresponding on average to around 2% of wages.
The pension funds (Siefores) are administered by fund management companies (Afores), which can be established by private sector and trade union groups or the IMSS – as long as they hold capital of at least 25m pesos.
Foreign majority ownership is permitted and foreign-owned companies are subject to the same conditions as domestic counterparts. IMSS collects the contributions for distribution to other management companies. Pensions eligibility comes at 65 after a minimum 25 years of contributions.
Regulation and supervision of the system are carried out by CONSAR.
Management companies are free to charge commissions and fees on contributions, assets or a combination of the two. However, Mexican pension law limits account transfers to one per year. The law also limits pension fund investment by type of instrument and issuer of securities and restricts the maximum market share of groups. Consequently, fund’s portfolios tend to consist of government securities. The private system had 13 Afores managing $11.5bn for around 15.5m Mexicans at the end of 1999, according to the Asociacion Mexicana de Administradoras de Fondos para el Retiro.


After several unsuccessful reform attempts, a new pension system was introduced in Bolivia in 1997, based on fully funded individual defined contribution (DC) accounts. Although the Bolivian system incorporates many elements of the Chilean system, it constitutes a completely new approach combining ‘capitalisation’ and pension reform. The old DB public system was closed down and all affiliates were transferred to the new system.
Under the ‘capitalisation’ scheme, 50% of the capital of the six largest state-owned enterprises was transferred to private partners through an international auction. The strategic investors and the government both hold 50% of the shares, although the government then transferred its shares to the privately managed pension system, where they are managed as a ‘collective capitalisation fund’ together with and by the same companies managing the newly established individual accounts. The collective capitalisation fund started with shares of $1.67bn in securities and $40m in cash.
The market was initially limited to two fund managers chosen via an international tender process from which two Spanish-led consortia were selected – Consorcio Invesco PLC – Argentaria (AFP Futuro de Bolivia) and Banco Bilbao Vizcaya (AFP Previsión BBV). In 2002, the market will be further opened to new AFPs. Individual account commissions are the lowest of all Latin America private pension systems – pre-set by the government at 0.5% of wages.
The Bolivian system is supervised by the pensions department of the financial sector superintendency. AFPs have to invest following guidelines issued by the Central Bank. To finance the transition from the old to the new system, AFPs were required to invest a certain amount in government bonds. The law also requires that at least 10% of the assets have to be invested abroad.
According to figures from AFP Futuro de Bolivia, the size of the pension fund market in Bolivia at December last year was around $500m, with more than 500,000 affiliates.


The new Salvadoran pension law was passed in December 1996. However, in mid-1997 the financial sector in El Salvador slipped into severe crisis following major incidents of fraud, delaying the law’s implementation.
By March 1998, five fund management companies had been authorised by the country’s superintendency. The reform, of all those in Latin America, is the closest to the Chilean model. It replaced the former DB PAYG system with fully funded individual accounts managed by competing private pension funds – Instituciones Administradoras de Fondos de Pensiones (IAFP).
Participation in the system is mandatory for all labour market entrants and affiliates of the existing system up to the age of 35. Male workers over 55 and female workers over 50 must remain in the old system institutions – ISSS for private sector employees and INPEP for the public sector.
Foreign ownership of IAFP shares is allowed but subject to restrictions and alliance with national or Central American shareholders. Companies already holding shares in national financial institutions are prohibited from involvement in an IAFP. Foreign investors present in the market include Chilean pension fund management companies, US and European banks.
Retirement age in the system is 60 for men and 55 for women. Early retirement after 30 years of contributions is also possible.
Contribution rates have been gradually rising and will hit a 10% target by 2002. Approximately two-thirds are payable are payable by the employer and the remainder by the employees.
Voluntary top-up contributions can also be made and switching between fund management companies is authorised every six months.
Investment provisions for Salvadoran IAFPs prescribe ‘ranges’ for the instruments a fund can invest in. However, the low level of financial sector development in El Salavador means these ranges are wider than in Chile. Significantly though, investment in foreign securities and shares is not permitted.
As in Chile, El Salvador has a relative rate of return guarantee for pensions as well as a minimum pension set by the Ministry of Finance.