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Impact of the Financial Crisis on Pension Systems in LAC
Waldo TapiaLabor Market Unit
Inter-American Development Bank (IDB)
OECD/IOPS GLOBAL FORUM ON PRIVATE PENSIONS:PENSION REFORM AND DEVELOPMENTS IN LATIN AMERICA
Rio Janeiro, Brazil14-15 October, 2009
Agenda
• Introduction• Private pensions in LAC and the financial crisis
• Evaluating the impact (assets, returns)• Asset allocation• Coverage
• Putting the crisis into a pension context• Conclusions
Introduction
• The financial crisis has affected many aspect of the economy, including private pension arrangements.
• In Latin America private pensions play an important role in mandatory pension provision.
• In Latin America 11 have implemented mandatory individual account pension systems.
• Private pensions leaves workers’ retirement income vulnerable to investment risk.
• In DC pensions, benefits depend directly on accumulated contributions and investment returns.
Market value of pension assets
By December 2008, the total assets of pension funds in LAC had decline by about US$ 52 billion, or nearly 14% relative to December 2007
0
50,000
100,000
150,000
200,000
250,000
300,000
2000 2001 2002 2003 2004 2005 2006 2007 2008
Mill
ions
of U
S$
Which countries were affected?
• Some of the countries most affected were Chile, Argentina, Peru.
• This lower value of the investment should not be interpreted as a loss, particularly where long-term savings are concerned
-40,000
-30,000
-20,000
-10,000
0
10,000
Chile
Méx
ico
Arge
ntina
Perú
Urug
uay
Cost
a Ri
ca
El S
alva
dor
Boliv
ia
Colo
mbi
a
(-23%)
(34%)
(-33%)
(6%)(8%) (13%)
(-11%)(-17%)
(-15%)
Assets as % of GDP
• As a % of the economy mandatory private pension funds in LAC fell from 16% in 2007 to 14% 2008
• In OECD countries the ratio for pension funds decreased from 76% of GDP in 2007 to 63% of GDP in 2008
0
20
40
60
80
Arge
ntina
Boliv
ia
Chile
Colo
mbi
a
Cost
a Ri
ca
El S
alva
dor
Méx
ico
Perú
R. D
om.
Urug
uay
OEC
D
2007 2008
20072008
The impact on investment returns
• Almost all countries experienced a negative return in real terms over January to December 2008
• Some of the countries most affected are those where equities represent a higher proportion of total assets invested
-25%
2%
-3%
6%1%
-1%1% 3%
20%
1%-2%-11%
-3%-9%
-2%-7%
-29%-22%
-40%-30%-20%-10%
0%10%20%30%
Argentina
Bolivia
Chile
Colombia
Costa Rica
El Sa
lvado
r
Méx
ico Perú
Urugu
ay
2007 2008
The experience in OECD countries
2008 pension fund nominal and real returns in selected countries (%)
Pension funds in OECD countries experienced during 2008 a negative real return of:
17.4% (unweighted average)
23.0% (weighted average)
Shifts in asset allocation
14
48
68
24
58
43
36
57
17
61
46
9
0
10
20
30
40
50
60
70
Chile Colombia México Perú Uruguay Total
15
23
8
41
1512
6
25
20
14
05
1015202530354045
Chile Colombia México Perú Uruguay Total
36
1114 15
3
21
4
1612
109
29
0
5
10
15
20
25
30
35
40
Chile Colombia México Perú Uruguay Total
Gov. bonds
Domestic equitiesForeign instruments
0%
3%
6%
9%
12%
Jun-08 Dec-08
0%
3%
6%
9%
12%
Jun-08 Dec-08
Investments by group of instruments (as % of total asset)
Impact on coverage
•The decline in the value of pension funds is not the only problem. It is also necessary to address the drop in coverage that will result from the economic slowdown.•The unemployment persons will increase between 2.8 – 3.9 millions
2007 2008 2007 2008 2007 2008
Chile 4,329 4,572 61.2 62.8 53.8 54.6Colombia 3,522 3,840 17.1 18 45.1 44.8Mexico 14,710 14,170 32.2 31.4 38.2 36.3Peru 1,699 1,770 13.4 13.8 41.4 41.2Uruguay 453 510 27.7 30.6 58.6 60.6Total 32,162 31,611 33.3 32.2 43.4 42.3
Contributors/Affiliates (%)Country Contributors (thousands) Contributors / EAP (%)
Putting the crisis into pension context
• Pensions are, by their nature, long-term and so their performance must be evaluated over a lengthy horizon.
• A temporarily lower value is note the same as a real loss• Pension systems in LAC are relatively young• Younger workers can hope for some good years to
make up the recent falls in asset value.• Some countries in the region have implemented
investment choice or multiples portfolios• Multiples portfolios include conservative options for
workers close to retirement.
The markets are recovering….
60,000
80,000
100,000
120,000
140,000
Jan-
08
Mar
-08
May
-08
Jul-0
8
Sep-
08
Nov
-08
Jan-
09
Mar
-09
May
-09
Jul-0
9
Sep-
09
12,000
16,000
20,000
24,000
Jan-
08
Mar
-08
May
-08
Jul-0
8
Sep-
08
Nov
-08
Jan-
09
Mar
-09
May
-09
Jul-0
9
Sep-
09
50,000
60,000
70,000
80,000
90,000
Jan-
08
Mar
-08
May
-08
Jul-0
8
Sep-
08
Nov
-08
Jan-
09
Mar
-09
May
-09
Jul-0
9
Sep-
09
Chile
PeruMexico
….and, with
them, the value of the investments.
Long-term investment
• Performance should be evaluated in a long time horizon
• Evaluating the results of a short period may distort the perception of their performance
9%7%
11%
7%
9%8%
10%
5% 6%
11%
7%
9%
4% 4%
8%6%
8% 8%
0%
3%
6%
9%
12%
Argentina
Bolivia
Chile
Colombia
Costa Rica
El Sa
lvado
r
Méx
ico Perú
Urugu
ay
2007 2008
Pension systems in LAC are relatively young
• A major drop in asset values may not matter much to younger workers who can expect the markets to recover overall in the long term
• The proportion of the elderly experiencing major declines in pension income is relatively small in most LAC
País < 30 30-44 45-59 > 60
Argentina 29 45 21 5
Bolivia 23 44 25 8
Chile 30 41 26 3
Colombia 38 48 14 0
Costa Rica 40 35 20 5
El Salvador 42 42 14 1
México 35 42 17 6
Perú 31 47 19 3
Uruguay 25 51 23 1
Total 35 43 18 4
Investment choice
• Multiples portfolios shield workers close to retirement from most of the losses in asset values
Investment choice
• A multifund model linked to the affiliates’ life cycle has been an important element in strengthening the pension fund system
• Provide a default options that involves a switch to less risky investment as people get closer to retirement
• Restrict investment choices for older workers to lower risk options
Distribution of participants by age
1-group 2-group 3-group Investment option Men up to
35 Women up to
35 Men
45 - 55 Women 35 - 50
Men from 55
Women from 50
More Conservative (E) 1 1 2 2 3 3
Conservative (D) 0 0 1 1 53 53
Intermediate (C) 3 4 65 66 36 36
Risk (B) 73 73 20 24 6 7
Riskiest (A) 23 22 11 8 2 2
Source: Superintendencia de Pensiones, Chile
Conclusions
• The impact on pension funds is clearly negative over the last 12 months
• The consequences of the crisis on the pension systems are important in LAC (mandatory and DC systems)
• Pension funds work with a long time horizon• Negative investment return cannot be interpreted directly
as a loss• Pension fund performance has been positive over the
last 10-15 years• Pension systems in LAC are relatively new• For younger workers, pensions are long term savings
Conclusions
• Some countries have implemented individual choice• Financial education is necessary to ensure that
members understand the risk they are exposed to• It is also to address the drop in coverage that will result
from the economic slowdown• Diversify retirement schemes • The balance between public and private schemes
should not be framed solely around the crisis• Government should resist to reactions that threaten the
long term stability of retirement income provision