Development of Pension Reform in Chile

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Coverage in the Chilean Pension System
Solange Berstein Chair IOPS Technical
Committee Pensions Supervisor, Chile IOPS
Regional Workshop Amman, Jordan February
2011
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Content

• Main Features of the Chilean Pension System
• Coverage in a Defined Contribution System
• Latest and most important reform in Chile
• Lessons from Chile

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Chilean Multi-Pillar Pension System

• The Chilean Pension System is supported by three
  pillars
• Pillar 1 Old age poverty prevention State
  financed
• Pillar 2 Consumption smoothing Mandatory
  (defined contributions)
• Pillar 3 Consumption smoothing Voluntary savings

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Coverage in a Defined Contribution System

• Pensions provided by the system depend directly
  on individuals contribution histories
• Making consistent contributions throughout the
  working life (high density of contributions)
• The timing of those contributions (contributions
  when young benefit from compound interest)
• Time of retirement (as benefits are based on
  actuarial calculations, early retirement has a
  significant negative impact)
• Participation is closely linked to occupational
  status
• Mandatory participation for salaried workers gt
  80 coverage
• Voluntary participation for self-employed gt 5
  coverage

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Density and Timing of Contributions
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Latest and Main Reforms to the Pension System

• 2008-2010 (non-comprehensive list)
• Creation of the basic pension (PBS) for
  non-contributors and a supplementary state
  contribution (APS)
• Competitive auctions for new affiliates and for
  the disability and survivorship insurance
• Introduction of gender-equality elements grant
  per child for women economic compensation in
  case of divorce survivorship pensions for men
• Introduction of risk-based supervision for AFPs
• Increased flexibility of the investment regime of
  pension funds

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Latest and Main Reforms to the Pension
System Coverage The 2008 Pension Reform

• Improve the level of coverage of the system by
  increasing personal contributions while providing
  a strong safety net for individuals who are not
  able to contribute

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A More Integrated Pension System
VOLUNTARY PILLAR
MANDATORY CONTRIBUTIONS
SOLIDARITY PILLAR
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Increase Coverage Solidarity Pillar

• Diagnosis
• The poverty-prevention pillar offered limited
  coverage to individuals excluded of the formal
  labor market or with very little participation in
  it
• A large proportion of individuals presented low
  density of contributions thus not qualifying for
  the MP-g (minimum of 240 non-consecutive
  contributions needed), in particular women
• Reform
• Basic Solidarity Pension (PBS) for individuals
  who could not contribute and belong to the least
  affluent 60 of the population (target will be
  reached in 2011, currently 55)
• Solidarity Complement (APS) for individuals who
  financed small pensions, designed to limit
  savings disincentives

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Increase Coverage Solidarity Pillar

• Effects Number of PBS beneficiaries and Average
  PBS

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Increase Coverage Solidarity Pillar

• Effects Number of APS beneficiaries and Average
  APS

12
Increase Coverage Contributive Pillar

• Diagnosis
• High levels of occupational coverage (i.e.
  proportion of workers in work who pay
  contributions)
• However, many individuals presented low density
  of contributions, meaning inadequate levels of
  savings for old age
• Lack of contributions for self-employed along
  with low savings rates for this group
• Poor contributory behavior and low contributions
  densities for young people (related to their high
  levels of unemployment)
• Reform
• Additional tools for supervising contribution
  payment
• Default participation as of 2012 and mandatory
  participation starting 2015, plus associated
  benefits for self-employed
• Subsidy on hiring and on pension contributions of
  young, low-income workers

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Increase Coverage Contributive Pillar

• Effects Recovered unpaid contributions
• As of August 2010 a total of 70,000 workers have
  been benefited with the recovery of unpaid
  contributions for over USD 1 million
• Effects Voluntary affiliates
• As of November 2010 a total of 6,090 individuals
  became voluntary affiliates
• These are mainly women that has been affiliated
  in order to get the bonus per child of the
  reform, but there are also cases of affiliates
  with less than one year of age

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Increase Coverage Contributive Pillar

• Effects Number of subsidies for young workers

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Increase Coverage Voluntary Pillar

• Diagnosis
• Levels of voluntary savings seemed insufficient,
  especially among workers with medium and low
  earnings, for whom the system of tax exemptions
  did not represent a strong incentive
• Reform
• Creation of collective voluntary pensions savings
  plans (APVC in spanish)
• Matching contributions for low and middle income
  voluntary savings

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Increase Coverage Voluntary Pillar

• Effects Number of APV accounts eligible for
  subsidy

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Lessons from Chile

• Coverage cannot be measured just by the number of
  people contributing in a given moment
• For a defined contribution system early
  contributions are very important, efforts should
  be made to encourage people to contribute at an
  early stage
• There might be significant heterogeneity between
  individuals, this should be considered by policy
  makers giving the tools for different types of
  workers to make up their pension
• Monitoring the performance of the pension system
  with adequate data is very important, so that
  reforms are based in relevant information

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Coverage in the Chilean Pension System
Solange Berstein Chair IOPS Technical
Committee Pensions Supervisor, Chile IOPS
Regional Workshop Amman, Jordan February
2011