Public Sector Pension and other Reform Experiences from Mexico

Transcription

1 Public Disclosure Authorized Public Sector Pension and other Reform Experiences from Mexico Public Disclosure Authorized Public Disclosure Authorized ERNESTO BRODERSOHN WORLD BANK CORE COURSE ON PENSIONS PRACTITIONER S EXPERIENCE WITH PUBLIC PENSION REFORM WASHINGTON, DC MAY 2 nd, 2016 d

2 Public sector pension reform Overall structure Some facts about Mexico Structure of the pension in Mexico since the private sector pension reform of 1997 (DB to DC) Public sector pension reform of 2007 (DB to DC) Implementation steps to migrate public sector to DC scheme Voluntary savings Identifying behavioural

3 Public sector pension reform Some data about Mexico Population 120 million Working age population of 56 million GDP: $1.2 Trillion US Growth Rate: ~2-3% Inflation Rate: 3.6%

4 Public sector pension reform In 1997 the Pension was reformed for the private sector Level of contributions was set at 6.5% wage Employees contribute 1.15% wage Employers contribute 5.15% wage Government 0.225% wage Additional social contribution for people earning 15 x Minimum wage Specific pension fund administrators were created (Afores) They are different entities from banks, but they can be part of a financial or economic group Each Afore administrates a set of funds (Siefores) which must comply with an investment regime A central switching entity holding records for every individual was created (Procesar), but recordkeeping is kept by the Afores Its main purpose is to facilitate collection of contributions, separate from tax information and fund flows Allows employers to contribute to all employees independent of the Afore they choose The transformation was set to have both s co-exists A transition generation who can choose the older pension was defined as everybody who has contributed before 1997 Since we do not know who will opt between the older Both DB and DC everybody contributes into their individual account

5 Overall organizational design of the pension in Mexico Collection of Contributions Public sector pension reform Employers Private Sector (1997) 11 PFAs BDNSAR PFA Switching Social Security Agencies (Housing and Social Security) DB

6 Default lifecycle funds Brief overview of Public sector pension reform Every Pension Fund Administrator holds 5 different funds exist which are age based Fund 4 People 36 years of age or younger (avg return 9.29%*) Fund 3 People between 37 and 45 years of age (avg return 8.50%*) Fund 2 People between 46 and 59 years of age (avg return 6.89%*) Fund 1 People 60 years of age or older (avg return 5.55%*) Fund 0 Focused on decumulation phase (Programmed withdrawals, partial withdrawals started nov. 2015) Over 99% of the clients have not elected a fund within their Afore Every year a transfer process exists to change people who qualify Netting processes helps minimize impact in portfolio turnover * Avg return calculated for 72 months (funds 3 and 4), 60 months (fund 2), 47 months (fund 1)

7 Fund accumulation since 1997 Growth of 129% since 2009 Public sector pension reform The funds belong to 55 million individual accounts Over US$150 billion Asset accumulation is now 14.5% of GDP

8 Public sector pension reform Fees charged by Afores have been decreasing over time In 2008 the law was reformed specifying that the only income Afores can have is based on a fee established as a percentage over assets under management Fees (% over AUM) Afores are mandated to submit the rates every year which are approved by Consar

9 Public sector pension reform 2007 public sector pension reform Main content of reform related to individual accounts Use the individual accounts that have been established in the private sector, through the use of the national ID number Designed to be portable and interoperable with private sector pension accounts Use the existing Afore infrastructure to administer the funds A key differentiator with respect to the private sector reform was that people had to choose between a reformed DB (parametric) and the new DC scheme Public Sector defined contribution structure Employees contribute 6.025% wage Employers contribute 5.175% wage Voluntary Contribution match (1 to 3.25) up to 2% wage Additional social contribution Total contributions in the public sector pension is much higher than private sector contributions at 11.2% 20.2% including voluntary savings

10 Incorporating the public sector into the existing pension infrastructure Collection of Contributions Public sector pension reform Employers Private Sector (1997) BDNSAR Government Agencies Public Sector (2007) 11 PFAs PFA Switching Social Security Agencies DB

11 Public sector pension reform Pension map in Mexico DB can opt for 1997 DC IMSS Private sector 1997 DC 1992 DB 2007 DC Recognition bond ISSSTE Public sector

12 Public sector pension reform Implementation went from March 2007 through December 2008 Bi-weekly meetings were held through a special committee Lead by the Ministry of Finance All sectors of the government were included Education, Social Development agencies, Health, Ministry of Interior, Telecommunications, Transport, Agriculture, Autonomous agencies, State agencies Recognition bond based on number of years worked and age Requirement to all government agencies to provide information for over 2 million people s employment history

13 Implementation details Infrastructure and data interactions Procesar was set to be the central record keeper of all data interactions with all government agencies In charge of collecting all employee history for all workers Public sector pension reform

14 Public sector pension reform Implementation details - Roadshows Roadshows to all states and government agencies to provide information about the benefits of the new pension plan Establishing interactive communication channels with all entities Transmit benefits to switching to new pension scheme FECHA ZONA SEDE ESTADOS CONVOCADOS HORARIO 03-Mar 1 Mazatlán, Sin. BC Sur, BC Norte, Sonora y Sinaloa. 10:00 hrs. 04-Mar 4 Guadalajara, Jal. Aguascalientes, Colima, Jalisco y Nayarit 10:00 hrs. 06-Mar 2 Monterrey, N.L. Coahuila, Chihuahua, Durango y Zacatecas. 10:00 hrs. 07-Mar 3 Durango, Dgo. Hidalgo, Nuevo León, Tamaulipas y Tlaxcala. 12:00 hrs. 10-Mar 5 Morelia, Mich. Guanajuato, Querétaro, Michoacán y San Luis Potosí. 10:00 hrs. 11-Mar 7 Oaxaca, Oax. Chiapas, Oaxaca, Puebla, Veracruz. 10:00 hrs. 13-Mar 8 Villahermosa, Tab. Campeche, Quintana Roo, Tabasco y Yucatán. 10:00 hrs. 14-Mar 6 Acapulco, Gro. DF, Guerrero, Querétaro, Estado de México, Morelos. 10:00 hrs.

15 Public sector pension reform Implementation details who chose? Out of 2.1 million total public sector workers Only 17% voluntarily adopted the pension scheme Recognition Bond awarded for over 216 billion pesos (16 billion US) 53 billion pesos (4 billion US) in cash equivalent (short term debt) 163 billion pesos (12 billion US) in recognition bonds 35% elected to stay in the old reformed pension scheme 48% did not elect neither the new nor the old pension scheme Law provided a ficta treatment stayed in the old reformed pension scheme Elected Recognition Bond and Individual Accounts Edad/Ant % ,615 1, , % ,550 17,909 1, , % ,403 29,063 12,987 2, , % ,362 16,975 14,715 10,527 2,463 56, % ,676 10,014 8,624 7,565 9,981 42, % ,937 5,645 5,605 4,851 9,050 29, % ,672 2,365 2,049 1,980 4,192 12, % % % Elected Old Reformed Pension Scheme 96,907 83,172 45,100 27,382 25, ,250 Edad/Ant. 278, % % 29.89% 16.21% 9.84% 9.23% , , % ,036 1, , % ,703 26,679 2, , % ,113 44,091 28,435 5, , % ,927 24,175 35,136 32,580 6, , % ,289 15,240 24,578 34,646 48, , % ,663 9,294 16,068 21,323 68, , % ,015 4,703 8,129 10,686 46,826 73, % ,402 2,019 3,483 4,575 24,248 35, % ,517 2,279 2,745 18,264 25, % 141, , , , , , , % 19.75% 18.07% 16.79% 15.63% 29.76%

16 Public sector pension reform What has happened since then with the public sector workers? 1,400,000 1,200,000 1,000, , , , , , , , , ,000 50,000 - Public Sector Individual Accounts Since 2011 Accounts with (with Matching) % of Accounts with (matching) vs Individual Accounts 25.00% 20.00% 15.00% 10.00% 5.00% 0.00%

17 Workers Brief overview of Public sector pension reform Mandatory Contributions are not enough, specially in private sector Out of 14.5 millon workers that were contributing in 2009 How many have constantly (over 60%) been contributing since 2009? Only 6.4 millon workers keep contributing regularly Bi-monthly contribution Even if Private sector workers had a contribution density of 100%, replacement rates at 6.5% contribution levels will only yield 30% replacement rate

18 How do we make 55 million people in the contribute to their individual account to increase their replacement rate Public sector pension reform Contributors Intermittent Non Contributors Voluntary Contributions or Savings Increase in replacement Rate Mandatory Contributions (6.5%) - + Greater need for Voluntary Contributions

19 Public sector pension reform Available channels to make Deposits Afore 1 Afore 2 Afore 3 Afore 4 Afore 5 Bank Branch Recurrent debit payments Electronic transfer Payroll Discount Promotes Promotes Promotes Promotes Retail Chains 6 7 Afore 6 Afore 7 Promotes 8 Afore 8 9 Afore 9 Promotes 10 Afore 10 Promotes 11 Afore 11 Promotes Each AFORE s has their own model and most of the times it requires a worker to go through complex procedures to make these deposits

20 Public sector pension reform 1 Some impressions on public sector pension reform The worker will only provide the Retail Chain s cashier : CURP (cellphone number will be also used) Type of saving (Pilar I) Deposit Amount 2 The Retail Chain will give the worker a deposit s voucher (in following stages, will also send an SMS or ) ProceSAR will centralize the operation between AFOREs and 3 Retail Chains Retail Chain

21 collection via Retail Chains Please, I want to give make me a your How $200 Voluntary My CURP pesos, CURP much would Savings please is or LOMJ750911HDFZTF01 you Sure, wish wait to a deposit second deposit, cellphone please in your Account? number

22 collection via Retail Chains Here, this is your Receipt You have received a Deposit for $200

23 collection via Retail Chains AFORE AFORE AFORE

24 Behavioural barriers to make deposits Setting up simple voluntary savings channels is the first step, we need to look at how to make people use new channels and change behavior towards savings Public sector pension reform Identifying behavioral barriers and policy The conclusions of the study pointed to new behavioral implementation policy currently being evaluated through pilots underway include New balance statement SMS reminder messages to make voluntary savings contributions Using Afore s sales force to promote voluntary savings Punch Cards

25 Public sector pension reform Take homes Implementing policy reforms Policy design must carefully consider implementation impacts in order to make sure full positive effects of policy reform are obtained Contribution defaults Private sector reform learnings provided input to encourage opt-in policy design in the public sector, however uptake on the program has been slow Opt-in mechanisms are slow to evolve to encourage additional savings Opt-out or save more tomorrow mechanisms may be better suited to encourage savings Behavioral research shows promising results: Short term focused incentives can encourage savings Better information can facilitate better informed decisions Pension Fund Administrator and Fund election Limited financial literacy implies that customers are swayed to switch not by returns but other factors play into customer decisions Once they elect an Afore most people do not chose beyond lifecycle fund defaults

26 Public Sector Pension and other Reform Experiences from Mexico ERNESTO BRODERSOHN WORLD BANK CORE COURSE ON PENSIONS PRACTITIONER S EXPERIENCE WITH PUBLIC PENSION REFORM WASHINGTON, DC MAY 2 nd, 2016