TOPICS. About Chile Chilean Mixed Pension System: Three Pillars. Performance Challenges

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2 TOPICS About Chile Chilean Mixed Pension System: Three Pillars. Performance Challenges

3 ABOUT CHILE

4 ABOUT CHILE Market-oriented economy High level Foreign Trade Macro Stability: Fiscal Balance Rule and Independent Central Bank One of the best evaluated emerging economies. May 2010, the first South American country to join the OECD. Population (2014) GDP at market prices (current US$) 17.7 million US$ billion -Per capita (PPP, 2014) US$ Last 10 years of real growth averaged GDP 5% per year Poverty rate 40.1% (1990) 9.9%(2013) Unemployment rate (% work force) 6.4% (2014) Inflation 4.3% (2015) Sources: date base World Bank, Data base Bank of Chile, Ministry of Social Development, Casen survey 2013, CEP.

5 THE CHILEAN PENSION SISTEM

6 PENSION SYSTEM DATA (March, 2016) N Affiliates : 10 Million Labor Force: 8,6 Million N Contributors 5.7 Million N Pensioners : 1.1 Million (1.3 Million PAYG system) 3 Types of pension: Old age 66% / Disability 11% / Survival 23% Average pension: US $ 301 Average taxable income : US $ 1019

7 MIXED PENSION SYSTEM 3 PILLARS Non-Contributory Redistributive 0,7% GDP Mandatory Defined Contribution Individual Accounts Voluntary Tax Incentives Individual Accounts a)basic Solidarity Pension b)solidarity Pension Complement - Total Public spending in Pension 3,2% of GDP - OECD Average:7.9% of GDP Private Pension Fund Manager Single purpose Monthly contribution rate 12,44%: -10% individual account (employee) -1,29% Average Commission (employee) -1,15% Insurance (employer) Open other fund managers million accounts (USD 7,837 million)

8 AFFILIATES CAN CHOOSE

9 PERFORMANCE

10 TOTAL ACCUMULATED IN THE PENSION FUNDS (March 2016, 70% GDP) US$163 BILLION

11 PENSION FUNDS ARE WELL DIVERSIFIED Investment in Chile 9.4% Equity 48% Fixed Income Investment out of Chile 27.5% Equity 15.1% Fixed Income

12 FUNDS HAVE YIELDED VERY GOOD % Nominal (8.3% Real) 2002-May % Nominal (5% Real)

13 PERFORMANCE TOP 3 ( ) 7.4%7.4% 6.5% 5.8%5.7%5.6%5.5% 5.3% Pension fund real 5-year geometric average Annual returns in selected OECD countries 4.6% 4.1% 3.8% 3.3% 2.9%2.8%2.8%2.7%2.6%2.5% 2.3% 2.2%2.2%2.1%2.1% 1.1% 0.2% -0.3%-0.3% Source: Pension Markets in Focus, OECD 2014

14 ADMINISTRATIVE FEES UNDER WORLD AVERAGE World average 0.89% Chile 0.65% in 2012 Chile 0.57% In 2015 Source: OECD Global Pension Statistics.

15 CHILE LEADS THE REGION IN PENSION AND EIGHT GLOBALLY Mercer Global Pension Index 82%81%80% 74%74% 62.8% 84.8% 73% 70% 69% Adequacy Integrity 65% 63% 62%61% 57% 56%56% 53%53% 52%52%51%48%48% 65% Sustainabilit y 44%44% 40% Melbourne Mercer Global Pension Index, October 2015

16 CHALLENGES

17 REPUTATIONAL ISSUE PEOPLE DISAPPROVE THE SYSTEM 88% AFP only care about making money and ignore the affiliate. 86% I contribute more than I will get back as pension. 68.2% AFP only benefit people with high salaries. 55.7% My pension will be lower or much lower than my last salary Source: Adimark survey, May 2016, Pension system image 2015 Affiliates and not affiliates.

18 REPUTATIONAL ISSUE LOW UNDERSTANDING KEY FACTOR 85% don t know % of Salary Contribution. 33% don t know in which fund (risk) their savings are. 80% ignore how pensions are calculated. 40% don t know account balance. Ignorance is the origin of gap in expectations

19 PENSION ISSUE PENSION GAP EXPECTED vs REAL Ambitioned Rep. Rate 70%-100%* Projected Rep. Rate 55% (75% density) 38% (50% density) Source: *Cadem Survey 2013; Salvador Valdés, Comisión de Pensiones evaluación del informe, 2015.

20 PENSION ISSUE INCREASED LIFE EXPECTANCY 32% more time ( 22 to 29) 46% more time ( 13 to 19)

21 PENSION ISSUE CONTRIBUTION BREAKS AVERAGE 45% 10 million affiliates Only 5,7 million contribute each month

22 PENSION ISSUE EVASION AND ELUSION Elusion Private Sector 10% Public Sector 18% Contribution Evasion:19% 13% no contract and 6% do not pay contributions

23 PENSION ISSUE LATER ENTRY TO WORKING LIFE Since 1981 average age rises from 20 to 24 years old DROP IN PENSION 20%

24 PENSION ISSUE ANNUITIES INTEREST RATE DROP OF Withdraw payment Annuity

25 OUR PROPOSALS

26 1. INCREASE CONTRIBUTIONS TO 14% -15% Tasas Composition de Cotización of a los the Programas contribution de Pensiones rates in OECD en Países countries de la OCDE With gradualness and charge the employer Reduce evasion and elusion (1) Tasa de Cotización al Pilar 1 y 2 del Sistema de Pensiones. El Pilar 1 incluye los esquemas obligatorios administrados por el sector público: 1) Regímenes de beneficio definido (DB); 2) Esquemas nocionales de contribución definida (NDC); y 3) Programas administrados por entidades públicas de contribución definida (FF). El pilar 2 incluye los esquemas obligatorios de pensiones administrados por el sector privado, ya sea fully funded o de beneficios definidos (DB). (2) Fuente: International Patterns of. Pension Provision II. A Worldwide Overview of Facts and Figures. Montserrat Pallares-Miralles, Carolina Romero y Edward Whitehouse. Worl Bank. June Para Chile la fuente es PrimAmérica Consultores. Enero 2013 Source: International Patterns of. Pension Provision II. A Worlwide Overview of Facts and Figures. Montserrat Pallares-Millares, Carolina Romera y Edward Whitehouse. World Bank. June, Para Chile la fuente es PrimAmérica Consultores. January 2013.

27 2. INCREASE RETIREMENT AGE Especially women

28 3.ENHACE NON-CONTRIBUTORY PILLAR Chile Public Spending In pension 3.2% of GDP *0,7% 1 Pillar OCDE average Public Spending in pension 7.9% of GDP Source: Chile Dirección de Presupuesto, 2015; Pension at a Glance, 2015

29 4.VOLUNTARY SAVINGS INCENTIVES AND EDUCATION Education is the key to increasing voluntary savings

30 CONCLUSIONS

31 CONCLUSIONS Despite excellent performance and strengths two main problems: Pension Gap Expected vs Real Pension Disapproval System Challenges: Increase Pensions: -Political will reforms technical consensus (3 pillars) -Risk populism and shortcuts Increase Approval and knowledge -Long term effort: Adjust expectation/contributions -Education, transparency, closeness

32 THANKS