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FIAP > Boletín – Recientes > 2016/2017 FIAP Annual Report
8 March, 2018

2016/2017 FIAP Annual Report

The Institutional Report 2016-2017 gives an account of the activities carried out by the Federation in the period accounted from June 2016 to October 2017.

Words from the FIAP President, Guillermo Arthur

More than three decades ago, a profound social security reform process began in Latin America to replace the PAYGO systems, which had fallen into a deep crisis, with privately managed individually-funded systems strictly regulated and supervised by the State. In the last couple of years, a massive pension payment process began in Chile, a pioneering country in this process, since the system had already been in place for more than 35 years. The pension amounts paid out did not respond to the expectations of members, for different reasons that we will examine, which gave rise to a protest movement that has contaminated the debate in other countries with similar systems.

The reasons why pension amounts do not necessarily respond to the expectations of workers are clear, and widely shared by all. The life expectancy of workers on retirement has grown by 43.5% for men, and 32.2% for women, since the implementation of the system in Chile. The interest rate, whereby savings are converted into pensions, was 6% at the time the reform was implemented, and is currently slightly more than 2%. If only these two variables (life expectancy on retirement and the interest rate) had remained stable over time, pensions would have been double what they are today. Nonetheless, and despite the fact that there is clarity regarding these issues, none of the most important parameters (the contribution rate and the retirement age) have been adjusted in 35 years, and none of the countries with similar pension systems have done so either.

One must add informality to these phenomena, which in some countries is well above 60%, as well as salary increases, which often end up affecting the replacement rate, since contributors save throughout their lives, so pensions are not necessarily related to the income of the last couple of years, but rather to the average income throughout the active lives of workers.

Notwithstanding the clarity of the diagnosis and the principal solutions put forward, most of them are demagogic and short-term, disregarding the serious effects they could have on future generations. They are encouraged by the fact that the Pension Fund Managers, rather than the State, have been burdened with the responsibility for this situation, notwithstanding their success, which is evidenced in the real returns of more than 6% they have given workers in all Latin American countries, and their real contribution to the economies of countries, exceeding 7% of GDP growth. The Pension Fund Managers are certainly not responsible in any way for the factors explaining pension amounts.
A recent Mercer study concludes that Chile, Colombia and Mexico have the best and most robust pension systems in the world. Nonetheless, there are people who propose a full or partial return to the PAYGO systems as a solution to these problems, despite the fact that demographic reality makes its medium-term funding unsustainable, as clearly stated by the developed countries, which are leading the field in demographic changes.

Let us take the case of Spain, where projections indicate that the number of pensioners will equal the number of contributors by the year 2047. The increase in the dependency rate in the PAYGO systems, caused by the aforementioned demographic changes, has made their funding unviable, due to which 55 countries increased the retirement age, 76 increased the contribution rate, and 16 adjusted the benefits formula, between 1995 and 2017. Despite these parametric changes, the PAYGO systems have not been able to finance the pensions of workers, and this obligation was finally assumed by governments, seriously affecting their sustainability. This is how debt, as a percentage of GDP, reached 491% in Portugal, 364% in Italy, 900% in Greece and 255% in Spain.

Another populist solution is the reimbursement of funds, i.e. their early withdrawal, which is contrary to the essential purpose of a pension system, which is to postpone present consumption to subsequently enjoy a more relaxed old age with the accumulated savings. This situation has already been experienced in the United Kingdom, where life annuities and other pension products dropped by 80%. We can see it happening now in Peru, where a law authorizing the withdrawal of 95.5% of saved funds by workers was enacted, resulting in 95% of savings being withdrawn, and only 1% being invested in any pension product.

Finally, I believe that the events in Chile should be seen in a positive light, as a warning for driving the changes that systems require for offering better pensions to their workers. Winston Churchill said that politicians become statesmen when they start thinking about future generations, rather than the upcoming elections.

The Chilean experience should shake our passivity and give us strength to work on the changes required by the system, for which there is a technical consensus, emphasizing the fact that we cannot postpone an automatic adjustment of parameters, such as increasing the contribution rate and the age of retirement in proportion to the increase in life expectancy and actively promoting voluntary pension savings, taking as examples developed countries that have established mechanisms such as matching contributions, automatic enrollment and scaling, among others. Also increasing the long-term returns of the pension funds by investing in alternative assets, accessing new instruments in economic sectors in which the pension funds have traditionally not been present, and the prize for liquidity they have, giving them the opportunity of investing in assets that have a low correlation with traditional assets. It is also essential to stipulate that the sole purpose of the pension funds is to finance the pensions of workers, avoiding any contamination with other purposes, as we have witnessed in some countries, as well as increasing the number of pension modes. Finally, it is necessary to establish a publicly funded solidarity pillar that would enable financing the pensions of the poorest and most vulnerable sectors that have not been able to save continuously throughout their working lives.

Through ongoing seminars, round tables and technical studies organized by our Federation, we have sought to contribute to the social security debate, focusing on those aspects that seek a sustainable solution to the pension problem, well aware of the magnitude of the challenge we face.

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