In a detailed review, FIAP demonstrated how the lack of financial sustainability of the PAYGO systems has led to a reduction of benefits, while increasing the retirement age and contribution rates and incorporating individually funded mechanisms to improve depleted replacement rates.

Santiago, Chile, Tuesday April 6, 2021. A detailed review of trends in the world’s major pension systems was delivered on Tuesday by the International Federation of Pension Fund Administrators (FIAP).

Within the framework of the webinar “Worldwide trend: the lack of sustainability of the PAYGO systems drives individually funded mechanisms,” the international agency conducted a thorough review of the adjustments that PAYGO systems have made to their key parameters, from 2009 to date – such as increasing the retirement age, raising contributions and pension amounts, and incorporating the typical elements of individual funding, to make the pension systems more sustainable and raise their placement rates.

On the occasion, the changes introduced by various countries to their public PAYGO systems were examined in detail, concluding that 79 have increased the mandatory contribution rate and 62 have increased the retirement age, while pension amounts have decreased, according to the survey carried out by FIAP, reviewing trends in the last 25 years. According to the figures shown, the ongoing deterioration in pension amounts led to a significant number of OECD countries introducing individually funded components into their pension systems, resulting in the average replacement rates in countries with private savings increasing to 55%, compared to the 40% they would have had if they had not incorporated these mechanisms.

On the occasion, FIAP’s President Guillermo Arthur stressed that the figures show that today, those countries that still have PAYGO systems do so “because they could not cope with the expenditure of the transition to the individually funded system,” and instead “the first thing they resorted to was parametric changes to reduce public pension expenditure,” doing so by raising the contribution rate, increasing the retirement age or making conditions for accessing pensions stricter.” Thus, they are “breaking their promise to provide workers with a defined benefit.”

By contrast, he said that it has been observed that an increasing number of developed countries have incorporated individually funded mechanisms since 2009. “They are precisely those that rank highest in the Mercer ranking, as the most complete pension systems.”

During his presentation, FIAP’s Research Manager Manuel Tabilo, provided emblematic examples of countries that adjusted their parameters, such as Greece, Portugal, the United Kingdom, Italy, France, Spain, Russia, Brazil and Nicaragua, among others. In these countries it was found, for example, that the retirement age rose to 68 in the United Kingdom, while the contribution rate increased to levels exceeding 30% of workers’ salaries (Nicaragua, Russia). The minimum number of years of contributions have also increased markedly, rising to 40 in Greece, 43 in France, and up 53 in Nicaragua.

Tabilo explained that these statistics “evidence the fact that States have had to systematically carry out parametric reforms, providing only temporary relief and postponing the need for further adjustments. However, making ever greater changes cannot be sustainable by any reckoning.”

FIAP’s Studies analyst, Rodrigo Vidal, then explained how at least 13 OECD countries have incorporated individually funded mechanisms, given the lack of fiscal sustainability entailed in the public PAYGO systems. “This has given rise to significant levels of individual funding, representing 82% of GDP on weighted average, for the countries of the bloc.”

As Vidal explained, “these higher levels of individual funding will help shore up the depleted replacement rates that will be provided by the PAYGO systems, and the countries that have incorporated these mechanisms have had good results. This is evident when observing the Mercer index of countries, driven primarily by improvements in their financial sustainability sub-indices.”

Finally, the Chairman of the Peruvian Association of AFPs, Giovanna Prialé – invited to comment in the conference – stated that “one of the key conclusions of the study is that it demonstrates, not only figuratively, but with facts, that the introduction of individually funded systems effectively improves replacement rates, which is what pensioners will finally receive on retirement. This is a significant improvement, from 40% to 55%, i.e., a 15% increase.”

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