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FIAP > Featured Content > FIAP Study – Chilean experience shows the need for creating a Technical Body for updating the Parameters of the Pension System

FIAP Study – Chilean experience shows the need for creating a Technical Body for updating the Parameters of the Pension System

8 November, 2016

The monthly pension of Chilean men has dropped from US$ 1,148 at the outset of the system, to  US$ 561 today, solely due to the effect of greater life expectancy and the interest rates used for calculating pensions.  Similarly, the replacement rate compared to the last salary, dropped from 105.5% a 51.6% in the same period.

This is revealed in a study conducted by the International Federation of Pension Fund Administrators, (FIAP).  The effects of the solidarity pillar, the bonus per child-born-live, and voluntary contributions, were not included.  The assumptions considered were a real annual return of 5%, a real annual salary growth of 1.5%, an initial monthly taxable income of US$ 785, and a replacement rate calculated as the average gross salary of the last ten years.  A contribution density of 80% was also assumed.

According to the report, the increase in life expectancy has made it necessary for pensions to cover an average time span of 43% more for men, and 32% more for women, than what was calculated at the outset of the model.  Moreover, the interest rate for calculating pensions has dropped from 6% to 2.69% since the 80s.

Applied to the analysis, this translates into a drop of 51% in men’s pensions and 46% in women’s pensions over the 35 years that the system has been in place. “The figures are meaningful and show that the pension amounts that the Chilean individually funded system can provide have dropped to almost half of what it could provide at the outset, solely due to the change in the studied variables,” says the report.

Although it highlights the good replacement rates that the system could provide at the outset, considering that the simulation was performed with real returns of 5%, considerably lower than the 11.9% and 13.3% achieved in the 80s and 90s, it acknowledges that “pension amounts and replacement rates drop substantially in the following periods.”

According to FIAP, approximately 58% of the drop in men’s pensions is explained by greater life expectancy, and the other 42% by the lower interest rate used for calculating pensions.  For women, on the other hand, the reduction in the interest rate for calculating pensions weighs more than the change in the mortality tables.

Gender gaps

The agency also highlights the difference in pension amounts between men and women as “significant,” especially considering that both family groups comprise one man and one woman.  It therefore sustains that the gap is not due solely to differences in life expectancy, but rather to the different retirement age of the originator of the pension.

To demonstrate this, women’s pensions were recalculated, changing only the retirement age.  The result was that, with current parameters, women who retire at age 65 receive pensions almost 50% higher than the same women who retire at age 60, achieving almost 90% of the pension amounts of men, and surpassing the 60% received by women who retire at age 60.

Adjustments

According to FIAP, the study makes it clear that the necessary adjustments were not performed in a timely manner, and adds that “parametric adjustments may not always be politically viable, due to which they were constantly postponed.”  Along these lines, the study proposes the creation of an independent technical body, similar to the Technical Investments Council, for assessing and proposing changes in the variables that influence pensions.  Given the existing interest rates and life expectancy, the agency believes that it would have sufficed to raise the contribution rate for men to 20.5%, and for women to 18.4%, to have maintained the system’s initial pension amounts.

Source: www.pulso.cl

Date: 20.10.2016

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FIAP > Featured Content > FIAP Study – Chilean experience shows the need for creating a Technical Body for updating the Parameters of the Pension System
8 November, 2016

FIAP Study – Chilean experience shows the need for creating a Technical Body for updating the Parameters of the Pension System

The monthly pension of Chilean men has dropped from US$ 1,148 at the outset of the system, to  US$ 561 today, solely due to the effect of greater life expectancy and the interest rates used for calculating pensions.  Similarly, the replacement rate compared to the last salary, dropped from 105.5% a 51.6% in the same period.

This is revealed in a study conducted by the International Federation of Pension Fund Administrators, (FIAP).  The effects of the solidarity pillar, the bonus per child-born-live, and voluntary contributions, were not included.  The assumptions considered were a real annual return of 5%, a real annual salary growth of 1.5%, an initial monthly taxable income of US$ 785, and a replacement rate calculated as the average gross salary of the last ten years.  A contribution density of 80% was also assumed.

According to the report, the increase in life expectancy has made it necessary for pensions to cover an average time span of 43% more for men, and 32% more for women, than what was calculated at the outset of the model.  Moreover, the interest rate for calculating pensions has dropped from 6% to 2.69% since the 80s.

Applied to the analysis, this translates into a drop of 51% in men’s pensions and 46% in women’s pensions over the 35 years that the system has been in place. “The figures are meaningful and show that the pension amounts that the Chilean individually funded system can provide have dropped to almost half of what it could provide at the outset, solely due to the change in the studied variables,” says the report.

Although it highlights the good replacement rates that the system could provide at the outset, considering that the simulation was performed with real returns of 5%, considerably lower than the 11.9% and 13.3% achieved in the 80s and 90s, it acknowledges that “pension amounts and replacement rates drop substantially in the following periods.”

According to FIAP, approximately 58% of the drop in men’s pensions is explained by greater life expectancy, and the other 42% by the lower interest rate used for calculating pensions.  For women, on the other hand, the reduction in the interest rate for calculating pensions weighs more than the change in the mortality tables.

Gender gaps

The agency also highlights the difference in pension amounts between men and women as “significant,” especially considering that both family groups comprise one man and one woman.  It therefore sustains that the gap is not due solely to differences in life expectancy, but rather to the different retirement age of the originator of the pension.

To demonstrate this, women’s pensions were recalculated, changing only the retirement age.  The result was that, with current parameters, women who retire at age 65 receive pensions almost 50% higher than the same women who retire at age 60, achieving almost 90% of the pension amounts of men, and surpassing the 60% received by women who retire at age 60.

Adjustments

According to FIAP, the study makes it clear that the necessary adjustments were not performed in a timely manner, and adds that “parametric adjustments may not always be politically viable, due to which they were constantly postponed.”  Along these lines, the study proposes the creation of an independent technical body, similar to the Technical Investments Council, for assessing and proposing changes in the variables that influence pensions.  Given the existing interest rates and life expectancy, the agency believes that it would have sufficed to raise the contribution rate for men to 20.5%, and for women to 18.4%, to have maintained the system’s initial pension amounts.

Source: www.pulso.cl

Date: 20.10.2016

FIAP > Featured Content > FIAP Study – Chilean experience shows the need for creating a Technical Body for updating the Parameters of the Pension System
8 November, 2016

FIAP Study – Chilean experience shows the need for creating a Technical Body for updating the Parameters of the Pension System

The monthly pension of Chilean men has dropped from US$ 1,148 at the outset of the system, to  US$ 561 today, solely due to the effect of greater life expectancy and the interest rates used for calculating pensions.  Similarly, the replacement rate compared to the last salary, dropped from 105.5% a 51.6% in the same period.

This is revealed in a study conducted by the International Federation of Pension Fund Administrators, (FIAP).  The effects of the solidarity pillar, the bonus per child-born-live, and voluntary contributions, were not included.  The assumptions considered were a real annual return of 5%, a real annual salary growth of 1.5%, an initial monthly taxable income of US$ 785, and a replacement rate calculated as the average gross salary of the last ten years.  A contribution density of 80% was also assumed.

According to the report, the increase in life expectancy has made it necessary for pensions to cover an average time span of 43% more for men, and 32% more for women, than what was calculated at the outset of the model.  Moreover, the interest rate for calculating pensions has dropped from 6% to 2.69% since the 80s.

Applied to the analysis, this translates into a drop of 51% in men’s pensions and 46% in women’s pensions over the 35 years that the system has been in place. “The figures are meaningful and show that the pension amounts that the Chilean individually funded system can provide have dropped to almost half of what it could provide at the outset, solely due to the change in the studied variables,” says the report.

Although it highlights the good replacement rates that the system could provide at the outset, considering that the simulation was performed with real returns of 5%, considerably lower than the 11.9% and 13.3% achieved in the 80s and 90s, it acknowledges that “pension amounts and replacement rates drop substantially in the following periods.”

According to FIAP, approximately 58% of the drop in men’s pensions is explained by greater life expectancy, and the other 42% by the lower interest rate used for calculating pensions.  For women, on the other hand, the reduction in the interest rate for calculating pensions weighs more than the change in the mortality tables.

Gender gaps

The agency also highlights the difference in pension amounts between men and women as “significant,” especially considering that both family groups comprise one man and one woman.  It therefore sustains that the gap is not due solely to differences in life expectancy, but rather to the different retirement age of the originator of the pension.

To demonstrate this, women’s pensions were recalculated, changing only the retirement age.  The result was that, with current parameters, women who retire at age 65 receive pensions almost 50% higher than the same women who retire at age 60, achieving almost 90% of the pension amounts of men, and surpassing the 60% received by women who retire at age 60.

Adjustments

According to FIAP, the study makes it clear that the necessary adjustments were not performed in a timely manner, and adds that “parametric adjustments may not always be politically viable, due to which they were constantly postponed.”  Along these lines, the study proposes the creation of an independent technical body, similar to the Technical Investments Council, for assessing and proposing changes in the variables that influence pensions.  Given the existing interest rates and life expectancy, the agency believes that it would have sufficed to raise the contribution rate for men to 20.5%, and for women to 18.4%, to have maintained the system’s initial pension amounts.

Source: www.pulso.cl

Date: 20.10.2016