The ICARE forum “Better pensions for Chile” was held yesterday, featuring a broad look at the pension issue in Chile and worldwide, and a serious reflection on how to address the challenge of improving pensions in Chile, which we believe could be of interest to you. You can download the presentations of the different speakers at this link.

The Chilean Minister of Labor and Social Security, Nicolás Monckeberg, the head of the Private Pensions Unit of the OECD, Pablo Antolín, the economist Andrea Tokman, and the senior advisor to the Danish Financial Supervision Authority (Danish FSA), Henning Hansen, attended the meeting.

The Minister of Labor and Social Welfare, Nicolás Monckeberg, stressed that pensions are below the expectations of pensioners, and that this is mainly due to the low contribution rates and contribution densities of workers. On average, Chilean workers spend half of their working lives without contributing. In addition, only 38%, on average, contribute for more than 20 years and the average pension of this group is CLP 303,314 (approx. USD 500). This reality lends a sense of urgency to a reform of the pension system. The new Government has a fourfold proposal for improving pensions:

(i) Increase the pensions of all seniors, through a gradual increase of 4 percentage points in employers’ contributions to their workers (paid into their individual accounts). This would benefit the 5.2 million existing contributors, whose pensions would gradually increase.

(ii) Jointly and severally improve the pensions of the most vulnerable senior citizens, increasing the fiscal contribution to the Solidarity Pillar by 42%, which seeks to increase the Basic Solidarity Pension (PBS) by between 10% and 50%, and the Solidarity Pension Contribution by between 30% and 150%. This would benefit 1.4 million pensioners.

(iii) Increase the pensions of the middle class and women, through the expansion of the coverage of the solidarity pillar for older pensioners (benefiting 45,000 new pensioners) and a pension bonus for the middle class when deciding to postpone the retirement age (for men and women with more than 20 and 16 years of contributions, respectively). Furthermore, the pensions of Programmed Retirement pensioners in the Solidarity Pillar will remain constant (without reductions over time).

(iv) Strengthen competition and services, through the authorization of a freely available amount for individuals who postpone their retirement age, and new incentives for opening voluntary pension savings plans.

Pablo Antolín also pointed out that according to the OECD’s publication Pension at a Glance, with a return rate on investments of 5% (which is the rate at which the system should converge) and contributions of 10% of salary over a period of 40 years, the maximum replacement rate one could aspire to is 40%, much lower than the replacement rate of 70% that many people had in mind.

According to the expert, the erroneous conclusion that some people have put forward in the discussion in Chile, is that this entails a failure of the individually funded system and that we must therefore return to the PAYGO system, when in reality the only solution to the low replacement rate issue is to contribute more, and for longer.

Introducing a PAYGO system without increasing contributions that ensure a 60% replacement rate can only be achieved with large increases in fiscal deficits, which is financially unsustainable. Antolin also points out that given the fact that the Chilean individually funded system works well and is in accordance with the OECD’s best practices, it is not recommended to return to a PAYGO system. The package of reforms that must be implemented should be comprehensive and consider the following points:

(i) An increase in the coverage and the amount of the minimum pension.

(ii) A gradual increase in contributions from 10% to 18%, with increases tied to salary increases (auto-escalation), matching contributions from the employer or the State for middle and low incomes, and employers’ contributions.

(ii) Study mechanisms for reducing the management costs of the pension funds (such as fixed commissions and commissions link to returns or performance; a default State AFP; strengthen and improve the mechanism for bidding for members).

(iii) Improve the design of non-contributory pensions; the solidarity component must be perfectly integrated with individual accounts.

(iv) Implement a default deferred life annuity purchased on retirement, but that does not start paying until 20 years later (as of 85 years of age), in order to protect against the risk of longevity.

(v) Make it mandatory the self-employed to contribute, and if not possible, establish incentives that make these workers aware of the cost of not participating in the pension system, or announce bonuses for contributing at the outset (which disappear if contributions cease).

The expert ended his presentation by once again emphasizing that if the purpose is to improve pensions, the only possible solution is to contribute more, and for longer.

The senior advisor of the Danish Financial Supervision Authority Henning Hansen, then spoke on the benefits and challenges of the defined contribution pension system in Denmark. This pension system is considered an example, since Denmark is rated level A, with an index of almost 80 points, according to the Global Pension Index report of the Consulting Firm Mercer.

The ICARE forum “Better pensions for Chile” was held yesterday, featuring a broad look at the pension issue in Chile and worldwide, and a serious reflection on how to address the challenge of improving pensions in Chile, which we believe could be of interest to you. You can download the presentations of the different speakers at this link.

The Chilean Minister of Labor and Social Security, Nicolás Monckeberg, the head of the Private Pensions Unit of the OECD, Pablo Antolín, the economist Andrea Tokman, and the senior advisor to the Danish Financial Supervision Authority (Danish FSA), Henning Hansen, attended the meeting.

The Minister of Labor and Social Welfare, Nicolás Monckeberg, stressed that pensions are below the expectations of pensioners, and that this is mainly due to the low contribution rates and contribution densities of workers. On average, Chilean workers spend half of their working lives without contributing. In addition, only 38%, on average, contribute for more than 20 years and the average pension of this group is CLP 303,314 (approx. USD 500). This reality lends a sense of urgency to a reform of the pension system. The new Government has a fourfold proposal for improving pensions:

(i) Increase the pensions of all seniors, through a gradual increase of 4 percentage points in employers’ contributions to their workers (paid into their individual accounts). This would benefit the 5.2 million existing contributors, whose pensions would gradually increase.

(ii) Jointly and severally improve the pensions of the most vulnerable senior citizens, increasing the fiscal contribution to the Solidarity Pillar by 42%, which seeks to increase the Basic Solidarity Pension (PBS) by between 10% and 50%, and the Solidarity Pension Contribution by between 30% and 150%. This would benefit 1.4 million pensioners.

(iii) Increase the pensions of the middle class and women, through the expansion of the coverage of the solidarity pillar for older pensioners (benefiting 45,000 new pensioners) and a pension bonus for the middle class when deciding to postpone the retirement age (for men and women with more than 20 and 16 years of contributions, respectively). Furthermore, the pensions of Programmed Retirement pensioners in the Solidarity Pillar will remain constant (without reductions over time).

(iv) Strengthen competition and services, through the authorization of a freely available amount for individuals who postpone their retirement age, and new incentives for opening voluntary pension savings plans.

Pablo Antolín also pointed out that according to the OECD’s publication Pension at a Glance, with a return rate on investments of 5% (which is the rate at which the system should converge) and contributions of 10% of salary over a period of 40 years, the maximum replacement rate one could aspire to is 40%, much lower than the replacement rate of 70% that many people had in mind.

According to the expert, the erroneous conclusion that some people have put forward in the discussion in Chile, is that this entails a failure of the individually funded system and that we must therefore return to the PAYGO system, when in reality the only solution to the low replacement rate issue is to contribute more, and for longer.

Introducing a PAYGO system without increasing contributions that ensure a 60% replacement rate can only be achieved with large increases in fiscal deficits, which is financially unsustainable. Antolin also points out that given the fact that the Chilean individually funded system works well and is in accordance with the OECD’s best practices, it is not recommended to return to a PAYGO system. The package of reforms that must be implemented should be comprehensive and consider the following points:

(i) An increase in the coverage and the amount of the minimum pension.

(ii) A gradual increase in contributions from 10% to 18%, with increases tied to salary increases (auto-escalation), matching contributions from the employer or the State for middle and low incomes, and employers’ contributions.

(ii) Study mechanisms for reducing the management costs of the pension funds (such as fixed commissions and commissions link to returns or performance; a default State AFP; strengthen and improve the mechanism for bidding for members).

(iii) Improve the design of non-contributory pensions; the solidarity component must be perfectly integrated with individual accounts.

(iv) Implement a default deferred life annuity purchased on retirement, but that does not start paying until 20 years later (as of 85 years of age), in order to protect against the risk of longevity.

(v) Make it mandatory the self-employed to contribute, and if not possible, establish incentives that make these workers aware of the cost of not participating in the pension system, or announce bonuses for contributing at the outset (which disappear if contributions cease).

The expert ended his presentation by once again emphasizing that if the purpose is to improve pensions, the only possible solution is to contribute more, and for longer.

The senior advisor of the Danish Financial Supervision Authority Henning Hansen, then spoke on the benefits and challenges of the defined contribution pension system in Denmark. This pension system is considered an example, since Denmark is rated level A, with an index of almost 80 points, according to the Global Pension Index report of the Consulting Firm Mercer.