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FIAP > News > The changes approved in Peru defeat the central purpose of all pension systems
13 May, 2016

The changes approved in Peru defeat the central purpose of all pension systems

Interview with Guillermo Arthur, president of the International Federation of Pension Fund Administrators (FIAP)

Actualidad Aseguradora América Latina (A.A.A.L.). As you are aware, a ruling was recently handed down in Peru whereby members over 65 years of age could withdraw up to 95.5% of their contributions to the AFPs. What is your opinion regarding this measure, and how will it affect the sector and members ?

Guillermo Arthur.– We believe that this measure defeats the central purpose of all pension systems —whether public, private or mixed, which is to provide an adequate, stable and financially sustainable flow of income during the decumulation stage of a worker’s lifecycle.
By permitting a measure that would enable withdrawing almost all of the funds accumulated during the active stage, people will be exposed to two risks:

a) Absence of consumption smoothing during the passive stage.

b) Potential situations of poverty and social exclusion.

Pension systems seek to guarantee stable incomes – through the provision of regular payments – to smoothen the consumption profile of households and thus ensure stable well-being over time. If this situation is altered, there could be an overall deterioration of welfare in society, which could be detrimental if this policy is not reconsidered, anticipating long-term scenarios of this type.

If, on withdrawing the funds, families manage their resources irresponsibly and shortsightedly, there will be higher risks of poverty and social exclusion, forcing the state to solve this problem by means of solidarity pensions or welfare programs.
On the other hand, making a large monetary mass available to the public would lead to potential inflationary pressure in the short term, which would require reconsidering monetary policy decisions.

Finally, another issue that I must highlight is that the law of free withdrawal of private pension funds poses a risk for advancing on the path mapped out by the presidents of the countries of the Pacific Alliance, particularly with regard to the free portability of balances in individual pension savings accounts. It only takes one of the countries of the region to adopt a rule like the one approved in Peru for creating a situation that could be used to advantage by migrant workers for withdrawing funds for purposes other than financing pensions.

Regarding its effects on the sector, I must point out that this measure will affect the investment decisions of the AFPs, since they will have to incorporate assets in their portfolios that can provide a greater degree of liquidity to respond to possible mass withdrawals of funds by members.

A.A.A.L.- What long-term repercussions could this have for the AFP sector ?

Guillermo Arthur.– It will have an effect on investment criteria, in that assets that provide greater liquidity will have to be incorporated into the portfolio, as I mentioned previously. These assets usually obtain lower returns in financial markets, which could impact the behavior of the overall yields of the system. Thus, the performance of the system, and consequently the total accumulated fund at the end of the active stage of workers, could be diminished.

A.A.A.L.– Do you think that this could lead to the end of the private pension system in Peru?

Guillermo Arthur.– The private pension system will remain stable if the conditions necessary for adaptation are available. This means that the AFPs will have to adjust their management and investment policies to this new scenario. Nonetheless, what should really concern us is that the Social Security of Peruvian citizens is at risk.

We believe that Social Security necessarily entails mandatory savings —mainly due to shortsightedness in the consumption of households— and that public policy design decisions should not be influenced by populist measures. This populism leads to politics behaving in a similar fashion, in other words with certain shortsightedness, considering only the short-term effects at the expense of future well-being.

Source: https://www.inese.es

Date: 13.05.2016

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FIAP > News > The changes approved in Peru defeat the central purpose of all pension systems
13 May, 2016

The changes approved in Peru defeat the central purpose of all pension systems

Interview with Guillermo Arthur, president of the International Federation of Pension Fund Administrators (FIAP)

Actualidad Aseguradora América Latina (A.A.A.L.). As you are aware, a ruling was recently handed down in Peru whereby members over 65 years of age could withdraw up to 95.5% of their contributions to the AFPs. What is your opinion regarding this measure, and how will it affect the sector and members ?

Guillermo Arthur.– We believe that this measure defeats the central purpose of all pension systems —whether public, private or mixed, which is to provide an adequate, stable and financially sustainable flow of income during the decumulation stage of a worker’s lifecycle.
By permitting a measure that would enable withdrawing almost all of the funds accumulated during the active stage, people will be exposed to two risks:

a) Absence of consumption smoothing during the passive stage.

b) Potential situations of poverty and social exclusion.

Pension systems seek to guarantee stable incomes – through the provision of regular payments – to smoothen the consumption profile of households and thus ensure stable well-being over time. If this situation is altered, there could be an overall deterioration of welfare in society, which could be detrimental if this policy is not reconsidered, anticipating long-term scenarios of this type.

If, on withdrawing the funds, families manage their resources irresponsibly and shortsightedly, there will be higher risks of poverty and social exclusion, forcing the state to solve this problem by means of solidarity pensions or welfare programs.
On the other hand, making a large monetary mass available to the public would lead to potential inflationary pressure in the short term, which would require reconsidering monetary policy decisions.

Finally, another issue that I must highlight is that the law of free withdrawal of private pension funds poses a risk for advancing on the path mapped out by the presidents of the countries of the Pacific Alliance, particularly with regard to the free portability of balances in individual pension savings accounts. It only takes one of the countries of the region to adopt a rule like the one approved in Peru for creating a situation that could be used to advantage by migrant workers for withdrawing funds for purposes other than financing pensions.

Regarding its effects on the sector, I must point out that this measure will affect the investment decisions of the AFPs, since they will have to incorporate assets in their portfolios that can provide a greater degree of liquidity to respond to possible mass withdrawals of funds by members.

A.A.A.L.- What long-term repercussions could this have for the AFP sector ?

Guillermo Arthur.– It will have an effect on investment criteria, in that assets that provide greater liquidity will have to be incorporated into the portfolio, as I mentioned previously. These assets usually obtain lower returns in financial markets, which could impact the behavior of the overall yields of the system. Thus, the performance of the system, and consequently the total accumulated fund at the end of the active stage of workers, could be diminished.

A.A.A.L.– Do you think that this could lead to the end of the private pension system in Peru?

Guillermo Arthur.– The private pension system will remain stable if the conditions necessary for adaptation are available. This means that the AFPs will have to adjust their management and investment policies to this new scenario. Nonetheless, what should really concern us is that the Social Security of Peruvian citizens is at risk.

We believe that Social Security necessarily entails mandatory savings —mainly due to shortsightedness in the consumption of households— and that public policy design decisions should not be influenced by populist measures. This populism leads to politics behaving in a similar fashion, in other words with certain shortsightedness, considering only the short-term effects at the expense of future well-being.

Source: https://www.inese.es

Date: 13.05.2016