Pension Plans:Key Factors for

Success:

Lic. Recaredo AriasSecretary GeneralFIDES

Índex• Context

▫Pension Plans Current Situation▫Pension Products

• Key Factors for Success▫Market size▫Marketing schemes▫Additional benefits and services▫Regulation▫ Investment regulations▫Mortality tables▫Operational processes▫Sector statistics

▫Problems, Limitations and Proposed Solutions

2

Context

Pension Plans Current Situation

4

Life Expectancy at Birth

5

Source: ONU

Life Expectancy at Birth

6

Source: OECD

Longevity Risk (Spain)

7

Source: BBVA

Pension Plans Current Situation

8

Pension Plan Reforms

9

Pension Plans Current Situation

10

Pension Plans Current Situation

11

Monthly Taxable Income

12

LATIN AMERICA 2007 2006 2005 2004 2003ARGENTINA 675 566 460 430 360BOLIVIA 546 520 480 440 440COLOMBIA n.d n.d n.d n.d 196COSTA RICA 5,837 7,411 7,503 4,193 4,056CHILE 793 682 670 610 529EL SALVADOR 474 303 304 298 313MEXICO 583 578 558 469 450PERU n.d n.d 828 808 n.dDOMINICAN REPUBLIC n.d n.d n.d n.d n.dURUGUAY n.d n.d n.d n.d n.dEUROPE & ASIA 2007 2006 2005 2004 2003BULGARIA 360 261 204   KAZAKHSTAN n.d n.d n.d n.d n.dPOLAND n.d 851 730 766 n.d

Dollars in current terms

Source: FIAP

Retirement Products

13

Lump Sum

14

Countries where full lump sum payment is allowed

15

As the only retirement benefit:•Hong Kong•India•Tailandia•Filipinas

As an alternative:•Australia•Belgium

•China•Czech Republic

•Greece•Hungary

•Indonesia•Japan

•Malaysia•New Zealand•South Africa

•Spain•Turkey

•USA

Phased Withdrawals

16

Calculation examples for Phased Withdrawals

17

Life Annuities

18

Countries with mandatory annuitization

19

•Austria•Bolivia•Colombia•Croatia•Hungary•Netherlands•Norway•Poland•Sweden•Uruguay

Mandatory annuitization in the event of early

retirement•Argentina•Chile•El Salvador•Perú

Product comparison

20

Protect against

Flexibility / Liquidity

Longevity Risk

Investment Risk

Bequest

Lump Sum      

Phased Withdrawals

     

Life Annuities

     

Retirement payments over time

21

Retirement products

22

RECOMMENDATIONS:

Key Factors for Success

Market size estimation

24

Retirement products’ market

25

Accelerated increase in annuitization rate due to:

Population over 65 years (in %)

26

Latin America Europ

e

Source: CIA – The World Factbook, 2008 est.

Market for Life Annuities in Chile

27

Source: OECD

Affiliates to the Pension Fund Management System

28

LATIN AMERICA Sep. 2008ARGENTINA 9,513,134BOLIVIA 1,143,559COLOMBIA 8,403,715COSTA RICA 1,720,116CHILE 8,308,264EL SALVADOR 1,772,276MEXICO 38,987,711PANAMA 347,689PERU 4,259,889DOMINICAN REPUBLIC 1,795,791URUGUAY 822,663EUROPE AND ASIA Sep. 2008BULGARIA 2,986,177RUSSIAN FEDERATION -KAZAKHSTAN 9,486,211POLAND 13,740,047ROMANIA 4,362,878FIAP Mandatory Systems 107,650,120

Source: FIAP

Affiliates vs. Total Population

29

Source: FIAP –ONU (World Factbook) - FIDES

Contributors vs. Affiliates

30

Source: FIAP – CIA (World Factbook) - FIDES

Commercialization scheme

31

Commercialization schemes

32

Examples

Retirement Pensions

33

Number of Old Age Pensions

34

LATIN AMERICA 2007 2006 2005 2004 2003

ARGENTINA 245,895 142,702 98,346 76,487 55,711

BOLIVIA 13,320 8,722 4,950 1,313 n.d.

COLOMBIA 4,836 3,652 3,234 2,861 2,198

COSTA RICA n.d n.d n.d n.d n.d.

CHILE 179,146 163,223 148,096 134,207 118,839

EL SALVADOR n.d n.d n.d n.d 1,388

MEXICO 255,279 251,394 259,358 251,588 241,076

PERU 14,252 13,776 11,143 9,677 n.d.

URUGUAY 717 566 420 342 240

Phased Withdrawals and Life Annuities

Source: FIAP

% of retirees vs. contributors

35

Source: FIAP –ONU (World Factbook) - FIDES

Additional benefits and services

36

Investment and Capital Regulations

37

Investment rates of return

38

The differential margin of rates of return, used to cover operational expenses, special funds and profits decreased form 3.24% in 2000 to 0.16% in December 2006.

Source: Banco de México

Investment and Capital Regulations

39

Managed Funds

40

LATIN AMERICA Sep. 2008ARGENTINA 30,171BOLIVIA 3,641COLOMBIA 25,870COSTA RICA 1,592CHILE 92,329EL SALVADOR 4,473MEXICO 81,534PANAMA 562PERU 17,975DOMINICAN REPUBLIC 1,253URUGUAY 3,739EUROPE AND ASIA Sep. 2008BULGARIA 1,327KAZAKHSTAN 11,549POLAND 59,180ROMANIA 192FIAP Mandatory Systems 335,387

In millions of US Dlls

Source: FIAP

Managed Funds vs. GNP41

53

2320

17 1715 14 13 12

9 8

3 3 20

CHILE

BOLIVIA

EL S

ALVA

DOR

URUG

AY

PERÚ

COLO

MBIA

POLO

NIA

KAZA

JSTÁ

N

ARGE

NTIN

A

MÉX

ICO

COST

A RICA

PANAM

Á

BULG

ARIA

REP.

DOM

INIC

ANA

RUMAN

IA

SOURCE.- FIDES WITH DATA FROM WORLD ECONOMIC FORUM 2008 – WORLD BANK 2009 – SWISS RE 2008

28 118 79 75 83 74 53 66 88 60 59 58 76 98 68

GLOBAL COMPETITIVITY

RANK INDEX 2008

42

Mortality Tables

Mortality tables – Active employees

43

Margins due to improvements are being reduced.

Mortality tables - Disability

44

The tendency observed is due in great measure to criteria changes on behalf of the Social Security in disability rulings as of the second semester of 2002.

Operational Processes

45

Operational Processes

46

Statistics

47

Public Social Security System Regulation

48

Regulation

49

To be able to face it, it is compulsory to direct actions towards

Promoting and mantainig a solid Insurance Market

that can satisfy the future needs of

the Consumer and the Insurance Business

• EFFICIENT

• FAIR

• SAFE

• STABLE

• TRUST WORTHY

•COVERAGE

•PROTECTION

• INNOVATION

• CAPACITY OF ATTRACTING AND RETAINING FUNDS

SOURCE: G-20; PRINCIPLES FOR PROMOTING SOUND INSURANCE MARKETS (AMIS ADAPTATION)

Challenges for Pension Regulators

50

Share a wide vision on the viability of the Pension Plan market

Principles to promote a sound insurance market:

Source: AMIS, with support from G20 arguments

Strategical View of the Judicial Frame

51

52

Critical aspects needed for the correct functioning of a supervising and regulatory regime:

Strategical View of the Judicial Frame

Source: AMIS, with support from G20 arguments

Market

Credit

Casualty

Life

Health

Financial

Insurance

Operational

Company

Concerning Economic Capital, the distribution of the varying types of individual risks are combined to determine the capital requirements, in order to constitute the sufficient Economic Capital for the company.

Source: Emphasis 2009/1 Towers Perrin

Determination of Solvency Capital

53

Risk Management: Economic Capital

Supported by:

Precautions:

54

Sectorial Situation Analysis• Collaboration between international

organisms• Historically economically solvent

sector• Intensive use of intellectual

resources• Replicable experiences at an

international level, within a continual process stationed in different stages according to the maturity level of each market

• Increasing conscience of a corporative government

• In the majority of markets, low rate of annuitization

• International trend towards risk based supervision

• More knowledgeable, demanding and sensible consumer

• Lack of long term investment instruments

• Limited technical statistics• Limited sistemic exchange of

information• Distorted public image• Duality of perceptions for outsiders• Lack of uniformity within statutory

regulations• Absence of a risk management

culture

• Crisis that may boost stricter regulations

• Other intermediaries’ regulations forced upon the insurance sector

• Financial convergence• Competition against other

intermediaries• Identity loss• Uneven distribution of income and

wealth• Possible reversion of pensions

derived from social security• Loss of capital attractivity

55

Strengths Opportunities

Weaknesses Threats

¡Thank you!

Regulation for Reserve Investment

57

Contributors

58

LATINOAMERICA 2007 2006 2005 2004 2003

ARGENTINA 4,391,847 4,563,768 4,283,242 3,541,146 3,331,437

BOLIVIA 624,681 473,861 411,925 732,936 435,507

COLOMBIA 3,596,565 3,059,661 2,458,094 2,240,698 2,538,688

CHILE 4,329,412 3,956,992 3,784,141 3,571,864 3,618,995

EL SALVADOR 566,693 538,370 505,637 489,328 497,303

MEXICO 14,503,855 13,929,389 13,263,788 12,751,029 12,577,265

PERU 1,651,191 1,412,001 1,318,135 1,313,878 1,295,222

DOMINICAN REPUBLIC 853,526 755,436 601,554 552,512 689,071

URUGUAY 452,601 415,016 381,619 346,240 335,316