All options are on the table in the debate about pension systems in Latin America, according to analysts. With elections looming in many countries, governments are discovering that their pension schemes are insufficient to cover the population's retirement needs. In Chile, which has the most mature system in the region, only 55% of the workforce are covered, and payouts have been much lower than anticipated.
"The pension system is number one on the agenda of governments again," says Truman Packard, senior economist in the World Bank's Latin America and Caribbean office. "After 20 years, the coverage of the systems is so low that people are asking: what have we accomplished?"
Since the 1980s, as governments sought ways to ease the pensions burden, 12 countries including the Andean region, have overhauled their pension systems, making private cover mandatory for employees within the formal economy (though civil servants and the security forces, for example, are excluded in some countries for political reasons). The problem is how to extend coverage to the self-employed and those working in the black economy, who are not covered by the state.
On average, only 50% of the overall workforce have entered private schemes in these countries, though in some the participation rate is much lower. In the Andean region (excluding Chile) it is especially low. In Peru, for example, the figure is 11%, and in Bolivia only 10% - partly because these countries have big informal economies.
Different choices
People who are not formally employed and are therefore not forced to join the private system are opting for other provisions. Instead of giving money to a bank, many prefer to invest in property or education. "If the system promoted by the government is perceived as costly or risky, people might turn away," says Packard.
Packard, in fact, argues that this choice is the big reason behind the low participation in private schemes, rather than because the formal economies are so small. "These are competing systems – will I choose to pay money into a bank account or invest in my own house and kids?" he says.
Governments are looking at measures to make private schemes more attractive. "In Chile, there is a big debate about how to extend participation to the self-employed. The government is trying to introduce some sort of incentive," says Alejandro Mico, research economist at the IDB. One idea is for the government to keep companies' tax rebates and to channel them into a pension fund.
Tailoring the systems to fit more closely with the reality of the labour market is another concern. "If you look at women's work patterns, you see that they enter and leave the workforce frequently," says Mico. "They contribute irregularly and lose the right to benefits at the end of their working life." Addressing such imbalances will become a central issue in Colombia, Peru and Bolivia.
Another issue is the cost of putting money into funds. Foreign institutions such as Banco Santander, Banco Bilbao Vizcaya Argentaria (BBVA) and Citigroup often undertake the administration of these funds. While these banks can reap good returns, they are criticized for charging high fees, which can take up to 10% of a customer's contribution. "It is very difficult to introduce competition into these private pension schemes, because participation on behalf of the clients is mandatory," says Mico. "The affiliates don't pay enough attention to their coverage and don't shop around."
But Francisco Murillo, fund manager at Santander Santiago, disagrees. "About 12% of clients change their pension fund each year [in Chile]," he says. The pension industry is one of scale, which favours big players, and this is one of the reasons why there are so few funds. "And compared to the administrative costs of mutual funds and managed assets in the US, which stand at 13%, Chilean pension funds are cheap. They cost the client only 6%."
Misconceptions
Murillo agrees that there is a problem with customers' perception of the funds, because many people assume the monthly deduction from their wages is a tax. "People do not understand that they are building up their own money. This was obvious in Argentina, where the debt restructuring destroyed people's private pension funds and nobody said anything. The population just wasn't aware that it was their money which was lost."
Murillo hopes to see greater diversification of investment, away from government securities, and a relaxation of the restrictions to invest abroad. "For a small country like Chile, the restriction should be at 70%; at the moment it's 30%," he says.
Yet the future remains uncertain, partly because the full picture of the reformed systems will not be measurable for another two decades. "I don't think there will be a full reversal to the old systems, which were very elitist and unsustainable," says Packard. "But many people thought that the reformed systems enjoyed greater political support than they actually do."