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Guillermo Arthur E. Chairman Association of Pension Fund Administrator Companies

CHILEAN PRIVATE PENSION FUND SYSTEM . Guillermo Arthur E. Chairman Association of Pension Fund Administrator Companies . CHILEAN PRIVATE PENSION SYSTEM. AGENDA: Former Chilean Pension System Current Pension System Main Features Results Achieved during last 18 years

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Guillermo Arthur E. Chairman Association of Pension Fund Administrator Companies

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  1. CHILEAN PRIVATE PENSION FUND SYSTEM Guillermo Arthur E. Chairman Association of Pension Fund Administrator Companies

  2. CHILEAN PRIVATE PENSION SYSTEM • AGENDA: • Former Chilean Pension System • Current Pension System • MainFeatures • Results Achieved during last 18 years • Future Challenges

  3. FORMER PENSION SYSTEM MAIN FEATURES • BASED ON DISTRIBUTION (Pay as you go) • PENSIONS WERE PAID OUT WITH THE WORKER’S OWN CONTRIBUTIONS ( ALMOST NO SAVINGS EXISTED ) • RIGIDNESS IN AFFILIATIONS • ACCORDING TO THE NATURE OF THE WORK • ADMINISTRATION • 32 EQUALIZATION (Private Pension) FUNDS (MOSTLY STATE-OWNED) AND 52 DIFFERENT SYSTEMS • MEMBER CONTRIBUTIONS • VARIABLE, ACCORDING TO EACH SAVINGS INSTITUTION (IN SOME CASES CONTRIBUTIONS EXCEEDED 50% OF THE MEMBER’S SALARY) • DISCRIMINATORY BENEFITS • DIIFERENT AND VARING REQUIREMENTS; NON-ADJUSTABLE PENSION

  4. FORMER PENSION SYSTEM MAIN FEATURES (CONTINUED) • RETIREMENT REQUIREMENTS 65 YEARS WORKERS PRIVATE EMPLOYEES CIVIL SERVANTS BANK EMPLOYEES CONGRESSMEN 35 YEARS OF WORK 30 YEARS OF WORK 24 YEARS OF WORK 15 YEARS OF WORK

  5. FORMER PENSION SYSTEM FINANCIAL CRISIS - CAUSES: • DROP IN RATIO( OF CONTRIBUTING WORKERS / PENSIONERS) DUE TO: • DEMOGRAPHIC EFFECTS • GRANTING OF BENEFITS WITHOUT FINANCING • HIGH EVASIONDUE TO: • MINIMAL RELATIONSHIP BETWEEN CONTRIBUTIONS & BENEFITS • HIGH CONTRIBUTION RATES • LOW PENSIONS • INAPPROPRIATE CONTROL SYSTEMS • ADMINISTRATIVE INEFFICIENCY • DIFFERENT LAWS FOR EACH EQUALIZATION FUND AND PENSION SYSTEM

  6. FORMER PENSION SYSTEMDROP IN RATIO OF CONTRIBUTORS / PENSIONERS NUMBER OF ACTIVE WORKERS PER EACH PENSIONER 12,2 2,5

  7. RADICAL CHANGE LAUNCHING THE PRIVATE PENSION FUND SYSTEM

  8. AFP SYSTEM CHARACTERISTICS • INDIVIDUAL CAPITALIZATION OR SAVINGS • PRIVATE ADMINISTRATION • INDIVIDUAL FREEDOM TO: • CHOOSE AND SWITCH AFP • DETERMINE HOW MUCH TO CONTRIBUTE (OVER THE MINIMUM) • DECIDE WHEN AND HOW TO RETIRE • CHOOSE KIND OF FUND • EQUALITY: COMMON RULES FOR ALL • EQUITY SEPARATION BETWEEN: • THE AFP AND THE PENSION FUND

  9. CURRENT PENSION SYSTEM ROLE OF THE STATE Dura LEX Est LEX • Provides Regulatory Framework and Control • To issue Laws and Regulations • To control the System though the AFP Superintendence • Subsidizes (as the last resort) • Minimum Pensions • Bankruptcy of Insurance Companies • Minimum Profitability of Pension Funds

  10. CURRENT PRIVATE PENSION SYSTEM BENEFITS PENSIONS: • RETIREMENT:65 YEARS FOR MEN AND 60 YEARS FOR WOMEN. • EARLY RETIREMENT : > 110% MINIMUM PENSION > 50% INFLATION-ADJUSTED INCOME OF LAST 10 YEARS • DISABILITY TOTAL: 70% OF INCOME (> 2/3 LOSS OF WORK ABILITY) PARTIAL: 50% OF INCOME (> 50% and < 2/3 LOSS OF WORK ABILITY) • SURVIVAL:Widowhood and Orphanhood

  11. EVOLUTION OF CURRENT PENSION SYSTEM REGULATIONS • MAIN LEGAL & ADMINISTRATIVE CHANGES: • 1983: Introduction of Early Retirement Plans for Old Age. • 1985: AFP administrator companies are allowed to invest in publicly-traded open stock companies, and the CCR Risk Classification Commission is thus created. • 1987: The Voluntary Savings Account is introduced. • 1990: AFP administrator companies are allowed to invest in equity shares of foreign investment funds (i.e. real estate, securities and corporate development) as well as in fixed-income securities. Also, the Partial Disability pension is established. • 1993: Domestic Employee Indemnification Accounts are introduced and their management assigned to AFP’s.

  12. EVOLUTION OF CURRENT PENSION SYSTEM REGULATIONS (cont’d) • Main Legal & Administrative Changes • 1994: AFP’s are allowed to invest in Foreign Corporate Bonds, Foreign Variable-Income Securities and to participate in Risk Hedging Operations. Conflicts of interest are also regulated. Additionally, the scope of business activities eligible for AFP administrator company operations is expanded, thus allowing them to do business in foreign social security activities. • 1999: A Second Pension Fund is created for AFP management. This is a fixed-income fund oriented to workers who are coming close to retirement age. Also, the minimum profitability measuring mechanism is improved. And, the foreign investment ceiling is raised to 20%.

  13. CURRENT PENSION SYSTEM RESULTS

  14. EVOLUTION OF AFFILIATES(In Thousands) *December

  15. WORKER COST COMPARISON( Percentage of Contribution over Taxable Income )

  16. Total Monthly Commission of the Pension System for an Average Affiliate(Disability and Survival Insurance Included) ( December of each year, as % of the Imposable Income) As at February, 2000, the Monthly Cost of the Pension System will show a real drop of 49%as compared to December, 1983. *February

  17. NUMBER OF PENSIONS PAID OUT BY THE AFP SYSTEM ( As of December 1999) NUMBER Retirement Age 80.968 Early Retirement Age 117.559 Total Disability 22.827 Partial Disability 2.284 Widowhood 46.312 Orphanhood 47.676 Other 4.608 TOTAL 322.234

  18. EARLY RETIREMENT(As of December 1999) Average Early Retirement Age Men : 56,3 years Women : 54,1 years Total : 55,9 years Source: SAFP

  19. EVOLUTION OF THE PENSION FUNDS(IN US $ MILLION - AS OF DECEMBER OF EACH YEAR) As of December 1999 Pension Funds represented 56% of GDP Fuente: SAFP *February 2000

  20. Pension Fund Investments (As a % of Pension Funds as of February 29, 2000)

  21. REAL ANUAL PROFITABILITY OF PENSION FUNDS ( Deflacted by U.F ) ( *1) Average Accrued Profitability July 81 - December 99 11,2% 4% Year 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 (*1) December

  22. FUTURE CHALLENGES • INVESTMENTS • To allow affiliate members the freedom to choose from a variety of multiple fund options (with minimum restrictions) • To eliminate the short-term bias in Pension Fund investments • To eliminate Minimum Profitability and Reserve Requirements • To allow affiliate members to choose their Pension Fund of their own convenience • To allow greater flexibility in maximum investment limits • To abolish geographical limitations • To boost AFP participation in open stock companies

  23. FUTURE CHALLENGES • CONTINUE TO DROP HANDLING COMMISSIONS COMMERCIAL AREA • To improve Transfer Operation Mechanisms • To have greater freedom in commission charges • To have uniform and across-the-board discounts for effective permanence in the System • To expand the AFPs line of business to include other social security services. (> productive competitiveness) EFFICIENCY • To install electronic contribution collection mechanisms (Internet) • To introduce safe keeping of Recognition Bonds • To enable a Centralized Contribution Collection System • To Centralize an electronic support of the affiliate’s social security file

  24. FUTURE CHALLENGES (cont’d) • IMPROVED SYSTEM BENEFITS • Marketing of Annuity Pensions • Programmed Retirements • Uniform requirements for Early Retirement Pensions and the • Withdrawal of Freely Disposable Surpluses • Equaling the requirements for Men’s and Women’s survival pensions • New Pension Modality (Lifetime Monthly Pension) • INCREASED COVERAGE • Incorporating more Independent Workers • SOCIAL SECURITY CULTURE

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