Longevity risks in Pension Systems viewed from the pay-out phase in Chile - Guillermo Larrain R.
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Longevity risks in Pension Systems
viewed from the pay-out phase in
Chile
Guillermo Larrain R.
Superintendente
Superintendencia de Valores y Seguros
Chile
Sao Paulo, Mayo 2008Agenda
I. Hard facts: longevity is a world wide
phenomena.
II. Consequences: longevity affects all pension
systems:
• DB/DC,
• PAYG/Capitalization,
• Closed/Open
III. Looking for solutions in the Chilean DB
payout phaseAgeing is affecting all.
Chile is ageing relatively more
Ageing, an international comparison
Life expectancy at birth (both genders)Mortality Tables for pensioners in Chile :
2004 vs 1985
Tablas de mortalidad rentistas hombres
0,70
0,60
0,50
Qx 0,40 RV2004 H
0,30 RV 85 H
0,20
0,10
0,00
50 60 70 80 90 100
Años
Tablas de mortalidad rentistas mujeres
0,70
0,60
0,50
0,40 RV2004 M
Qx
0,30 RV 85 M
0,20
0,10
0,00
50 60 70 80 90 100
AñosMortality Tables for beneficiaries in Chile:
2006 vs 1985
Tablas de mortalidad beneficiarios
hombres
0,70
0,60
0,50
0,40 B 2006 H
Qx
0,30 B 85 H
0,20
0,10
0,00
1 11 21 31 41 51 61 71 81 91 101
Años
Tablas de mortalidad beneficiarios mujeres
0,70
0,60
0,50
0,40 B 2006 M
Qx
0,30 B 85 M
0,20
0,10
0,00
1 11 21 31 41 51 61 71 81 91 101
AñosMortality Tables for disabled persons in Chile:
2006 vs 1985
Tablas de mortalidad inválidos hombres
0,70
0,60
0,50
0,40 MI 2006 H
Qx
0,30 MI 85 H
0,20
0,10
0,00
1 10 19 28 37 46 55 64 73 82 91 100 109
Años
Tablas de mortalidad inválidos mujeres
0,80
0,70
0,60
0,50
MI 2006 M
Qx 0,40
0,30 MI 85 M
0,20
0,10
0,00
1 11 21 31 41 51 61 71 81 91 101
AñosLife expectancy at each age in Chile:
a gender issue appears
Esperanza de vida según tabla de mortalidad
Pensioners
Edad Male
Rentistas hombres Female
Rentistas Mujeres
RV-85 RV-2004 Diferencia RV-85 RV-2004 Diferencia
45 32,71 35,17 2,46 37,79 42,48 4,69
50 28,36 30,71 2,35 33,16 37,67 4,51
60 20,29 22,12 1,83 24,32 28,38 4,06
65 16,65 18,16 1,51 20,21 24,04 3,83
70 13,34 14,56 1,22 16,36 19,83 3,47
Esperanza de vida según tabla de mortalidad
Beneficiaries
Edad Male
Beneficiarios Hombres FemaleMujeres
Beneficiarios
B-85 B-2006 Diferencia B-85 B-2006 Diferencia
45 30,28 35,31 5,03 35,55 40,82 5,27
50 26,07 30,83 4,76 31,01 36,13 5,12
60 18,41 22,21 3,80 22,44 27,12 4,68
65 15,04 18,24 3,20 18,52 22,88 4,36
70 12,05 14,61 2,56 14,9 18,87 3,97
Esperanza de vida según tabla de mortalidad
Disabled
Edad Male
Inválidos Hombres FemaleMujeres
Inválidos
MI-85 MI-2006 Diferencia MI-85 MI-2006 Diferencia
45 23,79 25,04 1,25 29,25 31,83 2,58
50 21,18 21,97 0,79 26 28,51 2,51
60 15,97 16,72 0,75 19,52 21,84 2,32
65 13,43 14,3 0,87 16,34 18,48 2,14
70 10,96 11,88 0,92 13,22 15,15 1,93Conclusions: Women on top
Increase in life expectancy at age
6
Beneficiaries
5
Pensioners
4
Female
3
2
Disabled
Age group (increasing)
1
45°
0
0 1 2 3 4 5 6
MalePreliminary conclusions
• Ageing is universal
• It is more acute in countries like Chile
• It may have more impact in rich countries
because they had developed more generous
PAYG pension systems
• Two broad conclusions:
– Retirement age is critical in view of ageing
populations
– Women appear to outpace men's ageing. Huge
gender issue with vast implications (social, political,
economic, etc…)Agenda
I. Hard facts: longevity is a world wide
phenomena.
II. Consequences: longevity affects all pension
systems:
• DB/DC,
• PAYG/Capitalization,
• Closed/Open
III. Looking for solutions in the Chilean DB
payout phaseImpact on Pay-as-you-go pension systems
Dependency ratios
100% 45
90% 40 Increasing
80% Overall 35 dependency ratios
70%
30 require:
60%
25 • Increasing state
50%
20 financing (to be
40%
0-14 years 15 financed by taxes or
30%
20% Old age (% pop, right axis) 10 reducing other
10% 5 expenditures)
0% 0 • Increasing personal
contributions
1950
1960
1970
1980
1990
2000
2005
2010
2015
2020
2025
2030
2035
2040
2045
2050
Source: SVS, based on INE
Ageing progresses without clear bound and birth rates stall, hence
The previous process is unbound: enormous fiscal pressure whose
political economy is complex (tendency to delay decisions evident)Impact on Capitalization pension systems
Pensions are diminished (for any size of personal savings, it is necessary
to finance more years of survival): the buffer becomes people´s pensions
instead of public finances… or so it seems at first glance
Interphase
Phase I : accumulation Phase II : Payout
Retirement Lifetime
age
This is a system. As such, the outcome depends on all of its partsImpact on Capitalization pension systems
Net savings Personal contributions (size, frequency,
Pension = starting age)
Life expectancy
Employers contributions (matching)
at retirement
State contributions (incentives)
Retirement age Financial returns in accumulation phase
Financial returns in payout phase
Costs
Operational during accumulation phase
Transactional in the interphase of
acc/payout
Operational during payout phase
The ongoing pension reform in Chile took care of all of this
elements plus a critical redefinition of the zero-first pillarEstimated effects of ageing on
programmed withdrawals in Chile (DC)
Trayectoria de la pensión en Retiro Programado (fuente: SAFP)
Líneas verticales expectativas de vida: --- RV85 y RV 2004Consequences for Life Insurance Companies
(annuity providers, DB)
Spreads are reduced inducing LICs to look for ways of
compensation
Potential increase in investment risks
Incentive to reduce operational costs:
potential market concentration
Increase in capital and reserve requirements to face increased
pension obligations
Increased competition may induced “commercial war” with
unintended consequences on undesired practicesAgenda
I. Hard facts: longevity is a world wide
phenomena.
II. Consequences: longevity affects all pension
systems:
• DB/DC,
• PAYG/Capitalization,
• Closed/Open
III. Looking for more solutions in the Chilean DB
payout phase1. Promote voluntary savings:
Individual (APV)
Individual Voluntary Savings
600.000 4.500
Scheme (APV)
4.000
• Tax incentive (suitable 500.000
therefore only for Number of accounts 3.500
income tax payers: 400.000 3.000
upper middle class)
Balances 2.500
• More financial 300.000
2.000
institutions allowed
• Attractive liquidity 200.000 1.500
feature : unless 1.000
mandatory savings, 100.000
500
APV can be consumed
before retirement. - -
Sepl-02
Sepl-03
Sepl-04
Sepl-05
Sepl-06
Sepl-07
Ju 2
Ju 3
Ju 4
Ju 5
Ju 6
Ju 7
Ma -02
No -02
Ene -02
Ma -03
Ma -03
No -03
Ene -03
Ma -04
Ma -04
No -04
Ene -04
Ma -05
Ma -05
No -05
Ene -05
Ma -06
Ma -06
No -06
Ene -06
Ma -07
Ma -07
No -07
7
y -0
y -0
y -0
y -0
y -0
y -0
v -0
• Taxes are paid when
v
v
v
v
v
r
r
r
r
r
r
Ma
consumption takes
Número de cuentas Saldo acumulado (MMUS$)
place2. Promote voluntary savings:
Collective (APVC)
Colective Voluntary Savings Scheme (APVC, just introduced)
• Tax incentive with liquidity feature as in APV
• Financial institutions allowed as in APV
New features
• Matching contribution from employer, tax deductible
• All APVC plans offered to employees are open to them: no
discrimination permitted
• Worker has rights over her savings and earns the right over the
matching contribution after some time. Possible use as an
incentive device to promote permanence in the firm (hence,
training, productivity…)
• Minimum number of workers within the firm must adhere to any
savings plan to make the firm eligible for tax benefit: this
grants access to lower middle classes3. Tougher conditions for early retirement
Tougher conditions for early retirement and use of excedent of free
disposal.
Early retirement.
• Before 2004: resulting pension should be 110% of minimum pension and
greater than the 50% of the last 10 years income.
• After 2004: same criteria but new parameters 150% of minimum pension
and 70% of last 10 years income..
Excedent of free disposal.
• Antes de 2004: Igual que retiro de ELD
• Ley Año 2004: Igual que retiro de ELD
Gradually increase in legal retirement age,
still a possibility for the future4. The challenge of the interphase:
The SCOMP system
Diminish asymmetries of information, promote healthier
competition reducing fees charged : the SCOMP system
Objective: promote a clear and comparable market for annuities and
other retirement products
Electronic market for Life Insurance Companies, Pension Fund
Administrators, Brokers
Blind quotation mechanism: each LIC compete for providing the best
possible annuity to an unknown client
Client can iterate (even organizing an auction among providers) or
postpone decision (except in case of auction)
Joint supervision: SVS - SAFP
Started 19 de agosto de 2004.4. The challenge of the interphase:
The SCOMP system
3. Diminish asymmetries of information, promote healthier
competition reducing fees charged : the SCOMP system
7,00%
%
%
91
%
58
6,00%
45
5,
5,
5,
%
%
84
5,00%
67
%
%
5,
89
4,
33
3,
%
5,
62
%
4,00%
66
3,
%
4,
68
2,
%
%
3,00%
%
%
40
16
13
47
3,
2,
%
2,
3,
67
%
2,00%
2,
47
%
%
2,
19
13
2,
2,
1,00%
0,00%
08
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
F e 007
20
19
19
19
19
19
19
19
19
19
20
20
20
20
20
20
20
2
b4. Working of the SCOMP
7 Certificado de Ofertas
Remate 9
Certificado
Inicio Electrónico SCOMP
Trámite 1 Saldo 2
Montos RP, 2
2 Bono, Proyección
Certificado Saldo
Consultante AFP
origen Solicitud de Ofertas
+
3 Solicitud Ofertas
de Ofertas Certificado de Saldo
6
Oferta Externa de RV 5
8
CSVn
AFP o CSV o AFPn
Corredor RV o
Asesor Previsional
Formulario Solicitud de Ofertas 44. Working of the SCOMP
SISTEMA
AFP
Envío Antecedentes del
potencial pensionado
Recepción Ofertas de
Montos de Pensiones
CIAS. SEGUROS
Certificado de Ofertas de
Montos de Pensiones
AFP
Compañía de Seguros
Corredor, Asesor Previsional
Solicita Oferta
TRABAJADOR
POTENCIAL PENSIONADO5. New Investment Regime for
Life Insurance Companies
Better risk-adjusted returns on assets
• More flexible approach focused on financial and
operational risks. It should allow investments on more
variable income instruments looking for a better risk-
return profile
• Hedging instruments desirable
• Critical good governance of LICs
• Risk based capital requirements6. Potential new pension products :
Differed Annuity
Differed Annuity.
• It allows to fix the terms of an annuity during the
working life period. This annuity, coupled with other
pension products will consist in the final pension.
• It transfers longevity risk to the insurer
• It allows future pensioners to take advantage of good
market conditions for buying annuities. It requires
significant financial advise.7. Potential new pension products :
Bonds indexed to relevant inflation
Inflation protection
• In Chile annuities are indexed to inflation measured by
the Consumer Price Index
• Consumption bundle of retired persons eventually
coincide with the average worker (relevant for CPI
purposes) but it gradually moves significanly away from it
as the person gets older
• The older the person, less relevant is CPI as relevant
measure of inflation
• Challenge:
• Create a Pensioner Price Index
• Design a market for instruments linked to this:
government, private companies (health institutions,…)
including derivatives or outright subsidies8. Potential new pension products
Longevity Bonds
A longevity bond promises a yearly payment indexed to a mortality index
which replicated the behavior of the pensioners
Pago del Bono
(CLP bn)
10
8
6
4
2
-
1 3 5 7 9 11 13 15 17 19 21 23 etc Años8. Potential new pension products
Longevity Bonds
• LICs would obtain an instrument to hedge against longevity risk.
Indexation could consider size of payments or maturity of the
instrument
• Hedge is adequate, even though not perfect as it relies on
average mortality, not LIC specific
• Issuer
• Must have interest in exposing itself to this kind of risk
• Derivative market desirable
• Transfer longevity risk to a reinsurer.
• Calculation of official mortality tables critical: Which entity will do
it? Public or private? How frequent?Longevity risks in Pension Systems
viewed from the pay-out phase in
Chile
Guillermo Larrain R.
Superintendente
Superintendencia de Valores y Seguros
Chile
Sao Paulo, Mayo 2008You can also read
