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 2008
Agenda
I.
Hard facts: longevity is a world wide
phenomena.
II.
Consequences: longevity affects all pension
systems:
•
•
•
III.
DB/DC,
PAYG/Capitalization,
Closed/Open
Looking for solutions in the Chilean DB
payout phase
Ageing 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
RV2004 H
RV 85 H
0,40
0,30
0,20
0,10
0,00
50
60
70
80
90
100
Años
Tablas de mortalidad rentistas mujeres
0,70
0,60
0,50
Qx
RV2004 M
RV 85 M
0,40
0,30
0,20
0,10
0,00
50
60
70
80
Años
90
100
Mortality Tables for beneficiaries in Chile:
2006 vs 1985
Tablas de mortalidad beneficiarios
hombres
0,70
0,60
0,50
Qx
B 2006 H
B 85 H
0,40
0,30
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
Qx
0,40
B 2006 M
B 85 M
0,30
0,20
0,10
0,00
1
11
21
31
41
51
61
Años
71
81
91
101
Mortality Tables for disabled persons in Chile:
2006 vs 1985
Tablas de mortalidad inválidos hombres
0,70
0,60
0,50
Qx
MI 2006 H
MI 85 H
0,40
0,30
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
Qx
MI 2006 M
MI 85 M
0,40
0,30
0,20
0,10
0,00
1
11
21
31
41
51
61
Años
71
81
91
101
Life expectancy at each age in Chile:
a gender issue appears
Esperanza de vida según tabla de mortalidad
Pensioners
Male
Rentistas
hombres
Edad
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
Male
Beneficiarios
Hombres
Edad
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
Male
Inválidos
Hombres
Edad
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
1,93
Conclusions: Women on top
Increase in life expectancy at age
6
Beneficiaries
5
Pensioners
Female
4
3
2
Disabled
Age group (increasing)
1
45°
0
0
1
2
3
Male
4
5
6
Preliminary 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:
•
•
•
III.
DB/DC,
PAYG/Capitalization,
Closed/Open
Looking for solutions in the Chilean DB
payout phase
Impact on Pay-as-you-go pension systems
Dependency ratios
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
45
40
Overall
35
30
25
20
0-14 years
(% pop, right axis)
Old age
15
10
5
2050
2045
2040
2035
2030
2025
2020
2015
2010
2005
Source: SVS, based on INE
2000
1990
1980
1970
1960
1950
0
Increasing
dependency ratios
require:
• Increasing state
financing (to be
financed by taxes or
reducing other
expenditures)
• Increasing personal
contributions
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
age
Lifetime
This is a system. As such, the outcome depends on all of its parts
Impact on Capitalization pension systems
Net savings
Pension =
Life expectancy
at retirement
Personal contributions (size, frequency,
starting age)
Employers contributions (matching)
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 pillar
Estimated 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 2004
Consequences 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 practices
Agenda
I.
Hard facts: longevity is a world wide
phenomena.
II.
Consequences: longevity affects all pension
systems:
•
•
•
III.
DB/DC,
PAYG/Capitalization,
Closed/Open
Looking for more solutions in the Chilean DB
payout phase
1. Promote voluntary savings:
Individual (APV)
Individual Voluntary Savings
600.000
Scheme (APV)
•
•
•
Tax incentive (suitable
therefore only for
income tax payers:
upper middle class)
4.000
500.000
3.500
Number of accounts
400.000
3.000
Balances
More financial
institutions allowed
300.000
Attractive liquidity
feature : unless
mandatory savings,
APV can be consumed
before retirement.
200.000
Taxes are paid when
consumption takes
place
2.500
2.000
1.500
1.000
100.000
500
-
-
Ma
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Ma -02
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v -0
7
•
4.500
Número de cuentas
Saldo acumulado (MMUS$)
2. 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 classes
3. 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 future
4. 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
5,
91
%
2,
13
%
1,00%
2,
19
%
2,
13
%
2,
68
%
2,
47
%
2,
67
%
2,00%
2,
16
%
3,
89
%
5,
84
%
3,
47
%
3,00%
3,
40
%
4,00%
4,
66
%
3,
62
%
5,00%
5,
33
%
4,
67
%
6,00%
5,
45
%
5,
58
%
7,00%
2
F e 007
b
20
08
06
20
05
20
04
20
03
20
02
20
01
20
00
20
99
19
98
19
97
19
96
19
95
19
94
19
93
19
92
19
19
91
0,00%
4. Working of the SCOMP
7
9
Remate
Inicio
Trámite
2
Certificado
Electrónico
Saldo
1
SCOMP
2
Montos RP,
Bono, Proyección
2
Certificado Saldo
Consultante
3
Certificado de Ofertas
Solicitud
de Ofertas
AFP
origen
Solicitud de Ofertas
+
Certificado de Saldo
Ofertas
6
5
Oferta Externa de RV
8
CSVn
AFP o CSV o
Corredor RV o
Asesor Previsional
AFPn
Formulario Solicitud de Ofertas
4
4. 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 PENSIONADO
5. 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 riskreturn profile
• Hedging instruments desirable
• Critical good governance of LICs
• Risk based capital requirements
6. 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 subsidies
8. 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 Años
8. 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 2008