Pension Funds Workshop The Pension System in Chile

Claudia MaistoStatistics Division

Macroeconomics Statistics AreaInstitutional National Accounts Department

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Outline

1. Framework

2. Main characteristics of the pension system.

3. Pension system in the Chilean National Accounts

Defined contribution

Pay as you go

4. 2008 SNA Recommendations.

1. Framework

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The pension system in Chile is supported by three pillar.

Chilean Multi-pillar Pension System

Pension System

Contributive pillar

Solidarity pillar

Voluntary pillar

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There are three important facts throughout the pension system.

1981

The creation of pension funds (DC).

2002 2008

The adoption of multi-funds scheme.

2008 Pension Reform

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In December 2012, the pension funds represented 61,1% of the GDP.

Figure 1. Contributors as a percentage of working population

(December 2012)

63.3%

0.9%

35.9%

contributors PAYG No contributors

Source: INE, Pension Superintendence.

The contributors to the Pension funds account for 63,3% of the working population.

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The pension funds have diversified their investment flows depending on the economic cycle.

Figure 2. Investment of pension funds by assets

Source: Central Bank of Chile.

2. Main characteristics of the pension system

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When we talk about the contributive When we talk about the contributive pillar, we are talking about the pillar, we are talking about the pension pension fund fund mainly.mainly.

The main characteristics of the scheme are: It is a defined-contribution scheme. It is compulsory for all employed workers. Working contributions are saved in individual accounts (10% of salary). Pension fund administration institutions (AFPs) are responsible for managing the funds, with separate assets. Workers are free to choose their administrator and type of funds.

Insurance contract to protect workers in case of disability or death(monthly payments). Pension funds constitute households’ wealth.

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There are two modes of pensions for retirement: Programmed withdrawals and Immediate Life Annuity.

Programmed Withdrawals Immediate Life Annuity

Institution AFP Life Insurance Company

Pension Annual updatingMonthly fixed pension inadjustable unit.

DurationPension decrease year byyear.

The value is fixed.

Ownership of the funds

Contributor keepsownership of the funds.

Contributor doesn't keepownership of the funds.

Mode changeContributor may changeAFP.

Contributor may not changeLife Insurance Company.

CharacteristicsMode of pension

3. Pension system in the Chilean National Accounts

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According to the recommendations of the 1993 SNA:

The pension scheme in Chile is comparable to a private social security scheme, based on special funds, which are managed by autonomous pension fund managers...

Social Security Transactions

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Pension Funds in the Chilean National Accounts: Method and source.

The pension funds are regarded as a “Conceptual Agents”

Financial Intermediary

Integrated approach

The transactions and balance sheets are compiles in a single process.

Pension funds integrated accounts are compiles based on Financial statements

These reports allow to obtain the current and financial account and the balance sheets.

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Pension Funds in the Chilean National

Accounts: Current accounts.

Pension Funds

Uses Resources

Property income earnedD41,D42

Property income allocated to holders of insurance policies and pension funds (D44: D41+D42)

Households

Uses Resources

Property income earned (Financial investment) D41 and D42

Financial Institutions

Uses Resources

Property income earnedD41, D42

Balance=0

A. Allocation of primary income account:

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Pension Funds in the Chilean National Accounts: Current accounts.

Pension Funds

Uses Resources

Social contributions

D61

Social benefits62

Households

Uses Resources

B. Secondary distribution of income account:

Social benefits

D62

Social contributions

D61DI

Assuming the pension scheme in Chile is comparable to a private social security scheme, we are representing the effect of this transaction in the household’s disposable income.

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Pension Funds in the Chilean National Accounts: Current accounts.

Pension Funds

Uses Resources

Adjustment for the Change in Net Equity of Households in Pension Funds (D8)

Households

Uses Resources

C. Use of income account:

Saving

In order to not affect household’s savings, we record the item “Adjustment for the Change in Net Equity of Households in Pension Funds”.

As a result, in the case of pension funds, the saving and the Net lending(+)/Net borrowing(-) are equal to zero.

Adjustment for the Change in Net Equity of Households in Pension Funds (D8)

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Pension Funds in the Chilean National Accounts: Balance sheet and financial account.

D. The Balance sheet of pension funds:

Financial Account

Opening Balance Sheetfor financial

assets and liabilities

The other changes

Closing Balance Sheet for financial

assets and liabilities

Pension Funds

Changes in assets Changes in liabilities

Net equity of households in pension funds reserves

Financial Investment

In the case of financial accounts of pension funds, there is an equality between changes in assets and in liability, so the Net lending(+)/Net borrowing(-) is equal to zero.

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Pay as you go System and fiscal commitments.

Contributive pillar (It is funded by The State)

• Transition generation remains in previous PAYG system (phasing out).

• People who belong armed forces.

• The payments to the workers who opted-out to the new scheme.

• Fiscal Commitments related with the solidarity pensions.

Solidarity pillar (It is funded by The State)

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Those transactions are recorded in the secondary distribution of income accounts.

Central goverments

Uses Resources

SocialcontributionsD61

Social Benefits D62

Households

A. Secondary distribution of income account:

Uses Resources

Social Contributions D61

Social Benefits D62

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Concerning the assets and liabilities of the Central government related with the pension system.

Liabilities: The debt that the State keeps with workers -who chose the new scheme- is imputed in the liability of Central Government.

Assets:In the context of solidarity pillar, the pension reserve fund was created for ensuring the payments of solidarity pension. The assets in the portfolio are recorded in the balance sheet and in the financial account of the General government.

4. 2008 SNA recommendations

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Currently, the national accounts of Chile for pension funds complies almost fully with the recommendations presented in the 2008 SNA. For the rest of the recommendations, they could be considered in 2013 benchmark compilation (expected publication 2016).

According to our pension system and based of the descriptions in paragraph 17.128 (2008 SNA), the Chilean scheme would be classified as a Employment-related pension schemes other than social security and as a defined contribution, as well.

2008 SNA Recommendations

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Main classification differences are related to: Classification of supplementary contributions. Bonds Indexation and its treatment in financial flows and

property income calculation. This treatment is currently under evaluation.

2008 SNA Recommendations

Concerning the supplementary table: Under a DC scheme the pension entitlements are part of

the national accounts. In the case of the pension entitlements of the old scheme, this would be included in this table, to the extent that the public sector publishes the information.

Pension Funds Workshop The Pension System in Chile

Claudia MaistoStatistics Division

Macroeconomics Statistics AreaInstitutional National Accounts Department