Edition date

December , 2000

Headline

Costa Rica's new system takes time to bed down

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Costa Rica’s partial pension privatisation is now proceeding reasonably smoothly as providers pick up clients for a compulsory complementary pension introduced this year, but the process has taken longer than planned.
"The affiliation process has been much more difficult that we expected" said Jose Manuel Arias, general manager of Banex Pensions, one of the new providers. "I do not think any OPC [complementary pension provider] expected a process so prolonged and expensive. We imagined it would take three months to sign up 800,000 people and it has been six months and only 520,000 are affiliated."
Of those which have signed up 62 per cent have chosen OPCs run by public sector banks, and Mr Arias warned against expecting a rapid embrace of the private sector. "The Costa Rican mentality remains very statist," he said. "It will take many years before the people stop believing in state action."
Around 800,000 workers, more than half the workforce, were obliged by a law passed in February to take up a personal pension in addition to the state pay-as-you-go scheme.
The Workers’ Protection Law was introduced after studies showed that the Costa Rican Social Security Savings Scheme, which provides pensions, would require huge state bail-outs by 2010 as baby boomers born after the country’s civil war in 1948 reached pensionable age.
"The government acted now to prevent problems in the future," said Mr Arias. The time leeway has allowed Costa Rica to proceed more cautiously than some other Latin American countries, such as Chile and El Salvador.
Private pensions were introduced on a voluntary basis in 1997. Under the pay-as-you-go system workers pay 2.5 per cent of their salaries and their employers 4.75 per cent. The new system requires workers who earn more than $300 a month to pay an additional 4.25% of their salary to a second pillar pension. This will pay out 25 per cent of their final salary after 25 years of contributions, or earlier in the case of serious accident. It will top up the state pension, which pays out 55 per cent of final salary to the lowest wage earners, 40 per cent to those earning $300-$600 a month and just 25 per cent to those earning above that.
The second pillar has been tied to reform of unemployment benefit. Previously the state paid 8.3 per cent of a worker’s salary for each year of service up to eight years if he or she was fired. That has been reduced to 5.3 per cent. The state will pay the remaining 3 per cent to the pension funds. Half goes into the complementary personal pension and half into a separate account to be used in the event of unemployment. The worker can withdraw the money from that fund every five years if they remain employed.
OPCs must have at least $817,000 in paid-up capital. They are restricted to domestic investments of investment grade and up to 90 per cent of their portfolio can be government debt. This ceiling has been reached because there are few alternative investment instruments within Costa Rica. Many companies are unlisted and rely on banks for long-term financing . Almost all stock market business is short-term raising of capital.
The nine OPCs had a total of 123,545 clients in April 2000 according to the latest figures published by the pensions superintendency. That was a rise of more than 150 per cent on the year before. They had $35.9m under management. The superintendency expects this to rise to $200m a year once all workers are signed up.
Commission charges are high, ranging from 8 to 10 per cent, and real net returns vary between 7 and 8 per cent. The largest provider is the state-run Banco Nacional, which has 45,900 clients and $17.7m invested. Analysts believe that eight financial groups is too many and that some will merge with time.
Mr Arias said the law would encourage a culture of savings and forward planning by workers but lower-paid workers would have to take out voluntary plans too if they wanted a pension they could live on. "It is dangerous to believe that the measures will solve the problem of lower income that pensioners experience," he said.
The other part of the worker’s protection law sets up a fourth pillar for those over 65 who are in poverty. Profits from the state lottery and fines for breaches of the labour code should raise the 3bn colon ($10m) annual cost. Any shortfall will come from the national budget.
Congress is considering a law that would remove the state guarantee of client’s funds should a private pension provider encounter difficulties. Its supporters argue that a year has been sufficient to test the system. Helio Fallas, an analyst, said it was too early to judge the impact of the law. While some believe it will create new dynamism in the domestic capital markets and lower interest rates, others fear small and medium-sized companies may miss out through not having the means to tap the markets.

Headline

Venezuela still debating new system

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THOSE awaiting Venezuela's long-delayed pension fund law will have to wait some more. The Presidential Commission for Social Security Reform, appointed in August, was unable to meet its November 10 deadline for coming up with draught pension fund legislation, and received a 60-day extension to finish its job.
President Hugo Chavez had wanted the National Assembly to adopt a pension fund law by year-end. In early November, the Assembly gave Mr Chavez special fast-track powers for a year in order to push through 37 laws, including social security reform and pension funds, without parliamentary debate.
Sources close to the commission say members are still divided over which pension fund model to adopt. They are torn between an individual capitalisation system in which workers would choose to pay into either state or private funds, which would likely result in private funds taking the lead, or one in which workers would be required to pay into a collective capitalisation fund run by the state. Private funds, in that case, would remain optional, and likely limited to high salary earners.
The internal conflict intensified on October 23 when the actuary contracted to carry out necessary studies that would help commission members to take a decision, abruptly resigned after a month on the job. Irene Madriz stated in a letter that government statistics were in complete disarray and that she had received no collaboration from state functionaries in doing her job. Thus, sources said, the commission has been left almost in limbo.
Mr Chavez has repeatedly voiced support for a collective capitalisation model, based on the Uruguayan system. But sources said that Finance Ministry technocrats on the commission are opposing that model since it proves financially onerous, and are staunchly backing a Chilean model of private funds.
"The president does not have sufficient information about the Uruguayan pension fund model, which is the most expensive in the region, and stipulates that the worker contribute 27.5% of his monthly salary, of which approximately 20% goes to the collective pool," says Norma De Duenas, president of the Pension Fund Association, who is not a commission member.
Ms De Duenas said her organisation had presented a proposal that calls for contributions of 14.5% of the worker's salary, of which 9-10% would be paid into his own account, and the rest into a "Solidarity Fund," which would cover pensions for the indigent.
But left-leaning commission members say that in view of Venezuela's high poverty rate of 80% of its 24 million population, and the fact that 52% of the workforce falls into the informal sector, only a collective pool scheme would be able to afford the majority of pensioners a decent retirement benefit.
Opponents note that such a system, much like the one currently in place, has not worked and is prone to corruption. An individually capitalised system would ensure transparency as each worker would know how much he has in his account, while the poor, who do not pay into the system, would rely on the state which would receive a smaller portion of each worker's contributions.
Observers say that since the President is backing the collective capitalisation concept, that is the one likely to predominate in the end.