Diapositiva 1

1
Regulatory and supervisory principles in pension
markets The AIOS view
Guillermo Larrain Rios Chairman, Superintendency
of Pension Funds of Chile President of
AIOS Kiev, May, 2004
2
Agenda

• A different sort of industry
• A different sort of costumer
• Foundations of good supervision (www.aiosfp.org)
• Information dissemination
• Investment management
• Final remarks

3
A different sort of industry

• In Latin America, the pension fund industry
  belongs in a critical way to the social security
  system.
• Savings are henceforth, mandatory.
• People have very different levels of financial
  education (and education at large in developing
  economies)
• Huge asymmetries of information
• There are state guarantees (in many countries)
• Moral hazard and adverse selection issues
• Managers manage third-parties-savings and
  own-resources
• Conflicts of interest

Huge menu of good economic reasons for which
mandatory pension funds need to be regulated,
more than in the case of other financial
industries.
4
A different sort of costumer

• Mandatory savings, compete with other, more
  urgent needs (liquidity constraints). Partially,
  this varies with age.
• Natural difficulty in assessing lifetime risks
  implies the inability to foresee future needs of
  income in old age
• contribution seems like a tax rather than savings
• peculiar demand curve
• Inelastic to prices and
• Inelastic to rates of return, but
• Elastic to anything that advance consumption
• This is not a tale Evidence from Chile

5
A sample from Chilean costumers
Index of Knowledge
An index of systems knowledge improves with age
and education
Age
Fuente HLSS
Tech.
Univ.
Primary
Second.
Educational level
6
In Chile, life expectancy increases too late
Expectativa de vida según tablas de 1985
The same people that realizes too late that their
life expectancy increases, ask for earlier legal
retirement age a somewhat inconsistent claim
with that of higher pensions.
7
Foundations of good supervision information
Principles Standard information should seek an
objective election of managers in order to
improve competition.

• Information from managers must be true, clear and
  timely
• Information on accounts must be available at all
  times
• Supervisory agency should periodically give
  information about the system, including the
  managers.
• Publicity must not induce errors, must be
  objective, timely, transparent and comparable

8
Information we start from the bottom
Distribution of knowledge index
Right answers
9
Information we start from the bottom
Usefulness of the financial statement
Do you receive it?
Do you read it?
Do you understand it?
Do you use it?
Yes
10
Promover esquemas que permitan la mayor
incorporación de afiliados y cotizantes al
sistema.
Alcance de los regímenes Aportantes / PEA
11
Foundations of good supervision investments
Objective Efficient investment allocation and
risk managment

• The supervisory agency must
• Have a basic structure that minimizes operational
  risk
• Certificate the competence of fund managers
• Look for a regulation that promotes efficient
  portfolios
• Seek adequate valuations of all assets

Basic trade-off regulate because its mandatory
vis-à-vis deregulate to improve competition. Its
an art.
12
Principles on investments

• Investment management
• Transactions must be made in authorized markets,
  with adequate supervision, control and public
  information
• Investments should be made on investment-grade
  issuers
• (mmm funds are big, have systemic effects,
• we may be losing something)
• Instruments must be deposited in specialized
  custodians
• The manager must excell in corporate governance

13
Principles on investments
Portfolio of Pension Funds in Latin
AmericaDecember, 2003
14
Final remarks

• Objetivo último el afiliado.

• Deben fomentar la competencia, la no
  discriminación y el desarrollo de la industria.
• Deben promover la disponibilidad de información
  para que el afiliado tome decisiones.
• Deben inducir a la gestión de riesgos por parte
  de los administradores.
• Deben incentivar la autoregulación.
• Deben aplicarse de forma consistente y uniforme.
• Deben fomentar las prácticas de gobierno
  corporativo.
• Adopción por convencimiento y no por imposición.

15
Regulatory and supervisory principles in pension
markets The AIOS view
Guillermo Larrain Rios Chairman, Superintendency
of Pension Funds of Chile President of
AIOS Kiev, May, 2004