Comparison of Target Rates of Return in Latin American Mandatory Pension Systems for the Period 1997-2016

Denise Gómez-Hernández,Felipe Pérez-Sosa

doi:10.13189/ujaf.2017.050403

Abstract

The aim of this work is to analyze which is the required average real return that Latin American workers need to obtain from their retirement funds, in order to get a reasonable pension at retirement, according to each system parameters; and to discuss if those required returns are feasible in the current economical context, or if any changes in the pensions designs are necessary. The results are that from the eight countries under analysis (Chile, Colombia, Costa Rica, Dominican Republic, El Salvador, Mexico, Peru and Uruguay), three do not reach a replacement rate of 70% or more (Dominican Republic, Mexico and Peru). Hence, in order to increase the replacement rate at an acceptable level in those countries, the actual rate of return on pension assets has to increase as much as 1.6 times, which seems unlikely at the current market conditions. Therefore, the compulsory pension systems of those countries should increase their contribution rate in 2 times from the actual level, with the purpose to provide an appropriate retirement to their members.

Highlights

Estimations from the World Economic Forum indicate that ageing and low returns on pension funds have created a deficit on public pension plans of 400 thousand millions of US Dollars by 2050 [1]
The aim of this work is to analyze which is the required average real return that Latin American mandatory Defined Contribution type (DC) pension funds should achieve, in order to provide a reasonable pension at retirement, according to each system parameters; and to discuss if those required returns are feasible in the current economical context, or if any changes in the pensions designs are necessary
The aim of this paper is to analyze which is the required average real return that a typical worker from different Latin America countries has to obtain from his fund, in order to get a reasonable pension at retirement age, according to the parameters of each pension system

Summary

Introduction

Estimations from the World Economic Forum indicate that ageing and low returns on pension funds have created a deficit on public pension plans of 400 thousand millions of US Dollars by 2050 [1]. With the purpose to solve the actuarial and financial unbalances in the Latin American pension systems, and by suggestion of the World Bank [2], many countries from the region shifted their mandatory pension systems from Defined Benefit type (DB) to Defined Contribution type (DC) [3]; and established modifications to the funding processes, the participation of the private initiative in the funds management and some changes in the general parameters of the systems, as the retirement ages and other criteria [4] This debate of pension reforms has focused on improving the financial sustainability and the administrative efficiency, in response to the consequences of the economic crisis and ageing populations [5]. This means, in terms of pensions, that the population at middle ages increased which is going to be the sector that will need a pension in the near future

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Results

Conclusion