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Regulatory and supervisory principles in pension markets: The AIOS view

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. A different sort of industry A different sort of costumer Foundations of good supervision (www.aiosfp.org)

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Regulatory and supervisory principles in pension markets: The AIOS view

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

  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. 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 A different sort of costumer

  5. A sample from Chilean costumers Index of Knowledge An index of system´s 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. 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 Foundations of good supervision: investments Objective: Efficient investment allocation and risk managment Basic trade-off: regulate because it´s mandatory vis-à-vis deregulate to improve competition. It´s an art.

  12. 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 Principles on investments

  13. 1 2 3 Principles on investments Portfolio of Pension Funds in Latin AmericaDecember, 2003

  14. 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. Final remarks • Objetivo último: el afiliado.

  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

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