By Manuel Riesco
SANTIAGO, Oct 21 2009 (IPS)

Riding the recent exuberance of emerging markets, Chilean pension funds have reduced to almost half the immense losses they suffered since the onset of the global economic crisis. But it won’t help much.

According to the daily tally of the losses posted at www.cendachile.org and based on official figures, between July 2007 and March 2009, the equivalent of USD 33 billion at today’s exchange rate was wiped out.

The sum is equal to more than six years’ combined contributions to the social security system, or the total increase in the fund between

1981 and December 2006. Chile’s public pension system was created in 1925 and still today provides pensions to three out of four adults of retirement age and nine of out ten adults over the age of 70. It was privatised in 1981 by the government of General Augusto Pinochet. Participants in the public system were pushed to switch to the Administrators of Pension Funds (AFP) without the possibility of switching back, assured that they would receive better

returns and handsome pensions. In most cases, the switchover was required by employers. All new contracts since that time require participation in the AFP system.

Beginning in 2002, the organisation offered five funds with different

levels of risk for clients to choose from. The new pension system lost 30 percent of its overall value during the crisis. The two riskiest funds lost 47 and 36 percent respectively. Named A and B, these two held the assets of 52 percent of the system’s pensioners.

The AFP’s bet consisted in increasing its exposure to variable-rate investments abroad. Between October 2008 and August 2009, the government raised the cap on such investments from 65 to 80 percent for fund A and from 45 to 60 percent for AFP as a whole. Even the most conservative fund E, the only one not to have suffered losses thus far because it was invested in fixed rate instruments inside the country, was allowed place up to 25 percent of its holdings in these investments.

Incredible as it may seem, this very year the government even authorised investments in financial derivatives, as long as they receive high marks from the ratings agencies -the entities that stamped “AAA” on the toxic derivatives that set off the crisis.

It is irresponsible to say the least. The Financial Times has characterised the continuous fluctuations of the emerging markets as “a speculative boom fanned by the optimism of the developed countries”.

The crisis has spotlighted the fact that over the last century the world’s financial markets have lost value most of the time and that stock prices grew by an average of less than 1.6 percent per year. This is obviously not enough to sustain a pension system like that of Chile, which is based entirely on individual contributions.

On the other hand, the AFP system depends on private insurance companies, which receive the sum of individuals’ retirement contributions when they retire and in exchange commit to providing them with lifelong pensions. The crisis has shown that the largest of these companies are insolvent.

Administrative costs have been scandalous: the AFP and related insurance companies have pocketed one-third of all contributions to the system since its creation in 1981.

Meanwhile, for workers with equivalent work history, pensions of those who stayed in the public system have been double those in the AFP plan. Women who opted for the AFP had their retirement age jump from 60, the level for women in the public system, to 65, the retirement age for men. Moreover, women receive less than men from the AFP even when they retire at the same age and with the same level of savings because they have a longer life expectancy.

For these reasons, Chile does not currently have a solvent pension system. It is essential that people nearing retirement age be allowed to return to the public plan. Moreover, Chile must build a public pension system for all citizens that does not depend on the financial markets but rather is financed by the yearly contributions

of the pool of workers.

In 1981 such contributions were enough to pay all public-plan pensions with one-third to spare. Since then revenue has grown by an average of 6.5 percent per year while the number of adults retiring is increasing by less than 3 percent. The public system will

have to be taken back if Chileans are to receive good pensions for life. (END/COPYRIGHT IPS)

(*) Manuel Riesco, a Chilean economist, is vice president of the Centre for National Studies of Alternative Development (CENDA) and director of the Foundation for Overcoming Poverty.

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