Target rates of return in DC schemes

Target rates of return in DC schemes


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Speaker(s): Denise Gómez-Hernández (Universidad Autónoma de Querétaro), Felipe Pérez-Sosa (Universidad Autónoma de Querétaro)

A comparison of latin american pension systems for the period 1997-2016

As a consequence of the actuarial and financial unbalances in the Latin American pension systems and the suggestions of the World Bank (Duarte & Elizalde, 2011), the initiative in 1981 from Chile to change the mandatory pension system from defined benefit type (DB) to a defined contribution type (DC) was imitated by other countries (Ham, 1996). The Latin American reforms had the main purpose to eliminate the design deficiencies related to the DB, making the pension systems consistent with the demographic context and sustainable for the future generations (Villagómez & Hernández, 2009).

The aim of this work is to give a general perspective of the characteristics, under which an average worker from Latin American (LA) countries, accumulate a pension fund of the DC type. The replacement rate that this worker will obtain for each of the LA countries is shown. In addition, it is analysed which is the "required" average real return that each worker has to obtain in order to get a "reasonable" pension at retirement age, according to each system parameters. Finally, it is discussed if those required returns are feasible in the current economical context, or if any changes in the system parameters are needed in order to achieve acceptable replacement rates. The results are that from the 8 countries under analysis (Chile, Colombia, Costa Rica, Dominican Republic, El Salvador, Mexico, Peru and Uruguay), 3 do not reach a replacement rate of 70% or more (Dominican Republic, Mexico and Peru). That, in order for these countries to increase the replacement rate at retirement to a target of 70%, the actual rate of return on pension assets has to increase as much as 1.6 times or the contribution rate in 2 times from the actual rate

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