Individual pension savings: a bastion of public financing and the retirement age

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This type of retirement savings plays a key role not only in the development of a country, but also in increasing the incomes of Latin Americans in their old age. A panorama of experiences, challenges and opportunities.

By Valora Analitik for Grupo SURA*

Individual savings via private pension funds are undoubtedly a driver of economic recovery. This phenomenon is repeated in the context of all those world economies that have a pension system aimed at making workers’ savings more efficient and, in this sense, the Covid-19 pandemic has left several lessons to be learned about the importance represented by workers’ savings within the framework of a strengthened financial system.

Much of the reason why the global economic crisis was not more critical at that time rested on the role of the financial system, the one that ensured the continuous injection of resources into the global economy. In this context, pension funds have taken on an important role: the resources managed by third parties in these funds have been kept in circulation on the stock markets or even on the debt purchase markets of certain countries.

The case of Spain and Australia
Retirement savings, through private funds, were vital to reviving the economy in a world that needed liquidity channels. To give just one example, the Bank of Spain, in a report for the year 2021, showed how the injection of funds, including pensions, made it possible to finance the government of the country during the phase of economic recovery.

So much so that, even with regard to the budgetary appropriations corresponding to 2022 , a sufficiently solid margin has been created to ensure lower financing needs, which has allowed the Spanish government to concentrate on the payment, for example, of its other outstanding debt or household improvement. cash transfer programs as well as market incentives.

Another emblematic example is that which takes place in Australia, a country which has a three-pillar pension system: one state, one compulsory and private and the other voluntary. The private system, known as Superannuation, handles the bulk of workers’ savings in this country.

This system is largely managed by private funds which, in addition to being in charge of managing the retirement savings of Australian workers, are also the main engine for turning the wheel of economic recovery.

Data from the Organization for Economic Co-operation and Development (OECD) shows that assets under management held by private pension funds in Australia amount to $1.8 trillion, representing not only around 130% of gross domestic (GDP) of the country. but also maintains a target of reaching 140% of this figure by the end of 2040.

It should be noted that this ratio translates into the fact that pension funds, taking the case of Australia as an example, serve as financiers for companies that operate in this same country, but also invest in various economies, in state apparatuses and mechanisms, not to mention what all this means for job creation.

The key role played in Latin America
Guillermo Arthur, Director General of the International Federation of Pension Fund Administrators (Federación Internacional de Administradoras de Fondos de Pensiones – FIAP), said that today, more than ever, the role of pension funds in financing national governments has translated into better investment opportunities and lower unemployment rates.

This is based on the objective of pension funds to secure workers’ funds and to ensure that they produce income such that, even in a volatile environment, they generate returns adjusted to the needs of their affiliates. .

Number of countries that have adopted different modalities of individual capitalization systems.

Arthur recalled that joint efforts between governments and pension funds have helped strengthen developing segments of the economy, such as infrastructure. Public financing, which is done through the management of retirement savings, is essential to guarantee the amounts of budget appropriations necessary to guarantee sufficient funds for the subsidies that have been introduced in the post-pandemic era, this among other government programs.

Just to get an idea, and based on the case of Colombia, the country’s director of public credit, César Arias, made special mention of the role that pension funds have played in contributing to investors’ appetite for Colombian sovereign debt, even in complex times of uncertainty, given the war between Russia and Ukraine and the results of the presidential campaign.

In this context, of the total amount of Treasury Bonds (TES) issued by Colombia between December 2021 and April 2022 (22.47 trillion COP), pension funds were the ones that bought the lion’s share of the the country’s public debt, with approximately COP 8.33 trillion.

Arthur, on this phenomenon, said that this same trend is repeated both in developed economies and in those on the way to becoming so, which shows, among other things, that governments are able to regain the confidence of investors, despite the fact that their countries lost their investment ratings in 2021, which happened with several Latin American countries.

The point of all this is to examine how the new macroeconomic scenario and the high inflation rates could reduce the contributions of pension funds to the financing of national economies.

Kathryn Rooney, Head of Global Macroeconomic Research and Investment Strategy for Bulltick Capital Markets, also explained at the last Asofunds Congress that, without a doubt, the current scenario of high prices and rising interest rates Interest could lead funds to, in general, turn their gaze to markets that offer better investment opportunities.

This ultimately means that, in line with the philosophy that pension funds have always stood for, they must make the best investments in the scenarios that offer the highest returns so that this translates into greater retirement savings. for its fund members, and they can enjoy better retirement income during their retirement.

A retirement savings engine
However, private pension funds do not only play a leading role in supporting the macroeconomic wheel: they are also healthy, inclusive and open options for workers to amass the necessary savings for their old age.

In an interview with La Tercera, Janwillem Bouma, chairman of the board of directors of the private pension fund in the Netherlands, Centraal Beheer APF, and director of Pensions Europe, an entity bringing together 24 pension fund associations in 17 the European Union (EU), ensures that one of the tools that helps workers realize their retirement ideals is based on the options that a certain fund offers compared to what is available within the financial system.

In this sense, the example of the Netherlands is based on banking or insurance products for individuals in order to increase their contributions to their retirement savings while granting them limited tax reductions for this purpose. “This is important, mainly, for people who do not accumulate (or could not) subscribe to a second pillar pension, for example, because (i) their employers are not affiliated with a pension fund ; (ii) they don’t have a permanent job; or (iii) they are self-employed,” Bouma told La Tercera.

And it is the individual contribution to retirement that continues to be a real option for obtaining returns on a person’s savings, even on the same pension. One of the options through which individual savings help to achieve this objective are voluntary funds, these are mechanisms in which certain resources can be periodically deposited, and depending on the profile of the member, these are then invested in funds conservative, moderate or more risky.

This is how a person, who has already retired, can ensure that their income produces returns over periods of up to six months. The latter, however, reveals one of the most pressing flaws of Latin American workers, as “they still lack an effective voluntary savings culture,” Arthur explained.

And it is important to create this kind of investment culture, and to anchor it firmly in options such as individual retirement savings funds, because this implies a two-way benefit: the case of the Dominican Republic in is a good example. The director general of the Dominican Association of Pension Fund Administrators (ADALF), Kirsis Jáquez, says that the individual capitalization system has contributed 22% of the Dominican Republic’s economic growth since 2003.

Challenges to Individual Retirement Savings Across the Region

The main issue here is that there are still challenges to be overcome for individual retirement savings to become an option that complements a person’s sources of funding for old age. Data compiled by FIAP shows that in Latin America, contributors to retirement correspond to 33.8% of the economically active population (EAP), while in OECD countries this number rises to 72.1 %.

“This difference shows that only one in three workers, on average, contributes to the pension system in Latin America, a phenomenon that is directly linked to the degree of economic development and the informality of regional labor markets”, as indicated the aforementioned institution.

This is a heterogeneous reality, adds the document, even in the case of nations that have relatively higher coverage such as Chile, Costa Rica or Uruguay as well as others in which such coverage constitutes a challenge, such as Colombia, Peru and El Salvador. , where only 17-26% of the economically active population are covered.

In addition to the above, it must be added that there is a great deal of misinformation that tends to permeate what individual pension savings funds really represent: one of them concerns the resources accumulated in view of retirement .

“Why the gap between what people expect and what they get? It turns out that in cases like Chile, only 18% have been contributing to their pension fund for over 30 years and, according to the Organization International Labor Organization (ILO), it takes at least 30 years to acquire a full pension,” explained Alejandra Cox, director general of the Chilean Association of Pension Fund Administrators.

Ultimately, the main issue here is that while there are shortcomings in ensuring strong levels of retirement savings, the truth is that the funds have mechanisms in place to protect individual retirement savings, even in times of volatility, while generating returns for savers.

*This article was prepared by Valora Analitik staff for Grupo SURA. Its content is purely journalistic in nature and in no way compromises the specific positions or recommendations made by our Organization.

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