Eduardo Vildosola on Chile’s pensions | AFP Capital | Video
World Finance interviews Eduardo Vildosola, CEO of AFP Capital, on the need for further reform in Chile's pension system
In 1980, Chile reformed its pension provision from a public, pay-as-you-go system, to a private, individual capitalisation one. It was one of the biggest privatisation experiments of the time, and today the system is still far from perfect. Eduardo Vildosola, CEO of AFP Capital, discusses the purpose behind the original reforms, the challenges that are left, and how AFP Capital is working within that framework to support millions of Chileans.
World Finance: What is the foundation of Chile’s pension system today, and how has it changed?
Eduardo Vildósola: Basically, the current system is based on individual accounts. That means that every worker, every month, puts their money in their account, for their whole working life, which is roughly 40 years. And then they receive what they have been saving for, for that time. That is compared with the pay as you go system, where you were basically saving for passive workers in a common fund, and there was not a direct relationship between what they were saving, and what they were receiving at the end of their work life.
Besides that, the current system is based on these individual accounts, which is the mandatory saving. Adults also have the voluntary saving pillar, which is related to individual voluntary savings and collective voluntary savings. And also we have solitary pillar, which is for people that cannot save so much, or for so many years, and that is partially financed by the state. These are the three pillars.
World Finance: But the system is still not meeting the expectations of Chileans: why not, and what are these expectations?
Eduardo Vildósola: I would say that there’s not a complete answer to the question, because the system is still not mature at all. We have been saving for 30 years, and we need 40 years to analyse that. But the women who are living more than we are expecting and are contributing less than they were expecting, because sometimes they are not in the labour force, but at home. They have been facing lower replacement rates of 50 percent. So there’s a problem there, that we have to address.
In the case of men, the replacement rate has been 70 percent, which is basically what they have been expecting. Furthermore, seeing as the size of Chile has increased a lot, when you calculate the replacement rate with the last size, of course you have a very important impact on that. The system was created thinking on a replacement rate calculated on the average of the last 10 years size. So, when the size grows up, you have a big gap there. Probably that is part of the answer of the expectations that haven’t been fulfilled.
World Finance: So how can these problems be resolved?
Eduardo Vildósola: There are three or four basic ideas on that. The first, of course, is to increase the contribution rate. In Chile now, we have a contribution rate of 10 percent, which is very low compared with the OECD countries. That is, I would say, the first idea.
Probably the second one is, trying to foster voluntary savings, both individual savings and collective savings for the middle income range. Third, of course, we are living more, so we have to address that. It means that probably we have to review the age of retirement. And the fourth idea should be to see how employers contribute to their workers every month. We have to use the loopholes, the pension loopholes that we’re facing today, which are playing a much more important part of the lower replacement rates that we are seeing today.
World Finance: Might it be possible to delay some of these changes in order to address other problems, like loopholes in the system?
Eduardo Vildósola: I think that we should address both of them. Of course, pension loopholes is something very important to do, but it’s something that is a little bit outside of the pension fund managers. It has to do with the labour market, with the supervision of companies that are not contributing to the system. But the other changes are quite urgent. Because at the end of the day, people are living more, and women have retired so early, and because of the loopholes, we have to increase the contribution rate. You have to take account that in the old system, the contribution rate was almost twice the current contribution rate. It was 20 percent. So, 10 percent? Definitely it is not enough to get enough money for building the pensions that Chilean people are expecting.
World Finance: So how is AFP Capital performing within this context?
Eduardo Vildósola: I think that AFP Capital has done a very innovative approach to the pension business, because I would say, most of our competitors have been very focused on the characteristics of the product, but we have been focused on the necessity of building the pension at the end of the day. So we create the so called ‘Get your number’ campaign, which is basically a campaign where we try our hardest to be conscious, to be aware of the necessity of beginning to save, as soon as possible. Because of the impact of that savings in the pension. So ‘Get your number’, you say ‘Oh my god, what a big number to save.’ But that is very necessary.
Remember that this is a mandatory savings scheme, so most of the time people feel very far away of this necessity. At the end of the day, saving competes with consuming, and consuming is more appealing. So we have realised that we have to make our clients to be aware of that, through the ‘Get your number’ campaign, and today we have more than 400,000 clients that have already calculated their number, and are beginning to do a savings plan in order to finally get their pension. So, that is the way we have been competing, it is a very unique approach, and we are happy that our clients are more aware of what they have to do, to, at the end of the day, fulfil their dreams. Which is to get enough money at the pension moment, so they can do whatever they want at that time.
World Finance: Eduardo, thank you.
Eduardo Vildósola: You’re welcome.