into areas of interest, for example infrastructure. While pension funds should be free to participate in these deals, the state bank can help in structuring financial products that could be appealing for the investment policies and risks that pension funds are willing to take.<sup>39</sup>

# _The payout phase_

A funded pension system without a well-developed strategy for paying out eventual benefits might not be called a pension system. Offering lump sums at retirement is not consistent with the idea of creating pension fund schemes that support consumption smoothing. The evidence suggests that individuals may overspend such money in short order, leaving them unprotected or with drastic falls in retirement income once they get older.

Recent experiences of liberalization of the payment of pension benefits has resulted in a high proportion of individuals taking cash lump sums. The experience in the United Kingdom and Peru shows that there is a high proportion of individuals taking these lump sums. Anecdotical evidence suggests that not all people spend their pension money in the short-term while many of them keep it invested in suboptimal strategies, such as bank accounts. In Peru, where 95 percent of retirees have taken lump sums, some people purchase annuities directly in the market, albeit paying very high fees, resulting in inefficient allocations.<sup>40</sup> Annuities provide a solution that protects individuals against longevity risk, and at the same time may offer a stable or relatively stable retirement income. However, for the annuities market to work it is important to have a heterogenous diverse pool of participants (that approaches the average mortality rate of the population) in a way that allows the annuity companies to ensure stable retirement income until death to all participants.

Such a critical mass of participants is difficult to achieve in voluntary schemes, but through default options and communications strategies, it is possible to incentivize people to participate more broadly. In the case of Chile, almost half of the retirees choose annuities. This participation is achieved through an efficient competition system—through an electronic quotation system, SCOMP—and proactive communication campaigns by the life insurance companies who offer the annuities.

Most importantly, the design of these pension schemes should only allow withdrawals after retirement age. AES should not be designed as a short- and medium-term tax deferral mechanism, but as a complement of future pensions of individuals. While it might be a “hard sell” for individuals to have their monies locked in a pension fund until retirement age, it is the only way of ensuring that the pension system is functional and meets its long-term objectives. The experiences of offering some liquidity for these funds during the contribution phase, for exceptional reasons, can mitigate the reluctance of individuals to participate in voluntary pension plans.

# _Liquidity options in the accumulation phase_

In order to mitigate the fear of locking money until retirement age, the system may offer some liquidity options in the form of loans to participants. The whole idea of a loan is to increase confidence of individuals about the pension fund scheme. While amounts should be limited, they should be easy to access, and they should be granted on standardized packages. According to PWC

> 39 See Garcia-Kilroy and Rudolph (2017).

> 40 In March 2016, the Peruvian Congress approved a Law that allow retirees to take 95.5 percent of the value of their pension account in the form of a lump sum. Peru has a mandatory funded pension scheme.

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