Gregorio Impavido under Art 81 of the LSAR for this purpose (CNSF 2006). The methodology used for the creation of these tables was revised by the Mexican College of Actuaries (CONAC).<sup>6</sup> Other factors influence the pricing of annuities. Since annuities are indexed every February to the inflation of the previous fiscal year a system of factors was developed to consider that: (1) it is possible the month of February falls between the date in which the insured individual acquires pension rights and the date when the IMSS declares the insured individual disabled; (2) pension benefits can be granted at any time during the month and companies need to credit the inflation every month. In addition, two types of mark ups are added to the premium: (1) a 2 percent mark-up (which is accumulated in the contingency reserve discussed in section II.C) is added to the premium as an extra buffer to compensate for possible statistical deviations in the mortality table; and (2) a 1 percent mark-up is added to finance acquisition costs incurred during the sale of the annuity and administration costs incurred during the payment of the annuity.

Since demographic and technical parameters used for pricing annuities are fixed by regulations, any new annuitant has access to the same IV and RT annuity irrespectively of the provider elected. This is ensured by a requirement for all companies to use a single pricing system (known as “SUC”<sup>7</sup> ) for calculating immediate premiums. This is nothing more than a piece of software that captures the relevant data of the individual and his/her beneficiaries and uses all pricing parameters prescribed by regulations. The rationale behind the single methodology for pricing annuities is related to the fact that on the one hand, the LSS-97 establishes defined benefit for IV and RT pensions, and on the other hand, it grants the right to pensioners to choose an annuity company. In addition, this methodology strives at eliminating unfair commercial practices towards retirees and towards the IMSS that ultimately pays premiums through its accumulated IV reserves.

In order to compete for clients, companies offer additional benefits to the basic IV and RT annuities. In the case of life insurance benefits, the annuities companies have to purchase additional benefits from other insurance companies authorized to operate life insurance business. Notice that the offer of additional benefits does not affect the price offered to the insured individual for the basic pension benefit. In other words, companies absorb all costs for additional benefits and finance them through the spread between the technical rate and the expected return on assets.

These additional benefits are tightly regulated in order to ensure that they are in line with the solvency profile of the company, and to avoid undue commercial practices. Additional benefits need to be registered in the CNSF before being offered to the pensioners. The additional benefits registered at the CNSF are posted on its website. They can only fall in one of two categories: 1) additional economic benefits constituting increments on the basic pension; and 2) life insurance products bought for the pensioner or their beneficiaries. In general, additional benefits can be offered during the duration of the basic pension benefit. In the case of additional economic benefits, pension annuity companies are required to constitute the corresponding reserves<sup>8</sup> considering a technical interest rate of 1 percent in real terms. In addition, life insurance benefits have to be

> 6 Colegio Nacional de Actuarios de México (CONAC) 7 Sistema Único de Cotización (SUC). 8

> More precisely, this is the mathematical or net premium reserve as it will be explained in section II.

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