the industry. This research influenced the reform approved by the Chilean Congress in January 2008, which established a bidding mechanism for affiliates joining the system.

# _Is the Elasticity of Demand Low?_

A well functioning market for retail DC plans requires informed consumers that react to relevant price parameters, such as administrative fees and real rates of return. These were the implicit assumptions when mandatory DC plans were implemented in emerging economies. Preliminary evidence, however, suggests inadequately informed affiliates and low elasticity of demand with respect to commissions. Twenty-five years after the reform, affiliates in Chile remain unapprised of critical factors in the system. Based on the 2004 the Social Protection Survey ( _Encuesta de Previsión Social_ , EPS), only 50 percent of respondents claimed to know their pension account balances and less than 2 percent knew about their PFA’s fixed and/or variable commissions (Arenas de Mesa et al. 2006). Such comprehensive surveys are not yet available throughout LAC, but one can presume that other countries in region face similar challenges. Affiliates, especially new members to the system, also display a passive behavior. In Argentina, around 80 percent of new affiliates were assigned by the pension supervisory agency in 2006.<sup>33</sup> In Mexico, about 70 percent of new affiliates were automatically assigned to an _Afore_ by Consar in 2006. Similarly, as of April 2007, around 70 percent of the Chilean system’s 8.63 million affiliates had been automatically assigned by the regulator.

Although few studies on demand elasticity have been conducted, results generally point to low elasticity. Berstein and Ruiz (2005) estimated the demand elasticity in the Chilean pension system using two panels of data covering 1995-1997 and 1998-2002. In the first period, featured by aggressive competitive strategies through sale agents, net transfers were found to be positively (negatively) correlated with differentials in rates of return (commissions). The number of sales agents increased (decreased) the elasticity of demand to rates of return (commissions). In the second period, after new regulations come into effect reducing the both the number of salesmen and transfers across PFAs, parameters related to fees and commissions were not found to be significantly related to the elasticity of demand. Thus, the massive number of salesmen during 1995-1997 helped to increase the elasticity towards price variables, in particular rates of return, but at a high cost.

In Mexico, affiliates seem to be particularly sensitive to marketing strategies of PFAs. García and Rodríguez (2002) estimated the demand elasticity function for Mexico and found that the only significant parameters were those related to marketing, while those related to fees and rates of return were neither significant nor significantly different from zero. Melendez (2004) found an affiliate’s decision to transfer her accounts across Mexican PFAs to be highly associated with the sales efforts of the manager and less associated with fees and rates of return; but he points out that the importance of these two last factors has significantly increased over time. By contrast, in Peru, positive and significant correlations between the elasticity of demand and the number of sales agents and price variables were found (Masías and Sanchez 2006).

> 33 The 2007 legal reform defined the PAYG as the default option for undecided workers. See Appendix 3.

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