# **II. Overview of Mandatory DC Schemes in LAC**

Mandatory pension schemes have had a long tradition in LAC. Chile and Uruguay led the way with the establishment of such systems in the early 1920s. Over the following half century, all other LAC countries set up mandatory schemes of their own. Mandated coverage varied across countries and often a multitude of separate schemes were created for public sector workers (e.g., Argentina, Colombia, Guatemala, and Mexico). Over the years, these schemes largely evolved into DB programs operating on a PAYG basis, although younger programs are still managing a modest amount of assets.

In this section, the focus is on the basic features of pension funds in LAC and in other emerging economies, whenever relevant. It discusses some history behind the reform processes in LAC, presents the basic features of the structural pension reforms implemented in 10 LAC countries, examines the fiscal impacts of the pension reforms focusing on the implicit and explicit public pension debts and studies coverage using cross-country data. This last subsection finds a positive relationship between GDP per capita and pension coverage and, using data compiled by Rofman and Lucchetti (2006), it shows that, in general, coverage has either stagnated or declined in reformed LAC countries when data for the 2000s are compared with those for the 1990s due to economic shocks and other labor market developments.

# **II.1. Basic Features of Mandatory Funded Pillars**

A radical transformation of pension systems in LAC countries started in 1981 when Chile moved from a PAYG to a funded scheme of mandatory individual retirement accounts. A decade later, the region experienced a wave of pension reforms mainly spurred by the need to both enhance the long-term financial sustainability of these schemes and improve intergenerational fairness. Other objectives were also weighed in, such as reducing inequities within cohorts, expanding coverage, and promoting the development of the domestic capital market. From 1992 through 2001, eleven additional countries enacted legislation that involved a transformation of purely DB PAYG schemes into multi-pillar structures including a mandatory DC pillar, but only nine of them in fact implemented the reforms (Table 1).<sup>8, 9</sup> Although these reforms share the introduction of mandatory individual retirement accounts, there are also important differences regarding the size and the role afforded to the different pillars, the provision of life and disability insurance, affiliates’ choices, the role of the state, and the institutional arrangements to manage the new pension schemes.

Four basic structures can be distinguished according to the level of choice among pillars and the degree of funding of mandatory retirement income (Figure 1). In Bolivia,

> 8 Nicaragua and Ecuador enacted pension reform legislations in 2000 and 2001, respectively, but have never implemented the new laws.

> 9 Panama is currently implementing the pension reform legislation enacted in 2006 to streamline its PAYG scheme and, in parallel, introduce a mandatory funded pillar to be publicly managed for high-income workers. Brazil has introduced changes to the PAYG schemes for public and private sector workers and implemented other initiatives to facilitate the growth of voluntary pension arrangements but has not introduced a mandatory DC pillar (World Bank forthcoming).

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