_Page 9_ _PENSiONREFORMINLATiNAMERICa_ their legitimacy. A pension trust fund was established, the _Fondo Consolidado de Reservas Previsionales,_ to back pension obligations. A ceiling for CV pensions was put in place, and pension adjustments of employees of formerly owned state enterprises are subject to the same limits as SNP pensions. These changes helped to reduce the fiscal impact of future CV liabilities.

As of September 1996, an estimated 1.4 million Peruvian workers were affiliated with the fully funded system, and the PAYG system covered approximately 980,000 active and 320,000 retired employees<sup>6</sup> . The defined benefit program for civil servants covered 250,000 active and 50,000 retired employees. The deficit for the SNP was an estimated US$207 million in 1997 and is expected to rise in the next decade because of an anticipate decline in contributions. Meanwhile, the treasury spends US$400 million annually in CV pensions which does not include costs paid by state-owned enterprises or local governments. In sum, the country's public pension systems -- SNP and CV -- are actuarially bankrupt. Present obligations exceed the Government's ability to pay, and these obligations will grow exponentially in the next 20 years.

The private pension funds (AFPs) have an estimated US$1 billion in funds. Each AFP manages a single portfolio and each affiliate can have only one account. Each AFP is required to have returns within a range of 50-150 percent of the average returns of other AFPs. The rate of return on the funds has been hampered by regulations that limit the diversity of allowable investment options. AFPs have therefore been investing in Central Bank paper, as well as a narrow range of bonds, certificates of deposit, and stocks. The real returns realized by the affiliates have been significantly negative over this period. Another hindrance to more robust growth is the commission for account management which is a high two percent of salary. In November 1996, Peru instituted changes to discourage the high commissions and to increase competition among AFPs to invest among a wider range of portfolio options. Especially important is the incentive to move away from investment in short term obligations toward long term financing which can bolster the economy.

Continued progress in Peru depends on continuing reform of the regulatory framework for pension funds and a reduction of the fiscal impact of outstanding obligations from ongoing public pension programs. To this end, also in November 1996 the eligibility criteria to apply for a BR have been eased. Now, all new applicants that have made contributions to the SNP in the last 10 years prior to December 1996 will be eligible for a BR. The intent is to create an incentive especially for younger workers to transfer from the SNP to the new regime.

# **C. Argentina**

Argentina's pension systems had their inception in the early 1900s. A variety of pension funds existed for different groups of workers. Each had independent rules and benefits. Most of the early funds were designed as fully funded systems; a few had pay-as-you-go schemes. But the early pension funds were subject to a number of deficiencies. Generous benefits outpaced the actuarial value of the contributions. The impact of demographic trends began to be felt, and coupled with sufficient long term planning, contributed to a growing crisis as financial instability began to emerge. The ratio of those age 65 and older to the working age population was 6 per 100 in 1950; in 1990, the figure was 15 per 100; in 2050, it could reach up to 29 per 100. By 1993, the national pension system was characterized by pervasive evasion, low retirement age, and lax rules for eligibility because of disability. Evasion was estimated to be as high as 46 percent of eligible workers. The deficit ranged from I percent to 1.5 percent of GDP which was partly a function of high pensions and replacement rates, along with indexation of _6_ See World Bank Report P-7031-PE, 1996.