-4-

# **Box 2. Chilean Superintendency of AFP**

Sometimes the amount of human capital required by a Superintendency is overstated. In Chile, the Superintendency of Pension Fund Management Companies had 79 employees with at least 4 years of university study in 1994. The composition was as follows:

|Accountants/auditors|26|Statisticians|3|
|---|---|---|---|
|Economists<br>.|21|Industrial engineers|_3_|
|Computer engineers|9|Sociologists|I|
|Lawyers|8|Medical doctors|I|
|Social workers|6|Other|I|

# C. **Pension Reform Design and Institutional Infrastructure**

11. The extent of institutional infrastructure needed to support a pension system depends on the specific design adopted. For example, a mandatory occupational pension scheme like that in Switzerland, which places the burden of pension management on the employer, avoids the collection stage so the associated infrastructure is not needed. However, duplication of accounts and account transfer can be very costly in that setting, because there may be tens of thousands of pension managers. Similarly, a pension design wherein the government is the sole issuer of securities that can be bought by a fully funded scheme does not require much of the infrastructure associated with domestic securities markets, such as valuation and risk rating services or complex laws and regulations relating to conflicts of interest and corporate governance. Finally, to the extent that the management of a large portion of pension funds is contracted out to a single major intemational fund management firm, and domestic investment by the pension funds is limited, there is less need for extensive supervision and infrastructure of the domestic securities market.

12. Another type of pension reform option that can vastly reduce the infrastructure needed is one where the role of the government would only be to mandate contributions, create a collection system, set certain minimum standards for a pension contract, and license international companies to offer that contract to local contributors. In other words, leave it to Merrill Lynch. in this case the small developing country is de facto importing supervision services, and avoiding all of the infrastructure needed for domestic securities markets except for registries to identify contributors and pensioners. In a less extreme case, some proportion of the assets could be invested in domestic financial markets. Although this option can reduce the infrastructure needed, it introduces other risks and costs to pensioners. For example, under this setup each contributor could switch to a different international pension fund manager once a year. This would mean that each worker could have 47 different suppliers through retirement. The cumulative costs of administering each pension would increase with each change. In addition, legal recourse by pensioners under laws in the country where the foreign investment management firm is domiciled would need to be carefully analyzed.

13. The effectiveness of some types of institutional infrastructure is also a function of the specific forms of infrastructure that can be provided "together in one bundle." For example, if the pension supervisory body performs some operating functions, as it does in Peru, it loses some of the authority and incentives needed for effective supervision of that function. This is because the administrators of such a supervisory body are subject to a conflict of interest, since many of them may find it difficult to criticize their own performance. In addition, a supervisory authority in that role becomes hostage to its own personnel, since there is no alternate supplier of the operating functions it has centralized and nationalized. There is also a loss of information about the efficiency with which those functions could