some cases, increased domestic savings depending on how the transition to the new system was financed.

Experience has also revealed many policy challenges. Coverage ratios have generally either stagnated or declined, which has raised public concerns about the DC system. Other factors, however, could have a greater bearing on participation, such as development in the formal labor market and GDP per capita.<sup>7</sup> Another important challenge is improving the system’s efficiency in terms of administration costs and fees, and investment performance. In most LAC countries, management fees remain relatively high and declines in operational costs have not been fully passed through to consumers, pointing out market deficiencies. In addition, a common problem is that pension fund administrators (PFAs) have been unable to adequately diversify their portfolios. The policy debate on the performance of DC plans is intensifying and policymakers are exploring how to address these challenges as replacement rates could otherwise prove to be low or a significant share of the population could remain uncovered by the pension system. For example, 27 years since inception, the Chilean Congress approved in January 2008 a reform of the country’s pension system that seeks to expand coverage and the investment choices made by PFAs on behalf of contributors as well as to promote greater competition.

To shed more light on these issues and contribute to the ongoing policy debate, this paper reviews the structure and performance of mandatory DC schemes in LAC and, whenever relevant, offers comparisons with other key DC reforms undertaken in emerging economies and in OECD countries, in particular Sweden. The review highlights important points. First, broadly speaking, it suggests that there has been overall positive progress in pension systems in countries that implemented a shift to a multi-pillar system where the mandatory DC component has an important role. There is, thus, scope for increasing efficiency, which should have a positive impact on future replacement rates and reduce unnecessary welfare losses. Second, management fees have been declining but remain relatively high, and the cross-country data gathered indicate that decreases in operational costs have only been partially passed through to consumers. Third, initially, regulators in LAC focused on limiting transfers (to discourage marketing and sales agents’ costs) and imposed other legal requirements, but these measures did not prove to be very effective. Unintentionally, they have created new barriers to entry.

In recent years, Mexico and Chile have introduced or are in the process of introducing a set of measures that focus more directly on the two root causes of inadequate competition – reducing market barriers to new entrants and the inelasticity of demand to fees. The latter is proving to be particularly challenging, and while increasing financing literacy and education is a necessary condition, it does not seem to be sufficient. Although the details of the approach implemented in Mexico since the early 2000s and the new one approved in Chile vary, the two rely on the automatic assignation of an important share of the market (new affiliates in Chile and unallocated affiliates in Mexico) to the PFA(s) with the lowest fee to compensate for the high inelasticity of demand. (The paper presents the details regarding the two approaches.) In Mexico, the

> 7 See Rofman (forthcoming).

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