CHILE A HOT MODEL FOR U.K. PENSION REFORM

HARROGATE, England-Chile's private pension system is beneficial for the country's economy and workers alike, according to Jose Pinera, president of the independent International Center for Pension Reform in Santiago.

Mr. Pinera, who spoke at the National Assn. of Pension Funds' annual meeting, said that he had recently met with Frank Field, the United Kingdom's new minister of state for social security. At that meeting and others with him before the U.K. elections, Mr. Field expressed intense interest in Chile's mandatory individual pay-as-you-go pension system, according to Mr. Pinera.

Chile's pension reforms started in 1980, with the introduction of a program for individual pension contributions. Three years later, it became mandatory for Chilean employees to contribute a minimum of 10% of their gross salaries to personal pension plans, with an extra 2% to 3% contribution to cover administration costs and life and health insurance. The pension funds are not managed by the government but rather by third parties or pools of employers that are chosen through public bids.

Chilean pensions currently total about $25 billion, said Mr. Pinera, or 40% of the country's gross national product. The growth of private pensions has created greater investment in the country, boosting the economy to an average 7% growth over the last 12 years, he said.

Not surprisingly, the Chilean model has been the blueprint for a number of countries wishing to convert their state pension programs to a private pension model.

"There is a global pension crisis," said Mr. Pinera, because social security systems around the world are going bankrupt. He blamed this crisis on the erosion of a link between contributions and payments and the link between "effort and reward," which become lost in state social security programs.

In addition, more developed countries are seeing their state pension systems threatened by demographic changes. Advancements in medicine and the quality of life means people are living longer, while birth rates continue to fall. Mr. Pinera illustrated this problem with Japan's experience. Very soon, he said, there will be only two workers to each pensioner in Japan.

By implementing the personal savings account system, Chile has depoliticized the whole issue of pensions and given individuals more control over their own retirement savings, he said.

Each month, Chilean employers deposit 10% of each worker's wages before taxes into a PSA, with no social security taxes on the deposits. "Instead of sending the payroll tax to a social security system-to that black hole-employers send it to the individual pensions account month by month," explained Mr. Pinera.

Workers are able to voluntarily contribute up to an additional 10% to their PSAs for early retirement or higher retirement benefits. This is a tax-deductible contribution.

Each worker selects from among the government approved Administradoras de Fondos de Pensiones-pension fund administrators-to manage the pension contributions. The funds are portable and competition between the AFPs is encouraged.

The secret to the Chilean system's success is the funds' "exponential growth through compound interest," said Mr. Pinera. The funds are invested in "a safe portfolio of bonds and shares," he said, and on retirement are either exchanged for an annuity or kept in the PSA to be withdrawn over time. At this point, the fund distributions are taxed as income.

If an employee's fund falls below a certain level on retirement, the state provides a guaranteed minimum pension.

Employees have been getting a better return from the PSA system than they would under the old state security system, said Mr. Pinera. Over the past 12 years, pension funds have seen a return of 12% above the rate of inflation. It has had a cultural effect too. "It has turned every worker into a capitalist," he said.