Pension Goals and Institutional Arrangements: Reforms DC 2.0 for Latin America

24 Pages Posted: 7 Sep 2017

Date Written: August 31, 2017

Abstract

The pioneering pension reforms that brought a market for individual defined-contribution (DC) pension accounts to some Latin American countries in the 1980s and 1990s have failed to gain widespread social legitimacy. Such systems do not cover everyone, and the market design and regulatory infrastructure are not geared towards achieving the objective of maximizing the value of pensions. This failure stems from a combination of flaws in the fundamental design of the investment regime, which is highly regulated and focused on short-term outcomes, and of misaligned incentives of the firms operating in a market that is not conventional due to consumer inertia and other forces that limit competition. The contribution of this paper is twofold: (i) first and foremost, to define a new paradigm for the investment regime, with long-term features to target pension goals; (ii) second, to discuss in parallel changes in the design of the market that are needed for implementing such goal-based investment approach. By delineating few principles for ensuring competition in lifelong investing, we identify research and policy questions that require further work for clarifying how to pursue needed reforms. Given the technical and political barriers to implementing all these DC 2.0 principles in different country contexts, the paper seeks at the very least to establish a framework for framing discussions about future pension reforms in the region.

Keywords: Pension Reform, Goal-Based Investing, Defined-Contribution Plans, Latin America

Suggested Citation

Garcia Huitron, Manuel Enrique and Rodriguez-Montemayor, Eduardo, Pension Goals and Institutional Arrangements: Reforms DC 2.0 for Latin America (August 31, 2017). INSEAD Working Paper No. 2017/54/EPS, Available at SSRN: https://ssrn.com/abstract=3029991 or http://dx.doi.org/10.2139/ssrn.3029991

Manuel Enrique Garcia Huitron

Inter-American Development Bank (IDB) ( email )

1300 New York Avenue NW
Washington, DC 20577
United States

Eduardo Rodriguez-Montemayor (Contact Author)

INSEAD ( email )

Boulevard de Constance
77305 Fontainebleau Cedex
France

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