Pension Reform in Bolivia : Innovative Solutions to Common Problems

In some respects Bolivia's bold program of pension reform went beyond the Chilean prototype. Bolivia's bold program of pension reform involved the immediate closing down of the old pay-as-you-go system and its replacement by a defined-contribution system based on individual capitalization accounts and managed by the private sector. The pensions of the old system will be covered by the Bolivian Treasury. Workers will receive compensatory pensions for their contributions to the old system. These will be calculated on the basis of a simple formula that could be improved to reduce the cost of transition.To avoid high marketing costs, Bolivia has entrusted management of the system to two groups selected through international competitive bidding (to minimize fees). Individual accounts have been preallocated to those two groups on a regional basis or, in large cities, on the basis of the birthdays of affiliated workers. Competition for individual accounts will be allowed in the year 2000 and the market will be opened to other private pension-fund administrators (AFPs) in 2002.Proceeds from the capitalization program will be used to pay an annuity to all Bolivians 65 and older. Funds from the capitalization program will also be managed by the two selected AFPs. Custodianship has been entrusted to a multinational group offering global custodial services.AFP investments are only subject to upper limits, including relatively high limits for foreign assets. However, they must initially purchase a certain quantity of treasury bonds to help finance the cost of transition.Bolivian pension reform faces major challenges:To create a competitive market for management of pension fund resources and hence achieve competitive returns on investment and higher pensions.To eliminate the requirement of investment in treasury bonds.To insulate the system from attempts to use AFP funds and capitalization proceeds for public projects. (One way to achieve this would be to transfer ownership of the capitalization proceeds to individual Bolivians.)This paper - product of the Private Sector Development Cluster, Finance, Private Sector, and Infrastructure Department - on work done for the Bolivia Financial Markets and Pension Reform Project