Pension goals and institutional arrangements: Reforms DC2.0 for Latin America

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.

ACKNOWLEDGEMENTS
An earlier document with some of the ideas developed in this paper was contributed as a chapter to the book “Ideas para una Reforma de Pensiones,” edited by Luis Carranza, Ángel Melguizo y David Tuesta. We would like to thank Solange Berstein, Jurre De Haan, Luis Mario Hernandez, Fernando Lopez, Stefan Lundbergh and Eduard Ponds for invaluable comments and feedback.