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1998 The Latin American Experience with Pension Reform

This paper discusses the pension formulae used by the new Latin American pension systems proposes policies to reduce the costs pensioners. The risks considered are investment risk, individual longevity risk and the risk about the average longevity of the covered group. It recommends to allow pensioners to take reinvestment risk- i.e. maturity risk- upon themselves, to reduce cost. It also recommends to allow pensioners to absorb part of the risk to average longevity by themselves, as this would also reduce the costs of their pensions. For this end it is not enough to allow pensioners to choose between annuities provided by life insurance companies and ‘programmed whitdrawals.’ It is also required that the CREF annuity be allowed. The paper shows that CREF annuities must be subject to a regulation on the mortality tables used. The paper also proposes a mutual reinsurance contract between CREF annuity funds, wich allows the coexistence of short-term management contracts with coverage of individual longevity risk. Pension management contracts have the advantage of preventing managers from satisfying the demand for lump sum payments from myopic pensioners.