Interview: Jorge Ramos Raygada
How does economic informality affect the growth prospects of the insurance sector?
JORGE RAMOS RAMOS: Basic pension deposits are compulsory worldwide. Very few countries have the market sophistication needed for customers to create decades-long savings plans and most people prefer to take a short-term view in their financial decisions. However, higher health standards and longer life expectancies will gradually oblige populations to understand that pensions are fundamental. This is also the case for Peru, where the population is projected to live longer in the coming decades.
A long tradition of economic informality sheltered Peru from the various global crises and recessions of the 1980s and 1990s, and it played a crucial role in the country’s early development. Following our boom period in the 2000s, the country urgently requires greater formalisation. Such a move will increase the market’s sophistication and create business opportunities in finance and insurance, as Peruvians become aware of their assets and seek to either protect them or use them as collateral when applying for loans.
Despite some superficial measures, there is still no direct plan to tackle informality. This, more than anything else, limits the growth prospects of insurance.
What measures could help reverse the decapitalisation of the pension funds system?
RAMOS: The solutions under discussion – entailing either the establishment of a state agency or further liberalisation – have generally had a very populist tone and revolved about the possibility of letting investors choose when to divest. Such a move would not help to establish a system that is sustainable in the long term. The most pressing issue has been and remains the low coverage rate, regardless of the private or public nature of the system’s administration.
This is a direct consequence of very high informality. Rather than trying to solve the coverage issue or allowing investors to withdraw their deposits whenever they wish, policies should address the problem underlying all of these issues. The former can only be solved through formalisation, because no matter what new pension policies we introduce, they will only have an impact on the 30% of the workforce that is currently formalised. Equally important to pension coverage are indicators of health coverage. They go hand in hand as the only way to improve social security, and both require a decrease in informality to generate more revenues, which will eventually translate into broader and better coverage for Peruvians.
Peru should look to its neighbour Chile, where pension reform is intended to incentivise long-term contributions by paying out higher premiums to those citizens who work beyond their retirement age. In Peru, by contrast, the recent funds liberalisation has made contributors prone to withdrawing most of their deposits at increasingly early points.
In a system where the workforce has to both produce income for itself and subsidise previous generations, the process of accumulating capital and eventually creating a large middle class seems unachievable, as constant revenue generation is limited to those within the age limits of the working population. In addition, the current situation has created a perverse set of incentives for some non-formalised citizens, many of whom receive satisfactory levels of subsidised health and pension benefits that may be lost if they enter the formal economy and become net contributors to the system.
Peru’s low levels of fiscal revenue do not allow for the near-term development of a large, European-style welfare state that provides both pension and health coverage. Accordingly, the most viable option at the moment is a combination of individual pension capitalisation and a public solidarity system wherein the state subsidises those whose private contributions are not enough to fund a basic pension.
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