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Sergio BaezaChairman of the Board of SCOMP S.A.May 2010
Reducing the transaction costs of retirement annuities in Chile
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1. Conditions prior to the reform1. Conditions prior to the reform
Assimetrical information between affiliates and sales agents leading to overweight of agents in the pension decision and choice of annuity company
High sales commissions to the detriment of pensions giving agents the resources to financially influence the individual’s choice of annuity company
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1. Conditions prior to the reform1. Conditions prior to the reform
Agents only earned commissions paid by annuity companies having no incentive to present their clients with the option of installment withdrawals from the pension company
Therefore little competition between these two options of retirement
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2. Goals of the reform2. Goals of the reform
Provide CLEAR and COMPARABLE information of the two basic retirement options, annuities and installment withdrawals
REDUCTION OF COMMISSIONS puting a ceiling to them at 2.5%
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2. Goals of the reform2. Goals of the reform
INCREASE PRICE COMPETITION through a simultaneous biding process
EMPHASIZE SOLVENCY by demanding a claims payment rating no less than BBB
PREVENT PAYMENTS FOR RETIREE INFORMATION by the official disclosure of data on candidates for retirement
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3. Organizational setup 3. Organizational setup
By Law in 2004 pension and life insurance company were required to put in place a system to provide information to affiliates on the values of the different pension options
Similarly affiliates were mandated to make inquiries through this system as a requisite for retirement
Thus a corporation was set up, SCOMP S.A., to provide this information system; its owners are the pension companies 50% and the life annuity companies 50%
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3. Organizational setup3. Organizational setup
Access to SCOMP is given to the Pension Companies, the Life Annuity Companies and the Pension Advisors
The system is under the surveillance of both the pension and the annuity regulators
To develop and operate the information system SCOMP hires a systems provider through an open biding process
SCOMP finances itself by charging a fee for each information request and for each closing of a pension decision
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3. Organizatioal setup - retirement options3. Organizatioal setup - retirement options
At retirement affiliates have to choose between different pension options:
Installement withdrawals from the retirement account
Immediate Life Annuity with or without guaranteed term
Installment withdrawals plus deferred annuity
Immediate Annuity plus Installment Withdrawals
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3. Organizational setup - process3. Organizational setup - process
The most relevant processes in the system are:
Issue of Balance Certificate
Request for Pension Offers
Issue of Pension Offers Certificate
Selection of Pension Option
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3. Organizational setup - process3. Organizational setup - process
Pension Company
SCOMP
Affiliate/Beneficiaries
Pension Application
Issues Balance Certificate:- Personal data - Beneficiaries data- BalanceValid for 35 days
SCOMPBalance Certificate
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3. Organizational setup - process3. Organizational setup - process
PensionCompany
SCOMP
Affiliate/Beneficiaries
Pension Offers Request
SCOMPPension Offers Request/ Pension Offers Certificate
PensionAdvisor
InsuranceCompany
Pension Offers Request
Pension Companiesmake Pension Offers
Insurance Companies make Pension Offers
Issues and sends Pension Offers Certificate
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3. Organizational setup - process3. Organizational setup - process
PensionCompany
Affiliate/Beneficiaries
SCOMPClosing
InsuranceCompany
Pension Company transfers balance of indivitual account
Decision making :· Accept offer· Request additonal life
insurance offers · Postpones pension
Selects Pension Option
Affiliate/Beneficiaries
SCOMP
Pension Company informs closing
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4. Results4. Results
Increase in price competition
Decrease in Agent’s Commisision with the corresponding increase in pensions
Affiliates easily have all relevant information to benefit from good pension advice to make a right choice of pension mode and carrier
The official disclosure of retiree candidates has added transparency to the marketing of pension offers
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4. Results – lower commissions 4. Results – lower commissions
Source: SVSSource: SVS
Agent́ s Commissions
3,40%3,62%
3,47%
4,67%4,66%
5,58%5,45%
5,84%5,91%
3,89%
2,67%2,68%2,47%
2,13%2,13%2,19%2,05%
1,47%
5,33%
0,00%
1,00%
2,00%
3,00%
4,00%
5,00%
6,00%
7,00%
1991 1992 1993 1994 19951996 1997 1998 1999 20002001 2002 2003 20042005 2006 2007 2008 2009
SCOMPstarts
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4. Results – Pension Offers Requests 4. Results – Pension Offers Requests
Number of Pension Offers Requests january/ 2005-december/ 2009
Pension Advisor 75.712Pension Company 80.425Insurance Company 60.176Total 216.313
Number of Pension Offers Requests(january/ 2005-december/ 2009)
Pension Company
37%
Insurance Company
28%
Pension Advisor35%
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4. Results - Closings 4. Results - Closings
Number of Closings(january/ 2005-december/ 2009)
86.461 64%
49.61336%
Pension CompanyInsurance Company
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4. Results - Capitals transacted 4. Results - Capitals transacted
Closings Capital 2009 (million US$)
915 36%
1.637 64% Pension Company
Insurance Company
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4. Results – Savings on commissions4. Results – Savings on commissions
Average commission before SCOMP: 4,40% Average commission before SCOMP: 4,40% ( 1991 - 2003)( 1991 - 2003)
Average commission since inception of Average commission since inception of SCOMP: 2,07% SCOMP: 2,07% ( 2004 - 2009)( 2004 - 2009)
Lower commissions of 2,33% on average Lower commissions of 2,33% on average On Capitals of US$ 1.760 million per year on On Capitals of US$ 1.760 million per year on average Represent savings of average Represent savings of US$ 41 million US$ 41 million per year per year
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4. Results – Service fees4. Results – Service fees
Fee concept Paid by Amount in US$
Fixed per request Advisor or provider 2
Fixed per closing Provider 7
Variable per closing Provider 26
Total 35
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4. Results - Balance Sheet4. Results - Balance Sheet
ASSETS: Dec-2008 Dec-2009 LIABILITIES: Dec-2008 Dec-2009
Cash and cash equivalents 9 47 Accounts payables 153 165 Securities 534 538 Allowances 69 81 Accounts receivables 207 299 Anticipated income 42 42 Tax receivable 73 12 Anticipated expenses 13 11 Total current liabilities 264 288 Deferred taxes 10 9
Total current assets 846 916 EQUITY:
Paid in capital 494 482 Computer equipment - 1 Retained earnings 35 86
Net income 113 61 Interim dividend (60) -
Total equity 582 629
TOTAL ASSETS 846 917 TOTAL LIABILITIES 846 917
SCOMP S.A.Balance Statements (thUS$)
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4. Results - Profit and Loss 4. Results - Profit and Loss
Operational revenue 834 893 Operational expense (479) (624)
Operational margin 355 269
General and administrative expenses (220) (227)
Operational profit 135 42
Other income net (1) 29
Profit before income tax 134 71
Income tax (21) (10)
Net income 113 61
SCOMP S.A.
Profit and Loss Statements (thUS$)
31/12/2008 31/12/2009
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CONCLUSIONSCONCLUSIONS
• SCOMP produces commission savings of US$ 41 million per year which divided into 17 thousand annuity closings per year represent savings of US$ 2.400 per closing
• This is achieved with a low initial investment in systems development of US$ 500 thousand
• The operational cost is very moderate, some US$ 35 per closing
• Efficiency per closing is great : spending US$ 35 to produce savings of US$ 2.400.