Reducing the transaction costs of retirement annuities in

Reducing the transaction costs of retirement annuities in Chile Sergio Baeza Chairman of the Board of SCOMP S. A. May 2010 Pag : 1

Agenda 1 Conditions prior to the reform 2 Goals of the reform 3 Organizational setup 4 Results Pag : 2

1. Conditions prior to the reform q Assimetrical information between affiliates and sales agents leading to overweight of agents in the pension decision and choice of annuity company q High sales commissions to the detriment of pensions giving agents the resources to financially influence the individual’s choice of annuity company Pag : 3

1. Conditions prior to the reform q 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 q Therefore little competition between these two options of retirement Pag : 4

2. Goals of the reform q Provide CLEAR and COMPARABLE information of the two basic retirement options, annuities and installment withdrawals q REDUCTION OF COMMISSIONS puting a ceiling to them at 2. 5% Pag : 5

2. Goals of the reform q INCREASE PRICE COMPETITION simultaneous biding process through a q EMPHASIZE SOLVENCY by demanding a claims payment rating no less than BBB q PREVENT PAYMENTS FOR RETIREE INFORMATION by the official disclosure of data on candidates for retirement Pag : 6

3. Organizational setup q 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 q Similarly affiliates were mandated to make inquiries through this system as a requisite for retirement q 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% Pag : 7

3. Organizational setup q Access to SCOMP is given to the Pension Companies, the Life Annuity Companies and the Pension Advisors q The system is under the surveillance of both the pension and the annuity regulators q To develop and operate the information system SCOMP hires a systems provider through an open biding process q SCOMP finances itself by charging a fee for each information request and for each closing of a pension decision Pag : 8

3. Organizatioal setup - retirement options q At retirement affiliates have to choose between different pension options: üInstallement withdrawals from the retirement account üImmediate Life Annuity with or without guaranteed term üInstallment withdrawals plus deferred annuity üImmediate Annuity plus Installment Withdrawals Pag : 9

3. Organizational setup - process q The most relevant processes in the system are: üIssue of Balance Certificate üRequest for Pension Offers üIssue of Pension Offers Certificate üSelection of Pension Option Pag : 10

3. Organizational setup - process Pag : 11

3. Organizational setup - process Pag : 12

3. Organizational setup - process Pag : 13

4. Results q Increase in price competition q Decrease in Agent’s Commisision corresponding increase in pensions with the q Affiliates easily have all relevant information to benefit from good pension advice to make a right choice of pension mode and carrier q The official disclosure of retiree candidates has added transparency to the marketing of pension offers Pag : 14

4. Results – lower commissions Source: SVS Pag : 15

4. Results – Pension Offers Requests Pag : 16

4. Results - Closings Pag : 17

4. Results - Capitals transacted Pag : 18

4. Results – Savings on commissions Average commission before SCOMP: 4, 40% ( 1991 - 2003) Average commission sinception of SCOMP: 2, 07% ( 2004 - 2009) Lower commissions of 2, 33% on average On Capitals of US$ 1. 760 million per year on average Represent savings of US$ 41 million per year Pag : 19

4. Results – Service fees Pag : 20

4. Results - Balance Sheet Pag : 21

4. Results - Profit and Loss Pag : 22

CONCLUSIONS • 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. Pag : 23