Peru - Pension Reform Adjustment Loan Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No.: 18048 IMPLEMENTATION COMPLETION REPORT PERU PENSION REFORM ADJUSTMENT LOAN (LOAN NO. 4134--PE) June 23, 1998 Country Management Unit Bolivia, Paraguay and Peru Latin America and the Caribbean Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS (As of March 31, 1997) Currency Unit = Nuevo Sol (S/.) US$ 1.00 = S/. 2.64 FISCAL YEAR OF BORROWER January 1 - December 31 ABBREVIATIONS AND ACRONYMS AFP = Administradora Privada de Fondos de Pensiones (Private Pension Fund) BCR = Banco Central de Reserva del Perui (Central Reserve Bank of Peru) BR = Bono de Reconocimiento (Recognition Bond) CV Cedula Viva (Public Employee Pension System) CONASEV = Comision Nacional Supervisora de Empresas y Valores (National Business and Securities Regulatory Commission) DDSR = Debt and Debt Service Reduction DL = Decreto Legislativo (Legislative Decree) EPAL = Electricity Privatization Adjustment Loan FCRP = Fondo Consolidado de Reservas Previsionales (Pension Reserve Fund) FSAL = Financial Sector Adjustment Loan IPSS = Instituto Peruano de Seguro Social (Social Security Institute) MEF = Ministerio de Economia y Finanzas (Economy and Finance Ministry) ONP = Oficina de Normalizaci6n Previsional (State Pension Regulation Office) PAL Privatization Adjustment Loan PRAL = Pension Reform Adjustment Loan SAFP = Superintendencia de Administradoras Privadas de Fondos de Pensiones (Superintendency of AFPs) SAL = Structural Adjustment Loan SNP Sistema Nacional de Pensiones (National Pension System) SPP = Sistema Privada de Pensiones (Private Pension System) TPRL = Trade Policy Reform Loan Vice President: Shahid Javed Burki Director: Isabel Guerrero Lead Economist: Ernesto May Task Manager: Fred Levy  FOR OFFICIAL USE ONLY TABLE OF CONTENTS Page Preface .............................................i Evaluation Summary ............................................ ii Part I: Project Implementation Assessment .................................. 1 A. Background .............................................1 B. Statement and Evaluation of Objectives ............................ ................. 3 Objectives .............................................3 Evaluation of Objectives .............................................4 C. Implementation Experience and Results .............................................6 Macroeconomic Context .............................................6 "Cedula Viva" Reform .............................................7 National Pension System Reform .............................................9 Private Pension Funds Reform ............................................ 10 Framework for Pension Asset and Liability Management ............................. 13 Complementary Capital Market Reforms ............................................ 14 D. Major Factors Affecting the Project ............................................ 14 Factors not subject to Government control ............................................ 14 Factors subject to Government control ............................................ 15 Factors subject to implementing agency control ........................................... 15 E. Project Sustainability ............................................ 15 F. Bank Performance ............................................ 16 G. Borrower Performance ............................................ 17 H. Assessment of Outcome ............................................ 17 I. Future Operations ............................................ 17 J. Key Lessons Learned ............................................ 18 Part II: Statistical Annexes Table 1: Summary of Assessments ......................... 19 Table 2: Related Bank Loans/Credits ......................... 20 Table 3: Project Timetable ......................... 20 Table 4: Loan Disbursement: Cumulative Estimated and Actual .............. ........ 21 Table 5: Key Indicators for Project Implementation .......................................... 22 Table 6: Key Indicators for Project Operation: not applicable .................. ......... 22 Table 7: Studies Included in the Project ................... ......................... 23 Table 8A: Project Costs ............................................ 23 Table 8B: Project Financing ............................................ 23 Table 9: Economic Costs and Benefits: not applicable ...................................... 23 Table 10: Status of Legal Covenants ........................................ 24 Table 11: Compliance with Operational Manual Statements ............................. 26 .This document has a restricted distribution and may be used by recipients only in the performnance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization...  Table 12: Bank Resources: Staff Inputs ........................... 26 Table 13: Bank Resources: Missions ........................... 27 Part III: Appendices A. Borrower contribution to the ICR ............................ 31 Map This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be distributed without World Bank authorization.  i IMPLEMENTATION COMPLETION REPORT PERU PENSION REFORM ADJUSTMENT LOAN (LOAN NO. 4134-PE PREFACE This is the Implementation Completion Report (ICR) for the Pension Reform Adjustment Loan in Peru. A loan in the amount of US$ 100 million equivalent was approved on February 26, 1997 and made effective on February 28, 1997. The loan was closed on March 31, 1997, after disbursement on March 6 and 14, 1997. The ICR was prepared by Frederic J. Truslow, Consultant, and reviewed by Edgardo Favaro, Lead Economist, the Caribbean Country Management Unit (former task manager for the operation); Emesto May, Lead Economist, the Country Management Unit for Bolivia, Paraguay and Peru; Fred Levy, Resident Representative Peru; Susan Goldmark, Sector Leader, Finance, Private Sector and Infrastructure; Noriko Iwase, Senior Country Officer for Peru, Latin America and the Caribbean Region and Hemant Shah, Principal Financial Officer, Financial Products and Services Department. The Borrower provided comments that are included as an appendix to the ICR. Preparation of this ICR effectively began during the Bank's completion mission of March 1997. It is based on material in the project file and a review of the project in October, 1997 and January, 1998.  ii IMPLEMENTATION COMPLETION REPORT PERU PENSION REFORM ADJUSTMENT LOAN (LOAN NO. 4134-PE) EVALUATION SUMMARY Introduction In 1993, supported by various adjustment operations, Peru had taken major steps to reverse the collapse of its economy and initiate a medium-term program of macroeconomic stabilization and structural reform, including a program of financial sector reform, and a comprehensive external financing package. Financial sector reform included: reducing state participation in banks, improving bank regulation, and reinforcing capital markets by strengthening regulations and introducing a private pension system. Preparation of a SAL II began at that time in support of these objectives, to address, among other matters, the comprehensive reform of the Government 'Cedula Viva' pension system for public employees (CV) and its successor for both public and private employees (SNP), as well as the successful launch of the private pension system (SPP). An important concern during SAL II preparation was the covering of large future pension liabilities and the avoidance of excess public spending. Consequently, the operation foresaw the allocation of a substantial amount of privatization proceeds to be invested for the payment of future pension obligations. In late 1996, set asides from the loan were designated to support the DDSR for Peru's financial creditors, and SAL II was renamed the Pension Reform Adjustment Loan (PRAL). Project Objectives The PRAL sought to increase domestic savings, strengthen the medium-term fiscal outlook, and broaden access to long-term external financing. Generally its objectives were aimed at keeping Peru's newborn pension reform on track. They called for the Government to (i) demonstrate its commitment to closing down the very expensive CV system, (ii) support the rapid expansion of the SPP as a substantial replacement for the SNP, (iii) support strong investment portfolios for the AFPs while reducing their costs and encouraging competition among them, (iv) reduce future fiscal burdens by allocating excess privatization proceeds to fund future pension obligations, and (v) expand the range of financial instruments in Peru's capital markets.  iii In addition, the PRAL supported a simultaneous DDSR operation with Peru's financial creditors. US$ 50 million of the proceeds of the PRAL were set aside to collateralize this operation, along with a free-standing US$ 183 million DDSR loan presented simultaneously for Board approval and US$ 80 million of a related Japan Export Import Bank loan tied to the PRAL. Dictated by the expected closing date of the DDSR operation, it was decided to transform the PRAL to a single-tranche operation due to the lack of time to fully develop second-tranche conditions. Implementation Experience and Results The preparation period of the SAL II/PRAL extended from late 1993 to 1996. Pension reform would involve a multi-year, incremental process of building the institutions of the SPP while modifying and reducing costs of complex existing state systems. The PRAL implemented the initial stage of this process as follows: * CV benefits were capped, new inscriptions to the CV system were prohibited and a scheme was established to register all CV beneficiaries and eliminate ineligible recipients. * The contribution rates and retirement ages of the SNP were changed to correspond to those of the SPP, so that the SPP competed on equal or preferential terms with the SNP. As a result transfers from the SNP to the SPP surged and the SNP effectively ceased to attract new subscribers. - The quality of AFP investment portfolios was upgraded to reduce investment in Government obligations, increase investment in corporate stocks and debt, principally in the non-financial sector, and lengthen debt maturities. This reduced risks associated with sol-denominated investments and heavy concentration in the government and financial sectors. Legislation was enacted to remove disincentives to AFPs competing on the quality of their portfolios and to authorize a greater range of investments. * US$ 1 billion of privatization proceeds were deposited in a newly created Pension Reserve Fund (Fondo Consolidado de Reservas Previsionales) (FCRP) to fund long term pension obligations and avoid excessive Government spending. * A new capital markets law was enacted authorizing new financial instruments and improving securities regulation. To keep up momentum for this ongoing reform process, the PRAL also set forth as objectives future additional funding by the Government of the FCRP, the establishment of budgetary rules to account explicitly for accrued pension costs, a study of the SNP to reduce its costs and consider its conversion to a fully funded program and a continuing review of AFP regulations to reduce cost and complexity.  iv Implementation of post-disbursement steps contemplated by the program have taken longer than anticipated. The Constitutional Tribunal held unconstitutional portions of the principal law addressing CV cost reduction. The Government responded vigorously, passing a corrective law, but the effort was delayed by about half a year. A register of CV affiliates has been created, and is expected by 1998 to be generating information about the number, age, marital status and salaries of employees in the CV and SNP needed to control these systems and estimate future system costs. The Government studies and reviews concerning the SNP and AFPs and pension budget rules have not yet been carried out. Regulations were issued in January 1998 implementing changes to encourage more independence in AFP investment policies. The Government and its implementing agencies, the MEF and the ONP, worked closely with the Bank through the extended preparation period, and showed a high level of commitment to pension reform. Coordination with the SAFP was limited and a set of shared objectives was not developed. After loan disbursement the reform process lost momentum, and the ONP's attention was absorbed by the Constitutional Tribunal decision and the creation of the CV register. As a result, other planned steps were delayed. The Bank was effective in preparing the project and working with the Government to strengthen the SPP and cut back the CV in 1995-96, and to accomplish the US$ 1 billion funding of the FCRP. The single-tranche structure of the PRAL did not, however, provide support to follow-up measures, which would have helped to assure the continuation of the reform process at the same pace into 1997. The Report considers the sustainability of the reforms to be likely, in view of the established position the AFPs have gained as sources of investment funds and the diminishing number of SNP affiliates, and recommends that the Bank continue its participation in the reform process. The PRAL also provided valuable and necessary support to the DDSR operation by collateralizing component loans, in conjunction with the Bank's simultaneous DDSR loan and loans from the Japan Export Import Bank and the Inter-American Development Bank. Summary of Findings, Future Operations, and Key Lessons Learned Overall the Report rates the outcome of the PRAL as satisfactory because of the US$ 1 billion funding of the FCRP, the establishment of SPP primacy over the SNP, the improvement of AFP investment portfolios, and the closing of the CV, all accomplished during 1995-96. Post disbursement implementation was, however, delayed, particularly in the implementation of contemplated studies of SPP and SNP reform, and the regulation of laws enacted in 1996. The Government has requested Bank assistance to carry out the  v planned studies. Future operations to continue and follow up the processes initiated by the PRAL are considered highly advisable in order to maintain the commitment to reduction of costs and expansion of the SPP, the shrinkage of the CV and SNP, and the continued funding and strengthening of the FCRP. Long-term Government commitment to the project is central to success. Persistence and flexibility are necessary for pension reform, since the success of new institutions requires changes in attitudes of Government officials and active and retired employees, and gradual adjustments in terms and levels of benefits to attenuate political and social impacts. A healthy economy that generates successful investment results for the AFPs is a precondition for shrinkage of the SNP. Traditional public pension systems lack adequate records or controls, and thus priority should be given to creating an adequate infonnation base to control expenditures and project future costs. The Bank should provide for ongoing supervision and follow-up in pension reform which involves complex issues and requires multi-year involvement.  1 IMPLEMENTATION COMPLETION REPORT PERU PENSION REFORM ADJUSTMENT LOAN (LOAN NO. 4134-PE) PART I: PROJECT IMPLEMENTATION ASSESSMENT A. BACKGROUND 1. The objectives of the Pension Reform Adjustment Loan (PRAL) built on the reforms begun by Peru in 1990. The first stage of reform involved a medium-term program of macroeconomic stabilization, a comprehensive external financing package, and structural reforms to return to a market economy. This process was supported by the Structural Adjustment Loan (SAL), Trade Policy Reform Loan (TPRL) and Financial Sector Adjustment Loan (FSAL) which were disbursed in 1993, and by the Privatization Adjustment Loan (PAL) and Electricity Privatization Adjustment Loan (EPAL). 2. The SAL sought to improve the provision of key public goods, while at the same time reducing the scope of government intervention in the economy. It addressed reforms in the tax system, labor legislation and social security, among other matters. The TPRL supported opening the economy to world competition through reduction of tariffs and non-tariff barriers, elimination of subsidies and other distortions, and customs reform. The FSAL supported reforms to stabilize the currency, reduce the state role in the financial sector, strengthen the banking sector and develop capital markets. The PAL and the EPAL provided additional support by promoting competition and privatization of state enterprises. 3. As part of the SAL program, pension reform was launched in 1992 and the first half of 1993. A fully-funded, defined contribution, private social security pension system (SPP) was established as an alternative to the existing pay-as-you-go, defined benefit, public pension system (SNP). At the same time, the public system was separated from the health benefits system, the IPSS, and placed under the control of a new agency, the Oficina de Normalizaci6n Previsional (ONP), dedicated to reducing its size and costs and tightening its administration. 4. The serious problems generated by the traditional pension system for government civil service employees, known as the 'Cedula Viva' (CV), were not resolved by the 1992-93 reforms. Efforts to close down the CV had been in the process since 1974, but the system offered such attractive benefits (e.g., retirement at half pay after 15 years, benefits automatically readjusting to match current employee salary increases) that it had been repeatedly reopened. Indeed, contrary to its legislative intent, the CV's coverage had been extended beyond civil service employees to include higher salaried employees  2 in independent state enterprises. Congress had refused in 1992 to cut back inappropriate expansions of the CV, and its benefits were preserved, despite some ambiguities, in the 1993 Constitution. As a consequence, the Government faced enormous unfunded liabilities, and the indexing of benefits to current salaries made necessary improvements in public sector salaries fiscally impossible. Annual expenditures of the Government on CV pensions in 1996 were- about US$ 400 million, compared to US$ 207 million in 1997 for the SNP. The present value of unfumded Government pension obligations totaled some US$ 15 billion under the SNP, and US$ 7 billion under the CV, with CV per capita actuarial costs twice those of the SNP. 5. By the end of 1994, efforts to promote the growth of the private system (SPP) had slowed. Unlike Chile, Peru's Congress had refused to bar new affiliations to the SNP, and the SPP was at a competitive disadvantage to the SNP, having less favorable contribution rates and retirement ages. New affiliations to the SPP had fallen from over 40,000 per month in the first half of 1994 to under 5,000 per month in the first half of 1995. Workers who switched from the SNP to the SPP were offered the incentive of a Recognition Bond (RB) certifying their right to a payment from the Government at retirement equal to the inflation adjusted value of the contributions they had made to the SNP prior to 1993. As time advanced, however, since RBs did not include 1993 and later contributions, incentives for transfers by the under-30 age group fell. 6. In addition, the SPP was not achieving an efficient intermediation of funds; the costs of the private pension fund administrators (AFPs) were high, and their portfolios were remarkably similar and in some respects (heavy concentrations in short-term sol- denominated paper, particularly 28-day BCR notes, bank CDs, and subordinated bank bonds), relatively risky. In large part this was due to a lack of suitable investments available in the Peruvian capital market. Only about 10 stocks traded actively in substantial volume, and there were few corporate bond offerings. 7. The SPP had been structured to discourage differentiation among AFPs' investment portfolios. AFPs were required to create reserves if investment returns on their portfolios varied either up or down from the average 12-month real rate of return of all AFPs by more than the lesser of 50 percent or 2 percentage points. These maximum and minimum 'bands' around a benchmark return rate created a strong incentive for all AFPs to have very similar investment portfolios. They thereby discouraged AFPs from competing on the quality of their investments. AFPs are not permitted to offer more than one investment fund, which further limits their ability to differentiate portfolios or offer portfolios designed to meet the needs of particular categories of workers, such as young workers with a higher tolerance for risk or older workers who would particularly wish to avoid loss of value in the short run. 8. A possible SAL II had been in discussion between the Bank and the Government since the Fall of 1993 to continue the program of the previous SAL. The new operation was initially envisioned as a multi-tranche loan addressing pension reform and a number of other objectives, including trade, budgeting procedures, and land title reform. From  3 the fall of 1994, large inflows of privatization revenues were also identified as a dangerous incentive to excessive Government spending, and SAL II discussions included the allocation of privatization proceeds to cover long-term pension obligations. In addition, the weaknesses of the SPP and the costs of the CV and SNP demanded attention. As a result, the focus of the proposed SAL II came to center on pension reform, with a secondary objective of trade reform. 9. In the fall of 1996, it was decided that 50 percent of the loan amount would be set aside to finance Peru's DDSR operation with its commercial bank creditors, and that the PRAL would be presented to the Board together with a related DDSR loan'. The PRAL was then designed as a single tranche loan focused on pension reform, and the establishment and funding of the Pension Reserved Fund (FCRP) was made a principal condition2. The possibility of a future follow-up operation was left open. The timing of the PRAL disbursement, although it had its own Board conditions, was closely tied to the DDSR operation. B. STATEMENT AND EVALUATION OF OBJECTIVES Objectives 10. The objective of the PRAL were consistent with the Bank's Country Assistance Strategy and supported Peru's medium-term program of macroeconomic stabilization and structural reforms through increasing domestic savings, strengthening the medium-term fiscal outlook, broadening access to long-term external financing, and providing a clear signal of the Government's determination to stay the course. The macroeconomic policy framework called for a 3-5 percent rate of economic growth in 1996-98, a drop in the inflation rate to 6 percent by 1998, and a public sector overall fiscal balance equilibrium by 1998. 11. Consistent with the objective of broadening access to long-term external financing, 50 percent of the loan amount of the PRAL was set aside to finance Peru's Debt and Debt Service Reduction (DDSR) operation with its commercial bank creditors. Disbursed simultaneously with the PRAL were a free-standing DDSR loan of US$ 183 million and a US$ 100 million loan by the Japan Export-Import Bank, of which US$ 80 million was cofinancing with the Bank and US$ 20 million with the IMF. 12. The objectives of pension sector reform were organized into five broad areas: (a) audit and reduction of the costs of the CV, (b) phase down of the SNP, (c) improving ' In accordance with the Board guidelines that a stand-alone DDSR loan should be no more than 15% of the three year lending program. For more information on the DDSR operation with commercial creditors, please see ICR on DDSR (Report No. 17779). 2 Dictated by the expected closing date of the Brady Deal, the senior management recommended a single tranche operation. There was insufficient time to fully develop second-tranche conditions, which could make the release of the second tranche difficult and contentious.  4 investment practices and reducing the cost and complexity of the SPP, (d) allocating privatization revenues to the coverage of the state's pension liabilities and making future budget liabilities and allocations more transparent, and (e) complementary capital market reforms. 13. The objectives of the loan were stated as follows in the Memorandum of President on the PRAL: 'CEDULA VIVA' REFORM: Reducing the contingent obligations of the 'Cedula Viva' pension system, and setting the stage for the reform of the civil service by making it possible to delink CV pension adjustments from civil servants' wage adjustments. NATIONAL PENSION SYSTEM REFORM: Encouragement of migration of workers and employees from the SNP to the SPP, and reducing the contingent obligations of the SNP. PRIVATE PENSION FUNDS REFORM: Increasing the menu of investment options available for those affiliated to the AFPs; more transparent disclosure of risk, and reducing complexity and associated costs of the current regulatory regime. FRAMEWORK FOR PENSION ASSET AND LIABILITY MANAGEMENT: Increasing the transparency of the fiscal accounts; and contributing to a judicious use of Government extraordinary revenues, in particular through the contribution of US$ 1 billion in privatization proceeds to a separate fund to cover future government pension obligations. COMPLEMENTARY CAPITAL MARKET REFORMS: Incorporating the use of new financial instruments into Peru's capital market; improving the regulatory environment; and expanding the range of instruments available for investment by institutional investors such as the AFPs. Evaluation of Objectives 14. The pension reform process is technically complicated and constrained by political sensitivities and the need for institution building. It is thus incremental by nature. Each step needs to build on and be shaped by the prior one. For example, only after the SPP had operated for several years did it become possible to take the further step of strengthening its ability to compete against the SNP, and only after the ONP, which took  5 operating control of the SNP in January 1995, had developed its information base and staff capabilities could it proceed to reform CV operations. 15. The PRAL program thus emphasized "next-step" objectives, which could be acted upon immediately, such as faltering SPP enrollments and the application of privatization proceeds to fund pension obligations. It also recognized important longer-terrn objectives, such as reducing contingent obligations of the SNP and CV, SNP restructuring and SPP cost reduction, for which it was not presently practicable or advisable to establish complete implementation plans, but which would provide the base for future "next steps". 16. The objective of reducing the contingent obligations of the Cedula Viva system was central to fiscal health, but difficult to achieve to the extent that it required cutting back benefits to retired teachers and other organized groups of traditional civil service employees. The strategy selected was to focus on benefit reductions to high-salaried beneficiaries employed by independent state enterprises, who could be singled out as a limited, privileged group. DL 817, enacted in April 1996, recognized the legal rights of legitimate CV beneficiaries, but required all beneficiaries to re-register to establish their benefit rights and to eliminate fraudulent claims. To control outlays to state enterprise beneficiaries, it undertook to audit their claims closely, to invalidate to the extent possible claims arising from wholesale incorporations of independent state enterprises into the system, and to impose a benefit cap equal to the salary of members of Congress. As discussed below, significant difficulties have arisen in auditing claims and overcoming legal challenges to benefit reduction. At the same time, the objective of delinking CV pension adjustments from civil service wage adjustments, which was important for future Government salary reform, was not implemented because of the resistance of traditional civil service groups and the concern that it would require amendment of the Constitution. 17. The objectives aimed at encouraging new affiliations to the SPP and transfers from the SNP addressed the most important immediate problem of the SPP, that of competition between coexisting private and public pillars. Closing the SNP to new entrants would have eliminated this problem, but this alternative had been rejected by Congress. The alternative solution, which was adopted, was to improve the competitive position of the SPP against the SNP, and to encourage migration of employees, particularly those under 30, from the SNP to the SPP. 18. The objective of reducing contingent obligations of the SNP was of central fiscal importance but was not susceptible of immediate implementation other than through promoting migration to the SPP. The possibility was considered of converting the SNP to a fully-funded system, but the Government considered that this step would have to wait until the SNP had been reduced in size, the ONP had developed more information and controls concerning SNP participants, the success of the SPP had been more clearly demonstrated, and the CV audit completed. A study of possible modifications to the SNP was included in the Letter of Sector Policy.  6 19. The improvement of SPP intermediation focused on enhancing the mix of investments in AFP portfolios and removing regulatory barriers to differentiation of AFP portfolios. Portfolio differentiation represented a significant innovation in the design of privatized social security systems. The Chilean model had discouraged performance variation among AFPs for fear that it would increase volatility in portfolios and reduce confidence in the system as a whole. Peru's system now permits competition among AFPs on the basis of portfolio type and quality. This should result in higher investment returns and a better range of products for affiliates. This objective is supported by the objectives for complementary capital market reforms. 20. The broader objective relating to SPP reform was to reduce complexity and associated costs of the current SPP regulatory regime. This was to be addressed by the review to be conducted by the Government after disbursement, since additional time was required to develop an agreed program of regulatory and institutional change. 21. The objective of covering outstanding liabilities and contributing to a judicious use of Government extraordinary revenues, which led to establishing and funding with US$ 1 billion the FCRP, stands out as a significant accomplishment of the PRAL. The Government faced a massive liability for future pension obligations. At the same time, it had substantial international revenues from privatizations, and needed to exercise fiscal restraint. It was thus agreed to set a portion of these revenues aside as a separate fund to back pension obligations. This appears to be the first time that any government has set aside such a substantial reserve from its general funds for investment and subsequent payment of medium and long-term pension obligations. The related objective of increasing the transparency of the fiscal accounts was left to post-disbursement action. The Government was to prepare budgetary rules and account for the costs of pension obligations, and to program additional future contributions to the FCRP. 22. The complementary capital market reforms sought to introduce more sophisticated legal, regulatory, and financial structures into the capital markets to build on earlier reforms supported by the SAL and FSAL. This was a natural adjunct to pension reform, as it increased the investment opportunities for the private pension system. It complemented the vigorous growth of the Peruvian securities markets and drew on the increasing sophistication of the securities regulatory system. C. IMPLEMENTATION EXPERIENCE AND RESULTS Macroeconomic Context 23. Fiscal and monetary discipline together with structural reforms, greater public order, and targeted programs to alleviate the condition of the poor had remarkable results from 1990 to 1996: the economy improved noticeably, terrorism was nearly defeated, and the percentage of families below the poverty line decreased. There was a steady decline in inflation, and Peru moved from virtual international isolation to become one of the most attractive emerging markets in the region. Higher confidence resulted in a large  7 inflow of capital, which boosted aggregate demand and economic growth. Productivity increased steadily and so did per capita income and consumption levels, especially in the more remote regions. 24. The rate of inflation fell steadily after 1990 as a result of tight fiscal and monetary management. The elimination of credit from the Central Bank to the development banks drastically reduced the rate of monetary expansion and inflation thus plummeted from 410 percent in 1991 to 12 percent in 1996. Monetary expansion during this period has resulted primarily from purchases of foreign exchange. However, the Central Bank has applied open market operations to absorb excessive increases in the money supply resulting from its accumulation of foreign currency assets. 25. Fiscal policy has been tight, maintaining public sector spending in line with tax collection, and financing the deficit entirely through external credits. Even though public sector spending was drastically reduced at the beginning of the stabilization programs, most of the savings were brought about through the elimination of credit subsidies, the reduction of state participation in the financial system, and cuts in the deficit of state owned enterprises; in other words, a reduction in government transfer payments, and not cutbacks in essential public services, which would have had negative social consequences. 'Cedula Viva' Reform 26. Progress towards the objective of reducing the contingent obligations and delinking wage adjustments of the 'Cedula Viva' pension system is considered partial. The basic strategy for achieving the objective of reducing costs of the CV was set by DL 817, enacted on April 23, 1996. This law was enacted under a general delegation by the Congress to the President to legislate as to matters enhancing employment. It: (i) permitted public employees to transfer from the CV to the SPP and established a recognition bond and other incentives for such transfers, (ii) authorized the ONP to audit for legitimacy all CV benefit claims, and (iii) set a ceiling for CV pensions at the level of remuneration of members of Congress. It acknowledged the legal rights of CV beneficiaries, but required that beneficiaries re-register to prove their rights, and sought to establish a special administrative and judicial regime to rule on CV pension issues. 27. DL 817 was a substantial advance in that it firmly committed the Government to closing the Cedula Viva system. In 1992, Congress had rejected DL 763, enacted by the President to cut back inappropriate incorporations of nationalized state enterprises into CV during the previous Administration, but did thereafter delegate to the President the power to legislate as to pensions. DL 817 contained firm measures to close and cut back illegal benefits under CV, and the ONP vigorously administered the law. 28. After disbursement of the PRAL, however, policy implementation was set back by an adverse decision of the Constitutional Tribunal on April 23, 1997. This held unconstitutional DL 817 to the extent that it (i) authorized the ONP to invalidate pension  8 benefits without judicial action, (ii) eliminated time limitations under previous laws on finding benefits invalid, (iii) imposed benefit caps retroactively, and (iv) created a special system of ad hoc judges for CV cases. DL 817 contained a number of provisions seen as infringing the independence of the judiciary, and thus proved difficult to defend in the courts. In response to the Tribunal's decision, Congress passed Law 26835 on July 3, 1997. This law provided for court review of ONP decisions as to pension benefits, set time limits for invalidation of benefits, provided a system of benefit caps effective July 1, 1996, and encouraged settlements of disputes by relieving pensioners under audit who settled disputes voluntarily from the obligation to return excess benefits. 29. The ONP gave first priority under the revised regime to registering all active and retired CV beneficiaries, to obtain, for the first time, the information base necessary to invalidate unlawful claims and accurately estimate future obligations. Over 320,000 potential beneficiaries, of which 60,000 are active and 260,000 retired, have submitted account information to the register. The ONP is presently reviewing and cross-checking this information, so as to be able to provide program cost estimates later in 1998. Important progress has thus been made in obtaining the information necessary to manage and control the CV system. 30. The ONP has established a methodology for, and expects shortly to commence contesting or negotiating disputed claims, with primary focus on large groups of high salary beneficiaries from formerly nationalized state agencies with defective legal authorizations. Many of these cases are in litigation. The ONP is also regulating the system of graded benefit caps created by Law 26835, which will apply public employee salary scales in calculating benefit adjustments for higher-salaried state enterprise retirees. The benefit caps will not change the existing linkage of CV pension adjustmnents for civil service retirees to wage adjustments of those civil servants, who are not receiving benefits based on the high salaries of state enterprises, and there appears to be no legal basis to do so. 31. The decision of the Constitutional Tribunal did not invalidate the cap on benefits equal to a Congressman's salary which was imposed by DL 817. Approximately 25% of CV pensioners of state enterprises would have had benefits exceeding that cap. The law thus resulted in an estimated US$34 million annual saving to the Government. Other savings from the cost reduction program have not yet been determined. More persons than anticipated have registered claiming to be CV beneficiaries, and no CV beneficiaries have voluntarily transferred to the SPP. In presenting Law 26835 to the Congress, the Government estimated in June 1997 that some 40,000 CV beneficiaries might be disqualified through the audit program, generating savings of about US$166 million per annum, but the audit has not yet progressed to the point of determining actual savings. The passage of Law 26835 by Congress has, however, strengthened the legal and political basis of the reform, and the register is substantially advancing the information base for control.  9 National Pension System Reform 32. Progress toward the objective of encouraging the migration of workers and employees from the SNP to the SPP is considered substantial. The SPP significantly enhanced its ability to become the system of choice for new entrants to the labor force, and win over from the SNP the bulk of the young workers who had joined the SNP during the period 1993-96. The principal means of accomplishing this objective was Law 26504 of July 1995, developed as part of the preparation of the PRAL, which equalized contribution rates and retirement ages for the two systems. DL 874 of November 1996 increased contribution rates for the SNP by 2% above the SPP, and established a presumption in favor of inscription in the SPP. 33. DL 874 also created a new series of Recognition Bonds 1996 to take into account contributions to the SNP during the period 1993-96, creating an incentive for transfer to the SPP by workers who would otherwise have lost the benefits of their contributions to the SNP during that period. The Bank supported this change particularly to encourage transfers by SNP affiliates aged under 31, estimated by the ONP to number 165,000 in October 1996. Regulations for the new BRs were issued in July 1997, and as yet they have not had an impact on affiliations. They are applicable only for transfers occurring before December 31, 1997. That date should be extended for another year to provide time for their promotion by the AFPs. 34. The effect of the foregoing changes and the CV reform is shown in weekly affiliations to the SPP. After an initial high pace of affiliation exceeding 10,000 per week from January 1993 to mid 1994, affiliations dropped to 1,000 per week until June 1995. Coincident with the promulgation of Law 26504, affiliations rose to over 5,000 per week from June 1995 to April 1996. Then there was a jump to 9,000 per week from April to September 1996, coincident with the passage of DL 817 and apparently resulting from concerns about the future of the SNP generated by the CV reform. Since December 1996, affiliations have run at about 4,000 per week. 35. The Superintendency of the private insurance associations (SAFP) has calculated that 1,439,000 persons transferred from the SNP to the SPP during 1993-96, and 94,000 more in the first half of 1997. Even without implementation of the BR 1996, 52,000 of these 1997 transfers were aged under 31, indicating a continuing migration to the SPP of younger SNP affiliates. It is significant that almost all of the 102,000 net new affiliations to the SPP in the first half of 1997 were transfers from the SNP, including over 7,000 of the 11,000 new affiliates aged under 21. This suggests that many new entrants to the work force may first join the SNP and then transfer to the SPP, confirming the importance of maintaining transfer incentives. 36. By December 31, 1997, 1.74 million workers were enrolled in the SPP, an increase of 190,000 since the end of 1996; there were almost no net new enrollments to the SNP; and the SNP had been reduced to under 1 million, principally through transfers to the  10 SPP. Most of those remaining in the SNP were older workers whose age would not permit them to build sufficient benefits under the SPP. 37. The ONP issued by the end of 1997, in fulfillment of a commitment by it to the IMF, formal certificates evidencing 36,901 BRs. Requests for 162,000 BRs in the amount of S/. 2,735 million had been received in acceptable form, and confirmations (constancias) had been issued for 158,000 BRs in the amount of S/. 2,668 million. 38. Progress toward the objective of reducing the contingent obligations of the SNP is considered partial. The ONP does not have accurate calculations of enrollment in the SNP, but has been advised by the IPSS, which keeps enrollment records, that the number of SNP active affiliates fell by about 370,000 from September 1995 to December 1996, roughly consistent with the growth of the SPP during this period. The ONP lacks the information as to the ages, salaries, marital status and demographics of SNP affiliates necessary to estimate the effect of this reduction on future benefit obligations. Costs include approximately US$ 0.43 billion in present value of BRs requested for issuance through December 1997, all of which are fully funded by the FCRP. It appears likely that the present value of all BRs, including bonds still to be requested, will be about US$ 1 billion. 39. The Government can still significantly reduce the contingent obligations of the SNP through encouraging transfers to the SPP. Transfers still account for most new enrollments in the SPP, and would presumably be increased if the Government extended effectiveness of the BR 1996. In addition, the Letter of Sector Policy called for the Government to prepare a study, in the first half of 1997, analyzing the state of the SNP and addressing the costs and benefits of alternative courses of action to reduce the contingent obligations of the SNP, including consideration of its phase-out or transformation into a fully financed pension regime. In the second half of 1997, the Letter of Sector Policy called for Government design and implementation of necessary changes in the pension regulatory framework. The ONP has commenced a market study to determine the reasons workers remain in the SNP, in order to better design strategies to encourage transfers to the SPP. Private Pension Funds Reform 40. Progress toward the objectives of increasing the menu of investment options available to those affiliated to the AFPs and a more transparent disclosure of risk is considered partial. Progress has been made in improving the quality of AFP investment portfolios. In the fall of 1995 the Bank suggested that (a) too much AFP investment was concentrated in very short-term debt (about 50 percent of all debt instruments had maturities of 90 days or less at year end 1994 and 1995, and only 36 percent in 1994, increasing to 45 percent at the end of 1995, had maturities of over 360 days); (b) stock investments were under-represented in the portfolio (14 percent at the end of 1994 and 18 per cent at the end of 1995); and (c) the Government appeared to be fostering substantial  11 AFP investment in short-term Central Bank sol-denominated notes to sterilize domestic currency issued for purchases of foreign exchange. 41. By mid 1996, the AFPs reduced their investment in Government obligations, particularly including BCR short-term paper, from about 23 percent of portfolios to under 1 percent, and increased correspondingly their investments in corporate bonds and non- financial entity stocks. By the end of 1996, 72 percent of AFP portfolio debt had maturities over 360 days, only 13 percent had maturities under 90 days, and investment in equities had increased to 32 percent. Holdings of Government obligations had remained at 1 percent. The portfolio was, for the first time, invested almost as much in non- financial sectors as in the financial sector. While the proportion of sol-denominated to dollar denominated debt remained at 4 to 1, the higher proportion of longer maturities meant that more sol debt was indexed, and there was less risk of loss due to currency devaluation. At the end of 1997 non-financial sector investments exceeded financial sector investments, and the proportion of sol-to dollar-denominated debt was 3 to 1. 42. It was possible to make these changes in the AFPs' investment mix despite the growth of portfolios from SI. 560 million at the end of 1994 to SI. 1.35 billion at the end of 1995 and to SI. 2.47 billion during 1996, because the supply of corporate equity and debt investments had substantially increased. AFP portfolio holdings of debt with maturities over 360 days increased from SI. 175 million at the end of 1994 to SI. 491 million at the end of 1995 and SI. 1.2 billion at the end of 1996. Equity holdings increased from SI. 79 million to SI. 244 million to SI. 787 million for the same periods. 43. In 1996, about 13 percent of AFP portfolios (declining to 10.5 percent in December 1997) were invested in subordinated bank bonds, taking an equity risk for a return appropriate to a fixed income security. The Government is considering the extent to which such investments should be limited or classified as equity in line with the continuing prudential limitations on equity investment. 44. AFPs were authorized in September 1997 to invest in structured bonds (medium- term corporate bonds which pay at maturity the principal plus a return based on the gain on a basket of publicly-traded stocks), and were authorized in January 1998 to invest in certain of the most widely traded unrated stocks, to be designated by the SAFP. Authorization is expected for AFPs to invest up to 5 percent of portfolios in Peru's Brady Bonds. The Government is considering the extent of permitted investments in foreign securities. 45. The enactment of DL 874 in November 1996 cleared the way to removing the regulatory impediments to each AFP independently structuring its investment portfolio. It also encouraged fuller disclosure of the impact of AFP costs on portfolio returns, and expanded the categories of securities in which AFPs can invest. DL 874 eliminated the maximum return requirement: that each AFP set aside in a reserve investment earnings which exceeded by more than the specified margin the average return on all AFP portfolios. It retained but softened the minimum return requirement, leaving to the  12 SAFP, with MEF approval, to determine the earnings level below which an AFP would be required to provide reserves. In addition, it required that rates of return on investment portfolios be reported net of fees charged by the AFP, thereby permitting and encouraging affiliates to take into account AFP costs in evaluating their performance. 46. The Bank had recommended elimination of the minimum return requirement, because there was ample incentive for an AFP to maximize its investment return, the presence of any restrictive minimum profitability requirement would tend to discourage investment in more volatile but potentially higher yielding securities, and the tendency to uniformity of portfolios was principally a result of the minimum return requirement. The regulation modifying the minimum return was issued in January 1998. It requires that the investment return of each AFP portfolio not be less than the lower of (a) the average return of all AFP portfolios minus 3 percentage points and (b) 25% of the average return of all AFP portfolios, but also requires that the real return in any case not be less than 0. The average return will be determined over a moving 60 month period, significantly loosening the previous 12 month test. The Government will be monitoring the effect of this change on portfolio differentiation. 47. The requirement of DL 874 that rates of investment return be reported net of fees has not yet been implemented by regulation. Care is needed in order not to overstate the impact of fees on investment returns in the initial years of AFP operation. AFPs are required to set fees, and also collect contributions to the retirement fund, as a percentage of salaries. Presently AFP fees approximate 2.3 percent, and contributions are set at 8 percent, of salaries. Monthly fees are thus a very high percentage of monthly contributions, but a declining percentage of cumulative contributions. Since earnings on the retirement fund are a function of cumulative contributions, they will be exceeded by fees in early years, but will be less and less impacted by fees over time. 48. Progress toward the objective of reducing complexity and associated costs of the current regulatory regime is considered partial. The Letter of Sector Policy called for reviewing present regulations during the first half of 1997 to explore possible reductions in complexity and cost. Some reduction of regulatory complexity has been accomplished through DL 874, and terms of reference are being prepared for the review of present regulations and costs called for the Letter of Sector Policy. To accomplish such a review the MEF should work in close coordination with the SAFP and the AFPs, but the relationships between these agencies have not been close, and the SAFP has resisted loosening its detailed regulatory control over the AFPs. The SAFP is interested in expanding voluntary investment by AFP affiliates and serving the informal and self- employed sectors and does favor increased competition among AFPs and reduction in their costs. It is doubtful, however, that the AFPs can achieve these objectives unless costs and regulatory complexity are further reduced.  13 Framework for Pension Asset and Liability Management 49. Progress toward the objective of increasing the transparency of the fiscal accounts is partial. The ONP has not yet issued the periodic estimates of actuarial costs of pension obligations under the SNP and CV contemplated by Law 26504, nor has it issued the related budgetary rules contemplated by the Letter of Sector Policy. The ONP, as described above, has made substantial progress through the register created under DL 817 toward determining the characteristics of its CV beneficiaries, and anticipates having by early 1998 sufficient information to estimate the actuarial cost of CV pension obligations. The IPSS initially inscribes affiliates in the SNP but does not have a system for identifying and enumerating affiliates. It is presently collecting information as to ages, marital status and salaries of affiliates. The ONP is testing a system, to be in place by mid 1998, for issuing mechanized electoral identification cards (libretas electorales) to SNP affiliates to permit their ready identification, simplify payment, and assist in controlling costs. 50. Progress toward the objective of contributing to a judicious use of Government extraordinary revenues is substantial. The Government established the Pension Reserve Fund -- Fondo Consolidado de Reservas Previsionales (FCRP) -- to back pension obligations as part of DL 817 in April 1996. The decree establishing the regulatory regime for the FCRP allows the FCRP to (i) invest funds in the domestic market or abroad, (ii) subcontract one or more administrators to manage the FCRP investment portfolio, and (iii) invest no more than 5 percent of the funds in public sector debt of the Government. The funds of the FCRP are declared to be exempt from embargo or attachment, and may be used only for payment of pension obligations. The FCRP is obligated to report periodically on its investment performance. Under the Letter of Sector Policy, the Government is to prepare budgetary rules for and account for the costs of pension obligations, and to program additional contributions to the FCRP. The Government designated the independent directors for the FCRP in November 1997, but has not yet set up its investment scheme or selected investment advisors. 51. In February 1997 the Government transferred US$ I billion from Treasury resources to the FCRP, significantly relieving future fiscal pressure on the Government. These funds and the returns thereon are designated for use exclusively for BRs created under existing laws. The present value of BRs issued or to be issued by the Government is estimated at about US$ 1 billion (assuming a 6% discount rate). As a result, all or most of the Government obligation for BRs is expected to be fully funded. This could provide a significant incentive to transfers to the SPP, particularly for employees in the 30-40 age cohort who may expect a lower pension under the SPP than the SNP but prefer the combined security of a funded BR and a funded account with an AFP. 52. Unfunded liabilities for future pension obligations under the SNP and CV are estimated to exceed US$20 billion. The FCRP is designed to determine the size of this fiscal gap and provide a repository for its funding in the future. As yet no further contributions to the FCRP have been programmed.  14 53. In September, 1997 the FCRP regulation was amended to permit the ONP to administer, as a restricted, non-embargable account, the funds transferred to the FCRP until it became operational. This was to avoid any possibility that the funds might be returned to the general accounts if the FCRP did not become operational within the budgetary period. In November, 1997 the Government named the two private directors of the FCRP, and an initial organizational meeting was held in December. Complementary Capital Market Reforms 54. Progress toward the objective of incorporating the use of new financial instruments into Peru's capital market, improving the regulatory enviromnent, and expanding the range of instruments available for investment by institutional investors such as the AFPs is considered substantial. DL 874 expanded the categories of securities in which AFPs can invest to accommodate the new investment funds and securitized pools authorized by DL 861 and 862, the new capital markets laws. Although these laws are sometimes lacking in protections for corporate autonomy and business judgment, and permit a very broad role for CONASEV, they are a useful advance toward a self-regulating market and appear to have been well administered by CONASEV. The investment vehicles authorized by these laws are by their nature complex and sophisticated. It will be some time before investments of this kind are available on the Peruvian capital markets, and adequate for AFP investment. Still, the market has shown a capacity for sophisticated instruments, such as structured bonds, and it can be expected that the AFPs will play an active role in fine-tuning the terms of the new instruments. D. MAJOR FACTORS AFFECTING THE PROJECT 55. The substantial progress toward pension sector reform achieved by the PRAL is attributed to a solid working relationship between the Bank and the Government during the preparation period, which lasted from late 1993 to 1996. The strong Government commitment contributed to the very positive outcome of revitalizing the SPP, closing de facto the SNP and de jure the CV, and providing substantial funding for the FCRP. The move to a one-tranche operation did, however, limit the ability of the PRAL to support those pension reform objectives not accomplished by the end of 1996. In addition, Bank staff continuity may have suffered as a result of Bank reorganization. Factors not subject to government control 56. During the period of implementation of reforms, concerns for the Peruvian economy were raised by the Mexican currency and banking crisis of December 1994. This factor may have facilitated making a substantial deposit of revenues to the FCRP, as it encouraged the closing of future fiscal gaps and restraint in public spending. The continuing stability of the economy and lack of severe adverse reactions in the capital markets also help sustain the continued expansion of the SPP. Given the central role of the SPP in providing a private source of pension security and minimizing the future  15 growth of Government funded pension costs, the health of the economy and the growth of investment opportunities in the Peruvian capital markets will continue to be important influences on pension reform. The future growth of the SPP will also depend on affiliations from the informal sector, estimated at 60 percent of the economically active population. 57. The presence of strong groups benefited by the CV or SNP has limited Government options, particularly in Congress's decision in 1993 not to close the SNP to new entrants, and in the adverse decision of the Constitutional Tribunal. Nevertheless, it was possible to increase SNP contributions and extend retirement ages in 1995 and to establish a clear policy in DL 817 and Law 26835 to close and cut back the CV. Factors subject to government control 58. The program represented by the PRAL depended upon a high level of Government commitment to fiscal responsibility, control of public spending, reduction in costs of the CV and SNP and support for the SPP. The Government showed this commitment in the US$ 1 billion set aside for future pension obligations, its willingness to equalize the contribution rates and other terms of the SPP and SNP in July 1995, even increasing SNP contribution rates above SPP rates in November 1996, and its decision to cap and audit CV benefits to a significant number of beneficiaries in April 1996. Pension reform is by its nature politically costly, since its adverse impacts are immediately imposed on a specific population in a visible and quantifiable way, while its benefits are not immediately quantifiable and come far in the future. This may have contributed to the reduction in Government attention to the PRAL objectives once the loan was fully disbursed. Factors subject to implementing agency control 59. The implementing agency for CV and SNP reform, the ONP, was highly committed to the success of the program, although its limited staffing required it to devote its principal efforts to the CV audit and related litigation. The issuance of BRs and particularly the implementation of the 1996 BRs, were thus delayed during mid 1997, as were the budgetary rules for accounting for accrued pension obligations. The SAFP was less committed to the program, and some lack of coordination with other government agencies occurred as a result. The program would have benefited from earlier efforts to establish a single policy in favor of encouraging transfers from the SNP to the SPP, to which the SAFP would adhere as well as the ONP and the MEF. E. PROJECT SUSTAINABILITY 60. Program sustainability based on the objectives of minimization of participation in the CV system, discouraging new inscriptions in the SNP, and continued expansion of the SPP is considered likely. Reduction of pension costs is closely related to the success of the broader program of economic liberalization supported by the SAL and FSAL, and to  16 the control of government spending necessary for macroeconomic stability -- low inflation, sustainable growth, and improving international liquidity. Thus pension reform is likely to be sustained as a part of a continuing government commitment to macroeconomic stability. Nevertheless, this assessment is based exclusively on an evaluation of the current government's plan of action, and the continuation of these policies with a new government cannot be assured. The history of the CV system, which was closed down and reopened repeatedly since 1974, is not encouraging as an indication of national self-discipline on pension benefits. Still, the Government has persisted in the cut back of the CV despite setbacks. 61. The long-term prospects for conversion of the present pay-as-you-go national pension regime into a fully funded defined contribution system are much strengthened by the presence of other such systems in neighboring countries and the proven beneficial effect of Chile's program on its capital market system. In addition, the SPP has reached US$1.5 billion in assets at year end 1997, and is expected to grow by year end 2000 to over US$ 4 billion. It will have become such an important source of institutional investment funds in the Peruvian capital market that the broad reversal of the program does not appear likely. The quantity of private pension funds to be invested will in particular tend to broaden the range of AFP investments and encourage diversification of portfolios. Continued supervision and follow-up will be important in enhancing sustainability. 62. Without detracting from the sustainability of the broad course of pension reform, however, the sustainability of the program to reduce costs of the CV regime in the near term may be in question. The decision of the Constitutional Tribunal limits the effectiveness of the cost saving devices of DL 817, and, despite Law 26835, the Government will be required to live with a very substantial CV cost burden, which also complicates the rationalization of public sector pay levels. F. BANK PERFORMANCE 63. Bank performance in the PRAL was satisfactory. The Bank identified the appropriate objectives in 1994 to keep the pension reform on track, and played a catalytic role through the preparation and appraisal stage in focusing the Government's attention on the measures necessary to reduce public expenditures, avoid using the AFPs to sterilize currency, keep the SPP growing and shrink the SNP, while obtaining a US$ 1 billion set aside of revenues to fund future pension obligations. The quality of staff analysis and effectiveness in communication contributed to the positive outcome of the program. 64. The beneficial effects of the loan were, however, truncated by having only one disbursement. A second tranche would have reduced the risk of reduction of Government's attention after disbursement. Follow-up was probably also adversely affected by the lack of a supervision mission and the impact of the reorganization on staff assignments.  17 G. BORROWER PERFORMANCE 65. Borrower performance in the PRAL was satisfactory in preparation and pre- disbursement implementation, although delays occurred in post-disbursement implementation. The Government showed a high degree of commitment to the programn, and cooperated fully during preparation and appraisal. Those directing the program in the MEF were prepared to resolve disputes and insist on the program's objectives. The ONP performed effectively to the extent of its powers and persisted in its mission to shrink the SNP and CV. A particular accomplishment was the passage of the corrective law after the adverse Constitutional Tribunal decision on DL 817. Coordination with the SAFP was limited, so that a set of shared objectives was not developed, and the implementation of DL 874 was only partial. Program objectives were in a number of cases not followed up after disbursement of the loan. H. ASSESSMENT OF OUTCOME 66. On the basis of the review of this program, the PRAL is rated as satisfactory. The program achieved its principal immediate objectives prior to loan effectiveness: a clear commitment to close and minimize the CV regime, the revitalization of the SPP and corresponding shrinkage of the SNP, and the funding of future pension obligations through the transfer of privatization proceeds to the FCRP. Sustainability is considered likely. The PRAL provided needed support for the DDSR operation, which closed successfully, substantially reducing Peru's debt service. 67. The effect of these steps is that Peru has turned the corner on pension reform. It has committed itself to the closing of Cedula Viva and achieved the defacto if not dejure closing of the SNP. The SPP thus becomes the principal focus for future progress. The diversification of AFP portfolios and establishment of incentives for the transfer of younger affiliates from the SNP to the SPP, establishment of budgetary rules for pension cost accounting, and the audit of the CV system have been initiated, but not advanced to the point that completion is assured. Planning for the simplification of SPP regulation, reduction of SPP costs, and the possible conversion of the SNP to a fully-funded system had been placed on the agenda but not yet commenced. I. FUTURE OPERATIONS 68. There are a number of areas in which future Bank operations could support the pension reform objectives not fully implemented by the PRAL. Cost reduction in the CV program will continue to be a fiscal priority of the Government. The phasing out of the SNP or its transformation into a fully funded pension system could be advanced through continued Bank technical and financial support. The simplification of AFP regulation and reduction of AFP costs should be explored so as to enhance competition among AFPs and make the SPP more attractive to the self-employed and informal sectors. A program for additional funding and an investment regime is needed for the FCRP.  18 69. A problem in the SPP which was not a focus of the PRAL but merits attention is that contributions for 50% of employees are paid late to the AFPs, mostly because employers postpone such payments to finance other operating costs. This issue was addressed through tightened enforcement in the regulations issued in January 1998. It will be essential for the future health of the SPP to preserve strict penalties against such practices. 70. The most fruitful areas for future Bank focus are the simplification of the SPP and the restructuring of the SNP to a fully funded system. It is widely recognized that the costs and complexity of the regulations controlling the AFPs make it difficult for the SPP to attract voluntary savings, and thus to expand into the informal sector and to serve the self employed. The SNP continues to generate high future obligations, which could be reduced if an adequate funded or partially funded alternative structure can be devised. The Bank can provide useful support in addressing these complex issues, most immediately through its participation in the studies of the SNP and SPP presently being prepared by the Government. 71. The difficulty in projecting future costs of the SNP and CV arises directly from lack of basic information about the number, age, salaries, and marital status of affiliates in these programs. ONP controls over and information about the SNP need to be improved in the future. J. KEY LESSONS LEARNED 72. Long-term Government commitment to the project is central to success. Persistence and flexibility are necessary for pension reform, since the success of new institutions requires changes in attitudes of Government officials and active and retired employees, and gradual adjustments in terms and levels of benefits to attenuate political and social impacts. A healthy economy that generates successful investment results for the AFPs is a precondition for shrinkage of the SNP. Traditional public pension systems lack adequate records or controls, and thus priority should be given to creating an adequate information base to control expenditures and project future costs. 73. The Bank should provide for ongoing supervision and follow-up in pension reform which involves complex issues and requires multi-year involvement.  PART II: STATISTICAL ANNEXES  19 Table 1: Summary of Assessments A. Achievement of Substantial Partial Negligible Not Applicable Objectives (1) ( ) (1) (1) Sector policies ] L II] Financial objectives L 0 Institutional development 0I I/ L Physical objectives LI LI LI Poverty reduction / F V Gender issues L L V Other social objectives L L I I Environmental objectives LI FI I] Public sector management I L/ 0 L Private sector development /L 3 LI Other (specify) [ LI B. Project sustainability Unlikel Uncertain (/) (1/) (1) C. Bank performance Highly satisfactory Satisfactory Deficient (1) (1) (1) Identification L I [ Preparation Assistance 0 [] Appraisal L J L Supervision L Ln D. Borrower Performance Highly satisfactory Satisfactory Deficient (1) (1) (/) Preparation 0 / -I Implementation L / L E. Assessment of outcome Highly Highly satisfactory Satisfactory Unsatisfactory satisfactory LV LI LI O ~~ ~ ~ ~ ~~~~~ / O  20 Table 2: Related Bank Loans/Credit Loan/credit title Purpose Date of approval Status Preceding operations 1. Trade Policy To support the 02/04/92 Fully Reform Loan Government's medium disbursed. (3437-PE) term program of trade policy reform. 2. Structural To support the 03/26/92 Fully Adjustment Loan Government's medium disbursed. (3452-PE) term program of macroeconomic stabilization and broad- base structural reforms 3. Financial Sector The Government's 6/17/92 Fully Adjustment Loan program of disbursed. (3489-PE) comprehensive financial reform with particular reference to banking and capital markets. The Trade Policy Reform, Structural Adjustnent and Financial Sector Adjustnent Loans were all quick disbursing loans, designed to support Peru in its macroeconomic and structural reform efforts in the context of clearance of arrears to the Bank at end- 1992. Table 3: Project Timetable Steps in Project Cycle Date Planned Date Actual/Latest Estimate Preparation October 1993 November 6-21, 1995 Appraisal 1995 September 16-20, 1996 Negotiations September 1996 November 18-22, 1996 Letter of Development Policy October 1996 November 25, 1996 Board Presentation November 6, 1996 February 11, 1997 Signing November 1996 February 26, 1997 Effectiveness November 1996 February 28, 1997 Disbursement November 1996 March 6 and 14, 1997 Project Completion December 1996 February 28, 1997 Loan Closing December 1996 March 31, 1997  21 Table 4: Loan Disbursements: Cumulative Estimated and Actual (US$ million equivalent) FY95 FY96 Appraisal Estimate 100 Actual _ 100 Actual as % of Estimate % 100% Dates of Final Disbursement March 6 and 14, 1997  22 Table 5: Key Indicators for Project Implementation Indicator Change in average Rate of January-June 1995: 3,770 Affiliation to SPP before and after enactment of Law 26504 July 1995-April 1996: 25,160 (July 1995) and DL 817 (April 1996 (affiliates/month) May-October 1996: 44,318 Increase in workers in 20-31 Economically Active Population 12/31/94 12/31/95 12/31/96 age cohort affiliated with SPP Total--formal dependent sector 2,657,000 2,782,000 2,897,000 as percentage of formal work SPP affiliates under 31 414,546 463,201 656,859 force. as percent of Total 15.6 16.6 22.7 Earnarking of Future None Privatization Proceeds to FCRP l Change in Composition of 12/31/94 12/31/95 12/31/96 12/31/97 AFP Investment Portfolios AFP Debt Investments: maturities under 91 days 51.8 % 49.9 % 13.4 % n.a. maturities over 360 days 36.3 44.5 71.8 n.a. Composition of AFP Portfolios (a) by type of instrument: Equities 14.1 18.1 31.9 34.8 Government debt 26.0 22.2 0.6 0.3 Non-government debt 26.6 32.7 42.5 40.0 Time deposits 33.3 27.0 25.0 24.1 (b) by sector: Government 26.0 22.2 0.6 0.3 Financial 58.5 54.9 51.3 43.6 Non-financial 14.0 22.8 48.1 55.2 Table 6: Key Indicators for Project Operation: not applicable  23 Table 7: Studies Included in Project Study Purpose as Defined at Status Impact of Study Appraisal/Redefined 1. Canales-Kriljenko, Jorge Draft prepared for LAI CO Completed Ivan, Social Security in Peru: division of World Bank. December 1991 Current Situation and Reform 2. Iglesias P., Augusto, Completed August Comentarios al Sistema de 1993 A.F.P. en Peru. 3. Knaudt, Susana, Peru: Completed July Instituto Peruano de 1991. Seguridad Social (IPSS): Policy Issues. 4. Hemant Shah, Toward Completed Better Regulation of Private November 1996 Pension Funds 5. Monika Queisser, Pension Completed July Reforms and Private Pension 1997 Funds in Peru and Colombia. Table 8A: Project Costs Appraisal Estimate (US$M) Actual (US$M) TOTAL 100 100 Table 8B: Project Financing 1 Source Appraisal Estimate (US$M) Actual (US$M) IBRD (PRAL) 100 100 IBRD(DDSR) 183 183 JEXIM Bank 80 80 I The DDSR loan of $183 million together with $50 million set aside under the PRAL and JEXIM's $80 million were used to support Peru's commercial debt education operation. Table 9: Economic Cost and benefits: not applicable  Table 10: Status of Legal Covenants Loan No. The Borrower shall open, prior to furnishing to the Bank the first 4134-PE 2.02 (b) 1 C request for withdrawal from the Loan Account, and thereafter Fulfilled maintain in its central bank, a deposit account in dollars on terms and conditions satisfactory to the Bank. The Borrower may use a portion of the proceeds of the Loan, not to exceed $50,000,000 ("Set-aside Funds"), for the implementation of 2.02 (d) 3 C the Financing Plan. If the Set-aside Funds have not been fully Fulfilled disbursed by March 15, 1997, or such later date as approved by the Bank, the undisbursed amount of Set-aside Funds may be withdrawn by the Borrower and deposited in the Deposit Account. 2.03 10 C 3/31/97 The Loan Closing Date shall be March 31, 1997 or such later date Fulfilled as the Bank shall establish. 3.01 (a) 9 c The Borrower and the Bank shall, from time to time, exchange Fulfilled views on the Program and the 1996 Financing Plan. The Borrower shall provide the Bank a report on the Program in Fulfilled 3.01 (b) 9 C such detail as the Bank shall reasonably request. The Borrower shall exchange views with the Bank on any proposed action to be taken after the disbursement of the Loan which would 3.01 (c) 9 C have the effect of materially reversing the objectives of the Fulfilled Program. Upon the Bank's request, the Borrower shall have the Deposit 3.02 (a) I CP Account audited in accordance with appropriate auditing principles On-going consistently applied by independent auditors acceptable to the Bank. Upon the Bank's request, the Borrower shall furnish to the Bank in no later than six months a certified copy of the report of such audit by said auditors, of such scope and in such detail as the Bank shall have reasonably requested.  Table 10: Status of Legal Covenants (continued) Loan No. Upon the Bank's request, the Borrower shall furnish to the Bank 4134-PE 3.02 (c) I C such other information concerning the Deposit Account and the Fulfilled audit thereof as the Bank shall have reasonably requested. 5 01 (a) 12 C The Borrower's macroeconomic policy framework is consistent Fulfilled with the objectives of the Program. The Bank is satisfied, after an exchange of views described in 5.01 (b) 12 C Section 3.01 (a), with the progress achieved in carrying out the Fulfilled Program. Covenant Types Present Status: L I = Accounts/audits C = covenant complied with 2 = Financial Performance / revenue CD = complied with after delay 3 = Flow and utilization of project funds CP = complied with partially 4 = Counterpart funding NC = not complied with 5 = Management aspects of the project or NYD=not yet due execution agency 6 = Environmental covenants 7 = Involuntary resettlement 8 = Indigenous people 9 = Monitoring, review, and reporting 10 = Project implementation not covered by categories 1-9 11 = Sectoral or cross-sectoral budgetary or other resources allocation. 12 = Sectoral or cross-sectoral policy/ regulatory / institutional action 13 = Other  26 Table 11: Compliance with Operational Manual Statements (There was no case of non compliance with Operational Manual Statements) Table 12: Bank Resources: Staff Inputs Stage of Project Cycle Planned Actual Weeks US$ Weeks US$ 000 Preparation to Appraisal N/A 54.6 198.0 Trust Funds1 N/A 36.4 60.5 Appraisal-Board N/A 12.1 69.4 Trust Funds N/A - - Negotiations through Board Approval N/A 5.9 18.5 Trust Funds N/A - - Supervision2 N/A 4.4 13.6 Trust Funds N/A - - Completion TOTAL I/ TF 020535, TF023109, TF025410 2/ There was no supervision mission since PRAL was a single-tranche adjustment operation. Supervision was related to effectiveness and pre-payment in FY 97.  27 Table 13: Bank Resources: Missions Performance Rating Stage of Project Month/Year Number Days in Specialized Staff Implementation Development Cycle of Field Skills Represented Status Objectives Persons Through 11/95 3 32 Economist Appraisal Pension spec. 3/96 1 3 Economist l 3/96 1 5 Economist 8/96 1 5 Economist _- 9/96 5 10 Economist Financial sec. spec. Public sec. spec. Pension spec. Lawyer l Appraisal 10/95 1 6 Pension spec. through Board Approval _- Supervision 3/97 2 3 Economist Pension spec. I   29 PART IH: APPENDICES   31 GOVERNMENT CONTRIBUTION TO THE ICR SUMMARY The reform program implemented through the Pension Reform Adjustment Loan (PRAL), signed with the World Bank in February 1997, was implemented in the context of sound macroeconomic policy-making by the Peruvian Government. The project components have allowed for a better functioning of the market economy through the promotion of a regulatory framework of a pension system which promotes economic efficiency, as well as through the development of capital markets. Furthermore, the project has contributed to generating a climate of confidence in Perui, thereby attracting increased flows of long-term foreign investment. Introduction The PRAL originated from the Structural Adjustment Loan II, prepared in 1993. It was decided that this loan would focus on support to the Peruvian Government in deepening pension reform and capital market reform, which would allow for increased domestic savings, strengthen fiscal discipline in the medium term, and increase long-term foreign investment. Consistent with this objective, 50 percent of the loan amount went to a concurrent project, Debt and Debt Service Reduction. Loan Objectives 1) Pension System Reform. With the creation of a private pension system in 1992, workers were permitted to open individual accounts with Private Fund Administrators (AFPs) as an alternative to the state managed system. This was an important step towards a fully funded pension system. a) Reform of "Cedula Viva" System. To reduce the contingent liabilities of the "Cedula Viva" system and establish the base for civil service reform, by de-linking the two systems. Actions were taken to reduce costs and eliminate unauthorized benefits of the Cedula Viva system. In July 1997 the "Oficina de Normalizaci6n Previsional" (ONP) became the proper legal entity for pension administration, including registration and actuarial studies. b) Reform of National Pension System. Create incentives for workers under the SNP to switch to SPP and to reduce the contingent liabilities of SNP. By October 1997, 146,866 workers had switched from SNP to SPP and by May 31, 1998 the system had 1,819,254 participants. Close to one million workers remain in the SNP. c) Reform of Private Pension Funds. Increase the available investment options for AFP members, achieve greater transparency in risk assessment and reduce the complexity and costs associated with the actual regulatory framework. Capital market development in Peru has made a significant contribution to pension portfolio diversification. The Regulations of the "Texto Unico Ordenado" of the SPP Law delineates investment guidelines and regulations for AFPs, characterized by transparency and a long-term outlook. In response to the objective of a reduction in complexity and cost associated with the regulatory system, the SAFP has been charged with simplifying the administration of SPP. d) Development of a framework for Pension Asset and Liability Management. The Consolidated Fund of Provisional Reserves was established in January 1997 to back the obligations under the authority of ONP. 2) Complementary Reforms in Capital Markets. In 1992, the Stockmarket Law (Legislative Decree 755) initiated the modernization of the capital market regulatory system. Since 1996 there have been numerous additional reforms and improvements to capital markets regulations.  32 Lessons Learned Role of the Bank Peru considers the PRAL to be a successful loan that contributed to the consolidation of the reform of the pension sector and to the completion of the Debt and Debt Service Reduction program. Thanks to a fluid exchange between the Bank and the Govemment, both parties were able to fiurther focus the initial objectives of the SAL II into central objectives of the process of reform consolidation - mainly pension reform and capital markets development - in the form of a quick disbursing loan. Role of the Beneficiary. The goals established in the loan agreement were realistic enough to allow the Govemment to comply with the stated objectives in the prescribed period of time. Peru began the reform process in the pension sector in 1992, and in only six years the system has supported the modernization of the financial sector, the labor market, and the insurance sector. It is significant to note the tendency of new participants to join SPP, which forecasts full financing of the system. The Govemment is aware that close attention should be paid to the long-term development of the SPP and SNP. A study is planned which will evaluate these two pension systems in order to make the necessary reforms that will ensure an equitable and sustainable system in the long-term.  33 INFORME DE CIERRE DE PROYECTO PRESTAMO DE AJUSTE DE REFORMA DE PENSIONES (Pension Reform Adjustment Loan - PRAL) El programa de reformas amparado por el Prestamo de Ajuste de Reforma de Pensiones (PARP) acordado con el Banco Mundial en febrero de 1997, se desarroll6 en el marco de sanas politicas macroeconomicas implantadas por el Gobierno Peruano. En este contexto los componentes del referido prestamo han permitido un mejor funcionamiento de la economia de mercado mediante la promoci6n de un marco regulatorio de un sistema de pensiones apropiado que promueve la eficiencia econ6mica y la competencia en el sector, asi como el desarrollo del mercado de capitales. Ello ha contribuido a generar un clima de confianza en el pais permitiendo atraer mayores flujos de inversi6n extranjera a largo plazo. Introducci6n El PARP tiene su antecedente en el SAL II cuya preparaci6n se iniciara en 1993, luego de que el pais adoptara una serie de medidas fundamentales orientadas a iniciar un amplio programa de reformas estructurales sustentado por tres operaciones con el Banco Mundial: el Programa de Ajuste del Sector Comercio, el Programa de Ajuste del Sector Financiero y el Programa de Ajuste Estructural. Este Prestamo se concibe inicialmente abarcando objetivos de reforma en sectores como agricultura, comercio, finanzas publicas, mercado de capitales y privatizaci6n. Posteriormente, se decidi6 focalizar el prdstamo para apoyar al gobierno peruano en la profundizaci6n del programa de reformas del sector pensiones y del mercado de capitales que permita aumentar el ahorro domdstico, fortalecer la disciplina fiscal en el mediano plazo y acceder al financiamiento externo de largo plazo. Consistente con este uiltimo objetivo, el 50% de los recursos del prestamo se destin6 al Programa de Reducci6n de la Deuda y su Servicio. El contexto macroecon6mico La columna vertebral del programa econ6mico peruano ha sido la disciplina fiscal y monetaria. El programa se sustenta en un regimen de tipo de cambio flotante, aunado a un estricto control monetario, acompafiado de una politica fiscal austera, con una administraci6n tributaria eficaz y un ferreo control del gasto puiblico. La total apertura de la cuenta de capitales, conjuntamente con sanas politicas macroecon6micas y estrictas normas prudenciales y de supervisi6n bancaria, han reportado importantes beneficios. Estas politicas, ademas de haber contribuido a generar un clima de confianza, han permitido atraer significativos flujos de inversi6n extranjera de largo plazo. Desde inicios de 1993 y luego de las duras medidas de estabilizaci6n iniciales, el Peru ha crecido 5 aflos consecutivos y lo ha hecho a una tasa promedio anual de 7.3%. Este crecimiento no ha estado basado en la expansi6n del consumo ni en el estimulo del gasto fiscal, sino en la inversi6n (tanto interna como externa) del sector privado y en el reciente dinamico desarrollo de las exportaciones de los bienes no-tradicionales. La aplicaci6n del Programa Econ6mico ha pernitido alcanzar un crecimiento sostenido con una baja tasa de inflaci6n. Asi la tasa de inflaci6n en 1997 fue de 6.5%, la mas baja en los ultimos 25 affos y el d6ficit del sector puiblico (excluidos los ingresos de privatizaci6n) ha alcanzado 0%. Por su parte la tasa de inversi6n ha aumentado de 18.6% en 1993 a 24.7% en 1997 constituyendo la segunda tasa de inversi6n mas alta en Latinoamerica. El ahorro interno creci6 de 13% a 20% del PBI y casi el 90% de  34 los flujos de capitales privados extranjeros en los ultimos 5 afios se realizaron bajo la forma de inversi6n directa extranjera. Finalmente la fortaleza de los indicadores macroecon6micos se refleja en que el crecimiento ha ido acompafnado por una constante acumulaci6n de reservas intemacionales netas que ascienden a US$ 10.3 mil millones equivalentes a 15 meses de importaciones, 6 veces la base monetaria y 80% de la liquidez total del sistema bancario. Se puede aseverar que en la actualidad el Perui cuenta con una combinaci6n ideal de tasa de cambio flotante y una posici6n fiscal y monetaria fortalecida. En relaci6n al servicio de la deuda peruana, la deuda del sector puiblico ha sido reprogramada en su totalidad de acuerdo a la capacidad de pago del pais. Asimismo, no existe deuda interna ni deuda externa de corto plazo. Los objetivos en el mediano plazo incluyen una tasa anual de crecimiento de 6.5%, una continua reducci6n de la inflaci6n a niveles intemacionales hacia el fin de la decada, asi como una reducci6n del deficit en cuenta corriente a menos del 3% para el afno 2002. Estos objetivos son resultado del compromiso del Gobierno de mantener la estabilidad macroecon6mica y el fortalecimiento de las reformas estructurales, incluyendo las de segunda generacion que ya han sido iniciadas. Sin embargo, para 1998 estos podrian verse mermados, en cierta medida, por los efectos de la crisis asiatica, asi como por el fen6meno de El Nifno. Objetivos del prestamo a) Reforma del Sistema de Pensiones La reforma del sistema de pensiones se inicia en 1992 con la promulgaci6n de la Ley 25897 que crea el sistema privado de fondos de pensiones como altemativa al sistema de reparto vigente. Este nuevo r6gimen permite a los trabajadores abrir cuentas individuales en las Administradoras Privadas de Fondos de Pensiones (AFPs) recibiendo un Bono de Reconocimiento por las aportaciones pasadas y constituye un paso esencial al lanzar un sistema de pensiones plenamente financiado. Asi, en junio de 1993 entran en funcionamiento ocho AFPs, de las cuales actualmente operan cinco, al haberse dado sendas fusiones de tres de ellas. El inicio de su funcionamiento estuvo caracterizado por la utilizaci6n de todos los recursos de las AFPs, lo cual motiv6 mayores requerimientos de capital y endeudamiento, que les permiti6 iniciar una fuerte campafia publicitaria y contar con una fuerza de venta de mis de 6 000 promotores. Posteriormente, en julio de 1995 se promulg6 la Ley 26504, conocida como la Ley de Consolidaci6n del Sistema Privado de Pensiones, que introdujo una serie de ajustes al regimen previsional privado a fin de mejorar su aplicaci6n y desarrollo. Esta Ley modifica el Regimen de Prestaciones de Salud, el Sistema Nacional de Pensiones, el Sistema Privado de Fondos de Pensiones y la estructura de contribuciones al Fondo Nacional de Vivienda (FONAVI), eliminandose las diferencias en las tasas de contribuci6n y edades de retiro entre el Sistema Privado de Pensiones (SPP) y el Sistema Nacional de Pensiones (SNP). Ello promovi6 un aumento significativo de las transferencias de SNP al SPP y se redujo a su vez las obligaciones pensionarias contingentes del SNP. En abril de 1996 se promulg6 el Decreto Ley 817 que aprob6 la Ley del Regimen Previsional a cargo del Estado que permiti6 reducir significativamente el impacto del regimen de Cedula Viva (CV) sobre los egresos del Tesoro, estableci6 las bases para un sistema de contabilidad que cuantifica y reconoce las obligaciones contingentes de pensiones y cre6 un fondo fiduciario de pensiones para respaldar dichas obligaciones. Mediante este Decreto se recupera la equidad del sistema de pensiones, se garantiza los derechos de los pensionistas del Decreto Ley 20530, se depura la planilla del Estado y se ordena la administraci6n y financiamiento de las pensiones. Especificamente, este Decreto establece  35 sin ambigniedades el derecho de los empleados puiblicos a transferirse del CV al SPP; da autoridad a la Oficina de Normalizaci6n Previsional para auditar todos los beneficios reclamados a traves de regimen de CV a fin de determinar su legitimidad, requiere que la ONP estime peri6dicamente el costo actuarial de las obligaciones pensionarias resultantes de los regimenes SNP y CV y de emisi6n de Bonos de Reconocimiento; instituy6 el fondo fiduciario de pensiones, Fondo Consolidado de Reservas Previsionales, para respaldar obligaciones pensionarias; estableci6 que los ajustes de las pensiones de los empleados de empresas estatales privatizadas se sujetaran a las mismas limitaciones que las pensiones del SNP; instituy6 incentivos para migrar del regimen de CV al SPP; y estableci6 un tope a las pensiones de CV a nivel de la remuneraci6n de un miembro del Congreso. Con el Decreto Ley 874 de noviembre de 1996 se incentiva la transferencia de trabajadores j6venes del SNP al SPP. Este Decreto flexibiliza los criterios de elegibilidad para aplicar a un Bono de Reconocimiento y da los primeros pasos para desincentivar las altas comisiones y otros cobros de las AFPs y aumentar la competencia entre ellas. Tambien se elimina el uso de tasas de retorno de referencia y "bandas" alrededor de dichas tasas para la industria de AFPs, aumentando asi los beneficios obtenidos por una AFP con performance relativa superior y reduce las penalidades por una performance relativa inferior. Con ello se recoge la voluntad de consolidar y profundizar la cobertura del SPP, la que dada su naturaleza de largo plazo, requiere se posibiliten ajustes y mejoras para compensar el esfuerzo individual con pensiones acordes a criterios de justicia y equidad. Posteriormente en enero de 1997, mediante el Decreto Supremo 144-96-EF se reglamenta el Fondo Consolidado de Reservas Previsionales sefialando su caricter de intangible y su finalidad de respaldar las obligaciones de los regimenes previsionales a cargo de la Oficina de Normalizaci6n Previsional, mediante la inversi6n adecuada de los recursos que administra. En la misma fecha se autoriza la transferencia al Fondo de US$ 1 000 millones como respaldo para la emisi6n de los Bonos de Reconocimiento. Este regimen regulatorio hace posible la transparencia del estado actual de activos y pasivos de los sistemas puiblicos de pensiones. Por su parte la Ley 26835 de julio de 1997 establece que la ONP es la entidad competente para reconocer y declarar pensiones derivadas de derechos pensionarios legalmente obtenidos al amparo del Decreto Ley 20530. En enero de 1998 se public6 el Decreto Supremo 004-98-EF aprobando el Reglamento del Texto Unico Ordenado de la Ley del Sistema Privado de Administraci6n de Fondos de Pensiones con el fin de adecuar las medidas reglamentarias para la debida aplicaci6n del SPP. Posteriormente se ha emitido resoluciones de la Superintendencia de Administradoras Privadas de Fondos de Pensiones aprobando los diferentes Titulos del Compendio de Normas Reglamentarias. Al 31 de mayo de 1998 el nuimero de afiliados al Sistema Privado de Pensiones asciende a 1 819 254 y el valor del fondo de pensiones es de S/.4 950 millones. La cartera del sistema privado de pensiones esta compuesta principalmente por acciones (34,3%), dep6sitos a plazo en soles (20,7%), bonos de empresas privadas (19,1%) y bonos subordinados (9,8%). Cabe sefialar que a partir del mes de febrero de 1998, los fondos de pensiones han realizado inversiones por primera vez en fondos de inversi6n alcanzando una participaci6n de 0,5%. La rentabilidad real del sistema entre abril de 1997 y abril de 1998 es en promedio de 10,36%. Objetivos de la Reforma de Pensiones > Reforma del Sistema de Cedula Viva Los objetivos fueron reducir las obligaciones contingentes del sistema de pensiones de "Cedula Viva" y sentar las bases para la reforma del servicio civil, haciendo posible desligar los ajustes en las pensiones de "Cedula Viva" de los ajustes de los servidores puTblicos.  36 El primero de los objetivos se ha alcanzado en la medida que a traves del Decreto Ley 817 se encaminaron las acciones tendientes a reducir los costos y eliminar beneficios no autorizados bajo el regimen de "Cedula Viva". Asimismo, mediante la Ley 26835 de julio de 1997 se fortalece las bases legales de la reforma, al establecerse que la ONP es la entidad competente para reconocer y declarar pensiones derivadas de derechos pensionarios legalmente obtenidos al amparo del Decreto Ley 20530. Cabe sefialar que actualmente ya no existe nuevas inscripciones bajo el sistema de CV. La labor de registro y revisi6n de los beneficiarios del regimen viene realizandose por la ONP, que ha alcanzado importantes avances. En ese sentido, se ha realizado la conciliaci6n, analisis, cruces legales y de Base de Datos de las Declaraciones Juradas y solicitud de expedientes a entidades segun el hallazgo de inconsistencias en cuanto al derecho mismo, duplicidades, fallecimientos, derechos derivados caducos, y otros, utilizando la siguiente informaci6n: * Base de Datos de las Declaraciones Juradas del Registro 20530 * Base de Datos de planillas enviadas por las instituciones * Base de Datos de Reniec (Identidad) * Matriz de derechos Legal segun arbol de decisi6n Con la informaci6n anterior se esta diseiiando la metodologia para Ilevar a cabo el estudio actuarial que se preve terminar en el mes de setiembre. > Reforma del Sistema Nacional de Pensiones Se plante6 como objetivos el incentivar la migraci6n de obreros y empleados del SNP al SPP y reducir las obligaciones contingentes del SNP. El primer objetivo se ha cumplido ampliamente. Los pasos iniciales en ese sentido se dieron a traves de la Ley 26504 y el Decreto Ley 874 antes comentados. Mediante este uiltimo se cre6 en noviembre de 1996, el Bono de Reconocimiento 1996 y hasta octubre de 1997, 146 866 afiliados del SNP se trasladaron al SPP, correspondiendo el 81% de este total a trabajadores menores a 40 afios de edad. Cabe senialar que el promedio hist6rico de afiliaci6n semanal, hasta mayo de 1998, asciende a 7 051 afiliaciones, habiendo sido el promedio semanal hist6rico maximo de 28 907 afiliaciones al sistema, hecho que ocurriera en 1993, es decir al inicio de las operaciones del sistema. Es importante seflialar que durante los periodos posteriores a la emisi6n de las normas antes citadas se detectaron recuperaciones importantes en el promedio de afiliaci6n semanal. Al 31 de mayo de 1998, el sistema cuenta con 1 819 254 trabajadores afiliados, habiendose observado un incremento de afiliaciones entre 1996 y 1997 de 190 000 y entre 1995 y 1996 de 422 087 comparado al incremento de 172 180 en 1995 respecto a 1994. La ONP ha realizando el estudio "Frenos y Barreras hacia el Sistema Privado de Pensiones" para verificar las razones por las cuales afin permanecen trabajadores afiliados al SNP donde actualmente se encuentran alrededor de un mill6n de aportantes. Este estudio se efectuo en tres etapas: cualitativo (focus group), cuantitativo (1 400 encuestados en ciudades representativas) y por ultimo entrevistados de empresas grandes, medianas y chicas. Las principales conclusiones de este estudio son:  37 a) El sector que ain no se traslada a las AFPs esta compuesto por empleados y obreros de sueldos bajos (vigilantes, obreros de fabrica, artesanos, secretarias, counters de turismo, camareros de hotel y profesionales (profesores, contadores y administradores) y se comprob6 que muestran gran desconfianza hacia el sector privado, representado en este caso por las AFPs b) Este sector se considera laboralmente inestable bien sea por las caracteristicas del empleo o por decisi6n propia o del empleador. Algunas personas j6venes y de edad media hasta 38 aflos, prefieren no estar a la expectativa de una pensi6n de jubilaci6n e iniciar un negocio propio y no trabajar 45 aflos para recibir una pensi6n baja cualquiera que fuere el sistema. c) Existe desinformaci6n o poco conocimiento de ambos sistemas de pensiones y adicionalmente no comprenden el lenguaje ni de la publicidad ni de los promotores de AFPs. d) La raz6n principal de su permanencia en el SNP es la seguridad de recibir una pensi6n, pues se trata de una entidad estatal con permanencia "asegurada" en el tiempo y gran nuimero de aportantes. Afirman que ello les genera mas confianza pues consideran que nunca va a quebrar o desaparecer, como si puede ocurrir con las AFPs, a pesar que mencionan que Ias pensiones en el SPP son mas altas que en el SNP. Asimismo, sostienen que estan acostumbrados a recibir sueldos bajos y esperan que su pensi6n en el SNP tambien lo sea. e) En las entrevistas con Gerentes o Jefes de Personal del sector empresarial, se constat6 que estos conocen los dispositivos sobre la incorporaci6n al SPP de los nuevos trabajadores. Sin embargo, se da el caso que dichos funcionarios "asesoran" a los trabajadores y les sugieren incorporarse al SNP por resultar mas beneficioso debido a los sueldos bajos. El referido estudio ha sido enviado a la Asociaci6n de AFPS. En cuanto a la realizaci6n de estudios actuariales, la ONP hacia fin de aflo y de acuerdo con el Programa de Recaudaci6n con SUNAT, tendrA los datos necesarios de los trabajadores activos. Asimismo, de acuerdo al Convenio con RENIEC (Registro Nacional de Identidad y Estado Civil) se ha poblado la base de datos a traves del otorgamiento de 177 mil Libretas Electorales Mecanizadas a los pensionistas que representan el 54% de la poblaci6n. Se culminara el proyecto en el mes de setiembre, pudiendose contar con los estudios actuariales de este sector hacia fin de affo. Se estima que el estudio actuarial estara concluido hacia principios del segundo trimestre de 1999. > Reforma de los Fondos Privados de Pensiones Los objetivos establecidos para la reforma de los fondos privados de pensiones son aumentar el menu de opciones de inversi6n disponible para los afiliados a las AFPs, lograr mas transparencia en la informaci6n sobre riesgos y reducir la complejidad y costos asociados al regimen regulatorio actual. El progreso en relaci6n a la diversificaci6n del portafolio de las inversiones del SPP, se considera significativo en el contexto de desarrollo del mercado de capitales peruano. En ese sentido, las AFPs son el mayor inversionista institucional, habiendo influido en la creaci6n de nuevos instrumentos financieros. Con la emisi6n del Reglamento del Texto Unico Ordenado de la Ley del SPP se consolida el diseflo de un regimen de inversiones de las AFPs caracterizado por su transparencia y tendencia al largo plazo, compatibilizando los conceptos del Reglamento con los incorporados en la Ley del Mercado de Valores y en la Ley del Sistema Financiero y del Sistema de  38 Seguros y OrgAnica de la Superintendencia de Banca y Seguros. En esa linea se ha incluido limites de inversi6n aplicables a grupos econ6micos, inversiones en activos titulizados, fondos de inversi6n y otras figuras incorporadas en la mas reciente legislaci6n. Asimismo, se modific6 toda la estructura de limites por emisor y por emisi6n. Con ello se pretende investir al sistema, y en especial a las inversiones que efectuan lasAFPs, de un marco de absoluta transparencia, hecho que redundarA en beneficio del mercado y del propio afiliado. Asimismo, mediante laredefinici6n del concepto de regulaci6n aplicable a la rentabilidad minima que toda AFP debe tener, se aspira a un regimen de inversiones a largo plazo, dotAndose a las AFPs de los mecanismos necesarios para impulsar una competencia mAs abierta entre ellas, en beneficio de los afiliados del sistema. Se modifica tambidn el tratamiento aplicable para el encaje que lasAFPs deben efectuar, en garantia de su obligaci6n de cubrir cualquier caida de los fondos de pensiones por debajo de su rentabilidad minima. Asimismo con el fin de establecer un sistema de medici6n independiente del que se deriva del desempefio del portafolio de las inversiones de las AFPs, se opt6 por la alternativa que establece que las AFP deberian obtener para los fondos de pensiones un rendimiento real de 0%. El margen de medici6n para el calculo de la rentabilidad minima se daria en un horizonte de 60 meses, por lo que las AFPs pueden, durante todo ese periodo, adecuar sus inversiones y alcanzar la rentabilidad requerida. El objetivo es fijar una rentabilidad minima sin involucrar el propio portafolio de los Fondos de Pensiones, es decir, tener un punto de referencia que sea completamente independiente del desempefio de las inversiones que realicen las AFPs. Finalmente se ha desarrollado un sistema de custodia de los instrumentos representativos de las inversiones de las AFPs mAs profesional e integral, dirigido a resaltar la responsabilidad y misi6n que corresponde a las AFPs en su calidad de administradoras de inversiones. Actualmente la colocaci6n de recursos del fondo de pensiones en acciones comunes es la principal modalidad de inversi6n con el 26% del total, sigui6ndole en importancia los dep6sitos a plazo en moneda nacional (20%) y los bonos de empresas no financieras (19%). Otros instrumentos con menor participaci6n relativa son los bonos subordinados, las acciones de trabajo, los bonos de arrendamiento financiero y los dep6sitos a plazo en moneda extranjera. Segin el destino de las inversiones se tiene la mayor concentraci6n hacia el sector bancario (40%), seguido por los servicios pfiblicos (17%), mineria (8%), la industria del cemento (7%), industrias de alimentos (6,7%) y otras empresas financieras (6%). En relaci6n al objetivo de lograr mas transparencia en la informaci6n sobre riesgos, se observa que hacia abril de 1998 existian ya 132 instrumentos clasificados correspondientes a 69 emisores. De estos instrumentos el 30% corresponde a dep6sitos a plazo, 20% a bonos corporativos, 15% a bonos de arrendamiento financiero y 11% a bonos subordinados, entre otros. De acuerdo a las categorias de riesgo acordadas por la Comisi6n Clasificadora de Inversiones del SPP, se observa que el 32% de las inversiones se concentran instrumentos de categoria de riesgo I, el 27% en categoria de riesgo I y el 4% en categoria de riesgo III. En cuanto a la reducci6n de la complejidad y costos asociados al regimen regulatorio actual, la SAFP ha venido propiciando la simplificaci6n administrativa del SPP. Al respecto se cuenta con apoyo financiero de organismos internacionales con la finalidad no s6lo de reforzar la supervisi6n, sino tambi6n mejorar procesos, reducir costos en el sistema y, lo que es mAs importante, propiciar la incorporaci6n de nuevos trabajadores al SPP.  39 En cuanto a los procesos de control y reducci6n de costos del sistema, la SAFP ha propuesto los siguientes aspectos que mejoraran los mecanismos de supervisi6n bajo condiciones de libre competencia y seguridad: * reformulaci6n y rediseflo de procesos de supervisi6n * revisi6n y mejora de los procesos de recaudaci6n de los aportes de los trabajadores. * establecimiento de procedimientos eficientes, considerando esquemas mas intensivos de seguimiento o supervisi6n remota. * revisi6n y mejora de las bases de los procedimientos de otorgamiento de prestaciones, ademas de los mecanismos de control y supervisi6n de los mismos. Sin embargo, es importante indicar que no basta con realizar ajustes meramente administrativos para alcanzar una reducci6n de los costos sino que es esencial propiciar una mayor competencia que redunde en una administracion mas eficiente, circunstancia que implicara menores costos de manera sostenida. En cuanto al nivel actual de morosidad del SPP, este no difiere sustancialmente a la tendencia y promedio mostrado por esquemas similares en otros paises (Chile, Argentina). Incluso hay otros esquemas en nuestro pais que muestran problemas similares; es decir, el caso de los agentes obligados a retener y pagar determinadas aportaciones que distraen dichos recursos para atender obligaciones operativas propias (IPSS, SNP, FONAVI). Sin embargo, se viene trabajando en procedimientos que permitan un mejor control y cumplimiento de estas obligaciones. Entre los procedimientos que se pondrian en marcha estA el de darle caracter de Declaraci6n Jurada a las planillas para facilitar el control de las respectivas aportaciones y de su pago por parte de los empleadores. Este procedimiento permitiria contar con un documento legal que facilite la validaci6n de la informaci6n, al tiempo que seria ejecutable en caso de incumplimiento. Un aspecto adicional de eficiencia administrativa lo constituye la mayor relevancia que tendria la Declaraci6n sin Pago, ya que aquel empleador que en su oportunidad no realiz6 dicha Declaraci6n no podra efectuar la regularizaci6n administrativamente sino tendra que someterse al proceso judicial respectivo. > Desarrollo de un Marco para la Administraci6n de Activos y Pasivos de Pensiones El 27 de enero de 1997 se promulg6 el Decreto de Urgencia 129-96-EF autorizando la transferencia al Fondo Consolidado de Reservas Previsionales por el equivalente a US$ 1000 millones, para ser utilizados en la redenci6n de los bonos de reconocimiento. En la misma fecha, mediante el Decreto Supremo 144-96-EF se reglamenta el Fondo Consolidado de Reservas Previsionales, que fuera creado mediante el Decreto Ley 817, sefialando sus fines, estructura, recursos y organizaci6n asi como la aplicaci6n y el destino del fondo y facultades de su administraci6n. Este Fondo tiene caracter de intangible y su finalidad es respaldar las obligaciones de los regimenesprevisionales a cargo de la Oficina de Normalizaci6n Previsional, mediante la inversi6n adecuada de los recursos que administra. Es administrado por un directorio de 5 miembros presidido por el Ministro de Economia y Finanzas e integrado por el Gerente General del Banco Central de Reserva del Peru, el Jefe de la Oficina de Normalizaci6n Previsional y otros dos miembros, actuando la ONP como su Secretanra Tecnica. En relaci6n a la transparencia en las cuentas fiscales como producto de una adecuada contabilizaci6n de los devengados provenientes de las obligaciones previsionales, la ONP  40 viene realizando esfuerzos sustanciales en lo concemiente al levantamiento de informaci6n. Los estudios actuariales totales de todos los regimenes del SNP se estima estarin terminados a principios del siguiente aflo. Finalmente, cabe subrayar la dimensi6n econ6mica que en poco mas de cuatro ailos ha alcanzado la reforma previsional que exhibe un volumen por fondos de pensiones superior a los mil millones y medio de d6lares americanos y mas de un mill6n ochocientos mil afiliados a las distintasAFPs; logros importantes que permiten preveer un horizonte favorable para el sistema, a la vez que comprometido en la construcci6n de una nueva cultura de previsi6n y ahorro intemo. b) Reformas Complementarias en el Mercado de Capitales Desde 1992 se inici6 la modemizaci6n del regimen regulatorio del mercado de capitales con la emisi6n del Decreto Legislativo 755, Ley del Mercado de Valores. Con este dispositivo se facilit6 la iniciaci6n y el incremento en el uso de nuevas instituciones e instrumentos financieros (tales como fondos mutuos, ADRs, bonos corporativos) y se mejor6 la supervisi6n y los sistemas de intermediaci6n e informaci6n. En octubre de 1996 con los Decretos Leyes 861 y 862 se introdujo mejoras al mercado de capitales al establecer un nuevo marco para la regulaci6n de fondos de inversi6n, proveer de una base s6lida para la titularizaci6n de activos financieros que de otra manera serian iliquidos, simplificar la regulaci6n de fondos mutuos, mejorar la regulaci6n referida a papeles de corto plazo y bonos convertibles, aumentar los requerimientos de capital para los intermediarios financieros, introducir el concepto de autorregulaci6n del mercado de valores, establecer la independencia del agente a cargo de la compensaci6n y liquidaci6n de las transacciones financieras en el mercado de valores y mejorar la transparencia del mercado. Posteriormente se han emitido los siguientes reglamentos: Reglamento de los Procesos deTitulizaci6n de Activos, Reglamento de Fondos de Inversi6n y sus Sociedades Administradoras, Reglamento de Fondos Mutuos de Inversi6n en valores y sus Sociedades Administradoras, Reglamento del Registro P ublico del Mercado de Valores, Reglamento de Instituciones de Compensaci6n y Liquidaci6n de Valores, Modificaci6n del Reglamento de Oferta Puiblica Primaria de Valores, Reglarnento de Fondo de Contingencia del Mercado de Valores, Reglamento de Oferta Puiblica de Adquisici6n y de Compra de Valores por Exclusi6n, Reglamento de Propiedad Indirecta, Vinculaci6n y Grupo Econ6mico, Reglam ento de Agentes de Intermediaci6n, Reglamento del Fondo de Garantia de la Bolsa de Valores de Lima. Finalmente se encuentran en elaboraci6n el Reglamento de Oferta Nblica Primaria, Reglamento de Sanciones del Mercado de Valores, Modificaciones al Reglamento de Fondos Mutuos de Inversi6n en Valores y sus Sociedades Administradoras, Modificaciones al Reglamento de Fondos de Inversi6n y Reglamento de Empresas Clasificadoras de Riesgo. Lecciones Aprendidas Sobre el desempeilo del Banco El Perti considera al Pr6stamo de Ajuste de Reforma de Pensiones como un pr6stamo exitoso pues contribuy6 con la consolidaci6n de la reforma del sector pensiones y con el cierre del Programa de Reducci6n de la Deuda y su Servicio. Gracias a una comunicaci6n fluida entre el Banco y el Gobierno, se pudieron focalizar los objetivos iniciales de un Pr6stamo de Ajuste Estructural n en objetivos centrales del proceso de consolidaci6n  41 de reformas, como lo son la reforma del sistema de pensiones y del mercado de capitales, plasmandose en un pr6stamo de rapido desembolso. Sobre el desempefio del Beneficiario Las metas establecidas en el contrato resultaron bastante realistas lo que permiti6 al Gobierno su cumplimiento en el periodo previsto. El Perfi inici6 el proceso de reforma del sector pensiones en 1992 y s6lo en seis afios el sistema ha permitido propiciar la modernizaci6n del sistema financiero, el mercado laboral y el sector seguros; tambien se han entregado pensiones con montos superiores a la alternativa estatal. En el aspecto empresarial, las administradoras han dedicado mayores y mejores esfuerzos a la atenci6n de los afiliados y se avizora ademas una situaci6n de equilibrio financiero de las AFPs. Es importante resaltar la mayor tendencia a la inscripci6n de nuevos afiliados al SPP, lo que permitepreveer la total financiaci6n del sistema. En el SNP se ha logrado importantes avances, sobre todo en el Registro de los beneficiarios del regimen de cddula viva, asi como en la informaci6n de los afiliados al SNP y en los calculos actuariales correspondientes. Sin embargo, el Gobierno es consciente de que debe seguir con atenci6n el desarrollo del SPP y SNP en el largo plazo y efectuar un anilisis serio y profundo de sus situaciones y posibilidades. En este sentido, se realizara un estudio que evalie estos sistemas previsionales de modo tal que se establezcan las modificaciones necesarias para lograr un sistema equitativo y sostenible en el largo plazo.  IBRD 26572R 78- i~~~~~~74 2' Co~~~~~~~~~~~~~~~O ECUADOR ICOLOMBIA r 41~~~~/ -%12 Ti-~~~~jic ElAlta 4~ O -A" I 4'i Ayobco-OAozo SoIAahooos o' * _ToroPot. - PAVED ROADS ........OTHER ALL-WEATHER ROADS *--.-RAILROADS '~~~ Mo~~~~~ oIe~~~~~~o Q - ~~~~~RAILFERRY c~~~*o~~~ o ~~~ ~~Coabombo 4 ~~~~~~~AIRPORTS 4~~~ ~~~ Tocoche Z~~~~~~~~~. ~PORTS - --RIVERS 4 7DEPARTMEN1T BOUNDARIES C / ~~~~~~~~~~~~~~INTERNATIONAL BOUNDARIES A N HUCM AZj < H ~~HUA ANUCOJAQN JCERRO r)E xo-Poepo ~JtI 4 5jrooco HUeCNCAYO U/AD ZEDE AiM ~~~~Longo(, ~~~~ jSl *~~~~~~' " ~PUERTO - Youyos0 ''~~~~~~ -0co6ob. I0MLDO C - ~~ 2HUANCA~1ELICA OuIolob z MLDNDO- c%Aoel -I---H ANCAVELC, ~ CO ~~~~AC142 A R E Q J . A ~~ \ ~~16' Atc \ 'y ~ aqui (CiOCLECCA Moan ~ .M3EOOOOi ~~~~~~~~~~~~~ ~~~~Cruo~~~~~~,JCMAK19