Chile reformed its pension system in 1981, shifting from a pay-as-you-go system to privately managed individual accounts. Workers now contribute 10% of salaries to pension fund administrators (AFPs) like AFP Provida. AFP Provida was an early entrant and achieved a 30% market share initially. It has since expanded its operations and services, including branches nationwide and online access, while merging with smaller AFPs. The Chilean pension system led to high investment returns and helped fuel the country's strong economic growth from 1990-1999.

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AFP Provida
MICHEAL E. PORTER
ARTURO CONDO

2. +
Brief Economic Overview of Chile

3. +
Brief Economic Overview of Chile
 1973 – 1990 : Economic reform was initiated
 1990 – 1998 : GDP growth average 7.3%
 1990s : High saving and investment rate, Less inflation rate
 Well-developed infrastructure
 More developed on financial system than other countries
 75% of the Santiago stock exchange’s equity traded in Chile

4. +The Chilean Pension System
 Chile was the first country to adopt pension fund system
 Old system, Pension were from active workers payment to retired worker
 Approach was similar to social security system in US.
 1960 – 1980 : Ratio between Pensioners : Active worker increase from 9%
to 45%
 1981 : Change to private pension system built AFPs (Pension Fund
Administrator)
 Active worker contribute 10% of salary to individual capitalization account at an
AFP, AFPs charged transaction fees
 At retirement (Men : 65, Women : 60)
 Programmed withdrawal
 Life annuity
 Deferred life annuity

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The Chilean Pension System
 Most AFPs charged available fee on pension payouts
 Pension Law, AFP’s fund was a separate legal entity from the AFP
itself
 Type 1 fund : short-term fixed income, limit risk
 Type 2 fund : expected to account for a small percentage assets
 1991 : allow AFPs to invest outside Chile in investment-grade
government or bank-guarantee debt securities
 1995 : allow invest in foreign bonds, stock, mutual fund and other
investment funds
 1999 : limit for investing in international asset
 Each AFP guarantee a minimum real return on investment and
maintain reserve fund for 1%

6. +
The Chilean Pension System
 Prevailing regulations had led to returns that were very similar
among AFPS

7. +
The Birth of AFP Industry
 1984 : worker switched to use new pension system
 1981 – 1993 : 21 AFPs entered
 Intense competition forced AFPs continuously improve and
extend services at lower fees
 1999 : After consolidation number of AFPs became 8. have 4
largest AFPs account

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The Birth of AFP Industry
 1990 – 1999 : Fund manage by AFPs grew at compound
annual rate 15%
 Total industry expenditures on sales and marketing increase
from US$30 million (1995) to more than US$50 million (1999)

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AFP Provida
• AFP Provida was found in 1981 by the Cruzat Larrain Group,
one of the largest Chilean business group.
• In the early months of new system, AFP Provida provide
achieved a market share of 30%

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Financial Information

11. +
Comparative Industry data

12. +
Comparative Industry data
 Provida had served all segments of the market and most
geographic regions of Chile.
 But most AFPs served only a certain geographic area or
particular population.

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Marketing
 Emphasized the company’s size, industry prominence and
reputation for quality and service, including its technological
capabilities.
 Advertising in TV, magazine, newspapers and public covering.

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Operations
 Provida operate an extensive branch system and sought out to
offer high quality service.
 Telephone support through a network of regional offices.
 Interactive voice response system.
 Web page provided an interactive service using
passwords and personal identification numbers.
 And the company also periodically contacted its members
to measure their satisfaction.

15. +
Service Quality Program
 In 1998, Provida began the improvement in Service Quality
Program.
 Development and Optimization of new at-home service.
 GOLD SERVICE programs.

16. +
Fund Return
 The company’s investment mix was close to the industry
average.
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In 1995, Provida merged with AFP Libertador, oriented to the
medium- income segment with approximately 42,000 members
During 1998 and 1999, Provida merged with smaller AFPs Unión
S.A. and Protección, focused on the medium-income and high-
income segments, respectively.

17. +
Diamond Analysis
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Pension Law
People need security
in their lives.
Guarantee Return
from this AFP
Every industry
Served all segments
Merge Company