LatinFinance - September/October 2013 - 82

ANDEAN
pension
funds

Expanding much faster than GDP, retirement funds in Chile, Colombia and
Peru have reached a size that makes them major movers of domestic markets.
Regulators are starting to take notice. By Katie Llanos-Small

Power to the people
if ever proof was needed that past
performance is no guide to future returns,
the performance of chile’s pension funds
provides it.
Yields on the most aggressive investment
funds have plummeted. and when
chileans woke up to the fact that the most
conservative pension fund buckets had also
become the best performers, they did the
logical thing and switched their savings.
Pension savers moved 5.5 trillion pesos ($10
billion) into the safest allocation strategies,
known as type e buckets. the size of these
funds doubled in little more than a year.
in response, chile’s local markets
shuddered.
the type e funds — which, by regulatory
design, must invest the bulk of their assets
in government securities — struggled to
deploy the incoming cash. Yields there fell
and those already subscribed to the type e
funds felt their returns pinched.
this in turn prompted the local regulator
to step in. in July, it loosened the investment
mandate for type e funds allowing them
to place up to 10% of their money into
investment vehicles with conservative
strategies. the rule change would mitigate
the impact on the local fixed income market
of large flows between buckets, the pension
supervisor said.
“the regulators — the central bank and
others — understood that these movements
of money in to type e funds would
suddenly depress domestic bond yields and
cause widespread capital losses through
the system,” says Peter Wall, ceo of Wall’s
Street advisor Services.
“the other funds would have to sell,
yields would go down. it had all those
systemic implications.”
Growing force
as private pension funds across latin
america swell, regulators are realizing the

82 l atinfina nce.com - September/October 2013

immense, and growing, strength of the
system — for better or worse.
Pension savings in chile, colombia
and Peru still account for a much lower
proportion of GDP than in other parts of
the world. Dutch pension funds’ assets, for
example, equate to around 136% of GDP.
of the three andean nations, chile has the
largest pension savings relative to the size of
the economy: there they equal around 56%.
But private pension pots in the region
are growing quickly, and moving debt and
currency markets in the process.
in chile, the regulatory intervention has
been spurred by savers’ reactions to fund
performance. the riskiest funds — type as
— generated average real returns of 12.5% in
the three years to December 2011. type es
generated 6.51% over the same period.
By mid-2013, poor performance had
taken a toll, particularly on the riskiest
investment portfolios. average annual
real returns on type a funds were 0.8%
over the three years to the end of august.
conservative strategies had held up better
— the type es averaged 3.65% returns over
the same period.

Safe bet
Assets managed by Chilean pension funds,
by type (CLP, trn)
45
40
35
30
25
20
15
10
5
0
Dec-2011
Source: SAFP

Type A
Type B
Type C

Type D
Type E

Jun-2012 Dec-2012

Jun-2013

as well as moving markets and provoking
regulatory change, the unimpressive
performance is making latin america’s
oldest private pension system a debate topic
ahead of the november presidential election.
long-term returns are still solid. chileans
who invested in the riskiest funds in
September 2002 are sitting on real returns
of 6.25% on average a year. But not everyone
has been so fortunate.
“there are younger people who
happened to get in when the markets were
high, and now they’re wondering what’s in
this for them,” says Wall.
“can you really convince a general
populace, who may have been hurt over
the last year, two years, that the system is
working? it’s going to be a tough political
campaign from that aspect.”
Peso power
in colombia, regulators have also come to
understand pension funds’ power to tip the
economic balance.
legislative changes put forward in the
first half of 2013 proposed altering the pool
of reference securities that funds must
benchmark their returns against. Under the
plans, the pool would take on more foreign
investments, effectively opening the way for
colombian pension funds to allocate more
cash overseas.
that would help stem some of the
momentous appreciation of colombia’s
peso, the rationale went. Yet as the market
turned, the plan was quickly put on ice.
“the scenario completely changed with
the announcements about fed tapering
and the depreciation of emerging market
currencies in the last two to three months,”
says alejandro arreaza, latam economist at
Barclays. “the colombian peso weakened
a lot, so the necessity for the government to
implement the reform from the fX front has
reduced.” LF
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