/ Government of Chile presents reform to the pension system: possible impact on asset managers

The President of Chile sent a bill to Congress on Monday, November 7, 2022 in order to completely overhaul the pension system (the Bill).

This is in the words of the Bill an “industrial reorganization” whereby all mandatory pension contributions will now have to be paid into a government owned entity called the Administrador Previsional Autónomo (APA) who will be in charge of keeping the individual accounts and performing all support functions that are not strictly investment management.

This entails a “de-integration” of the system, whereby the current private pension fund managers (AFPs) will be required to turn into Inversores de Pensiones Privados (IPPs) whose sole remit will be to act as investment managers.

Likewise, a government owned pension manager (IPPA) will be created to compete with the IPPs in relation to the management of the current 10% (which would be raised to 10.5% under the Bill) mandatory contribution withheld from paychecks of employees.

The Bill provides for an additional 6% mandatory contribution to be funded by employers and which shall be managed exclusively by the government owned IPPA.

The types of funds that will be managed by the IPPs and the IPPA in relation to the aforementioned 10.5% will now be target-date funds, called Fondos Generacionales (Target Date Funds).

The 6% contribution will go into a special so called Integrated Pension Fund that will be used in part to fund different social security programs and only in part be used to fund the pension of the relevant employee.

This is a highly complex bill that is more than 300 pages long and has 350 articles and 73 transitional provisions. However, among the several items of concern that we have preliminarily identified there are some that our clients should be aware of:

1.    Mutual Fund and Private Fund Fees

The IPPs and the IPPA will have to bear in full the amount of the fee load of the mutual funds that the Target Date Funds they manage will invest in. The same applies to the Integrated Pension Fund.

As to private funds (i.e. alternative investment funds), only up to 0.1% in fees of such funds may be borne by the Target Date Funds or the Integrated Pension Fund. The excess over said 0.1% will have to be borne by the relevant IPPs and IPPA.

This prohibition for the pension funds to bear such fees creates a clear disincentive for IPPs and the IPPA to invest in collective investment vehicles and thus use the expertise of third party managers.

This is something that may have a direct impact on the ability of foreign and local managers to continue to offer their investment fund products to Chilean pension funds. However, in a best case scenario, given that the pool of investable assets may be broadened by the 6% to be managed by the government owned IPPA, there might be opportunities for foreign managers  to provide advisory services to said entity in relation to part of those assets.

2.    The CCR is abolished and discretion under the Investment Regime is broadened.

Indeed, a very high degree of discretion is granted to the pension regulator (SP) and Ministry of Finance (with or without regard to the recommendations of the so-called Investments Technical Committee – CTI – (which is independent)) in determining what instruments are eligible investments for pension funds. Furthermore, the individual approval of instruments, such as investment funds, would now be solely in the hands of the of the SP, which will replace the CCR in its role. This is relevant given that the CCR is currently composed of seven commissioners, four of which are appointed by the AFPs, two by the securities regulator (CMF) and only one by the SP. Thus, if the Bill is passed by Congress in its current form, decisions regarding the approval of funds as eligible for Chilean pension fund investment would only depend on the criteria of the SP, meaning that there will be less checks and balances in the fund approval process.

The discretion granted to the SP and Ministry of Finance in determining investment limits would now be extremely wide, since there would no longer be statutory minimums or maximums, including in relation to the ranges within which the Central Bank may set the maximum exposure to  investments abroad. This degree of flexibility is in a way a setback given it could enable the SP and Ministry of Finance to reduce investment limits in foreign instruments to close to zero.

In terms of the likelihood of the Bill being approved by Congress, it is not yet clear. Indeed, while the current administration does not have a majority in Congress, the opposition is quite fragmented.

We shall keep you posted on how the Bill progresses through Congress.

Felipe Cousiño
Partner
Alessandri Attorneys at Law