Chilean pension fund returns in question

After several years of strong returns, concerns are growing over the sustainability of Chilean pension funds’ yields, amid volatility in local and international markets.

A fall in the Chilean peso and strong returns in global markets pushed up yields on international investments from the country’s pension funds, or AFPs.

“While the international stock markets have performed well in the past three years, interest rates in Chile have reached historic lows,” says José Ramón Valente, partner and executive director at Econsult. “AFPs have had all the gains from lower long-term interest rates.”

System-wide average returns ranged from 10.43% to 5.03% in the past 12 months, above the OECD average, according to the regulator.

That could change this year, as market volatility picks up, say experts. In turn, the concerns are driving further changes.

A government-appointed group, dubbed the Bravo Commission, is analyzing the AFP system to find weak spots and bring solutions. The commission is due to report by August. Management’s fixed rates and direct investment in alternative instruments are topics under discussion, Max Montecinos, head of the financial division at Chile’s pension regulator, said.

“In order to improve pensions in the future, we need to seek other choices to boost profitability while keeping an adequate risk-return correlation,” Montecinos said.

Chilean AFPs have CLP105.606bn ($173bn) of assets. LF

–Courtesy of Latin Finance

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