Chile gets ready for new alternative asset investment rules

New pension fund regulations governing investment in alternative assets come into force in Chile on November 1.

The rules permit private pension fund managers, or AFPs as they are known, and the country's solidarity unemployment fund to invest in areas such as non-residential real estate, concessions, and international private equity and private debt placement.

Pension funds currently invest indirectly in alternative assets.

In Chile, each AFP manages five pension funds - A, B, C, D and E - which affiliates can choose from, with A being the highest risk and E the lowest.

Chile's central bank was tasked with establishing how much AFPs can invest in alternative assets.

In a statement, the central bank said a maximum of 10% of the size of fund A can be invested in alternative assets. The maximum is 8% for fund B, 6% for fund C, 5% for fund D and 5% for fund E. The solidarity unemployment fund can invest up to 5%.

The bank can amend the limits if it thinks that it is needed.

"Even though the legal framework permits the bank to set limits of between 5% and 15% of the corresponding fund, it was decided to set limits, for all types of funds, below the maximum of said range," the central bank said. "This decision was taken so eventual changes in the investment portfolios of the pension funds can be made without affecting the normal functioning of the financial system."

Natan Melnick, CEO of Santiago-based business valuation consultancy Valorus, said the move should lead to portfolito diversification and an increase in returns.

"The reality is that the returns of all AFPs tend to be similar," he said in a statement. "This is because they tend to follow each other in terms of investment policy which generates a herding effect. This phenomenon is expected, considering that if one fund manager makes a mistake with an investment and obtains returns significantly lower than that of the other players, it could suffer considerable damage to its reputation.

"This initiative will bring about change in the industry since, for example, an unlisted company may not want to sell shares to two different AFPs. And even if it wants to do it, the price of the company will have been changed because of the previous transaction."

Osvaldo Macías, the head of the country's pensions watchdog SP, said earlier this year: "We've seen in the past few decades a sustained drop in the performance of investments, which without doubt has an impact on the size of pensions," "It should be kept in mind that a percentage point increase in profitability during the entire active life of a worker can increase by 25% the final size of their pension."

Total assets under management by the country's private pension funds managers, grew 13.2% in the 12 months through June to US$190bn.

The Chilean government has submitted pension reform bills. The current system has drawn criticism because of the small pensions that many retirees receive.