Chile's AFPs one step closer to green light for alternative assets

Chile's pensions watchdog SP has put out to public consultation new regulations governing investment in alternative assets.

Authorities are this year due to introduce the rules, which 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, SP said in a statement. As of end-April, funds invested this way totaled US$4.666bn, the equivalent of 2.5% of the AFPs' total assets under management at that point.

Chile's central bank will establish how much AFPs can invest in alternative assets. This will be between 5% and 15% of the size of each type of fund.

The solidarity employment fund can invest up to 5%. The central bank will determine the definitive limit.

"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," SP head Osvaldo Macías said. "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."

"It is for this reason that the regulations put out to public consultation seek to increase the security of investments made with money in the funds and, therefore, achieve the objective of obtaining higher profitability, which allows for improved pensions for affiliates in the system," he added.

The Chilean government is due to submit a pension reform bill next month. The current system has drawn criticism because of the small pensions that many retirees receive.

People and companies that want to comment on the alternative investment rules can do so until July 21.

*See the regulations (in Spanish)