Pension regulator and FIAP at odds on overseas investments

Chile's pension regulator and the international federation for private pension fund managers (FIAP) are at odds as to how much pension fund managers (AFPs) should be allowed to invest in overseas capital markets. FIAP chairman Guillermo Arthur believes a greater degree of overseas investment is vital to the private pension systems in Chile - and other Latin American countries - with small capital markets and a limited supply of financial instruments. Strict regulations governing overseas investments help drive up prices on local financial instruments, which in the end hurt pension affiliates and their savings, Arthur said at a pension seminar in Santiago. However, overseas investments are not "the" solution to a well-functioning pension system because the key to success can also be found in other factors such as sound fiscal management by governments and their ability to resist the temptation to use pension assets to pursue costly industrial policies, Chile's pension regulator Guillermo Larrain said in response to Arthur's remarks. The overseas investment ceiling for Chilean AFPs will likely be increased to 50% in the long-term, up from today's 25% cap, chief investment officer Joaquin Huerta at Chile's largest pension fund manager BBVA Provida said recently. Costa Rican authorities also allow their private pension fund managers to invest 25% of their assets overseas in triple-A rated instruments and has no plans to extend that cap in the foreseeable future, the country's pension regulator Javier Cascante told BNamericas. The pension fund managers "must learn" how to invest safely overseas first, before any possibility of upping the cap can be considered, he added. Overseas investment possibilities are important for Latin American pension fund managers in terms of investment diversification and profitability but they also present increased risk due to foreign exchange exposure and macro economic implications from increased outward investment flows, pension consultant Vinicius Pinheiro at OECD's financial affairs division told BNamericas. Pinheiro said foreign exchange risk insurance mechanisms should be in place before local regulators allow large-scale investments in international capital markets. There is a trend in Central America where individual countries sign bilateral investment treaties that permit their respective pension fund managers to invest in neighbouring capital markets. El Salvador and Panama have such an agreement in place and regional rating agency PCR expects other Central American countries to follow suit in the near future, PCR's chairman Oscar Jasaui said recently. Arthur also said that Latin American authorities should seek to avoid co-existence of private and state pension systems to reduce political risk for private investors because in difficult times - or in the case of crisis - governments are likely to favour state-run systems over private systems.