A series of measures to improve the mechanism for transfers between pension funds made by members of the Chilean AFP system was announced on Wednesday by Solange Berstein, Chile’s Superintendent of Pensions.
Bernstein stressed that the measures do not include any particular course of action to restrict the freedom which affiliates have to move their pension savings from a particular fund to another, although there will be new measures of information and other regulations in order to better address mass transfers.
The objectives of these measures, said Solange Berstein, are three:
- That members who take an active strategy of changes among funds are well informed of how this affects the profitability of their pension savings
- Establish greater fairness amongst those who transfer between funds
- Provide management flexibility to the E Fund's portfolio in a scenario of mass fund transfers
The superintendent stressed that pension funds are intended for the finance of pensions, thereby being a long-term investment. She added that Law permits free choice between five Funds which offer different options of expected return and risk and a “default portfolio " for each age group, with certain restrictions on the funds in which the member can stay when that member is either close to retirement or has already retired.
“The selection of a fund should be a well- informed choice which is consistent with the characteristics of the affiliate in respect of at least, the investment horizon, risk preferences, other sources of funding for the retirement stage and their health,” she added.
After the crisis of 2008, and recently even more so, there has been a significant increase in fund transfers. In view of that, the Superintendent decided to draw up a Technical Note, which is published on the website of the Superintendence, and analyzes the results, in terms of profitability, of the fund transfers made in 2008 by members in different circumstances, showing twelve months of following induced strategies (case study of “F & F-Felices y Forrados,” an advisory firm that has caused most of the fund transfers thus motivating regulatory review).
Using data from member’s actual accounts, results were conclusive that, in general, transfers in these scenarios have not been favorable for members. In addition to the mostly negative effects observed on the members themselves, it also advises of the potential negative effects to passive members and to the operation of the domestic capital market.
The measures adopted are explained below:
- Information: Profitability Information Screen
- Regulation: Pro-rated basis in mass fund transfers- The prorated proposal is directed towards providing equal treatment to all members who instruct a fund transfer on the same day, as all members in that situation will be transferred in proportion to the total number of fund transfer applications.
- Regulation: Liquidity Funds for the E Fund – This measure proposes that the E Fund may invest in investment vehicles with a low component of restricted instruments (up to 10% in restricted instruments for each vehicle). These liquidity management funds will be limited to 10% use of the Fund. According to the Superintendence, the measure will facilitate the search for foreign investment vehicles which allow for the accommodation of E Fund investments in times of high inflows. It was approved last week by the CTI and is under consultation on its website.