RIO DE JANEIRO - Brazil's Social Security Ministry has begun closer financial monitoring of state-owned company pension funds following a recent in-house study that showed the funds have $22 billion in projected liabilities.
The study, released in June and based on December 1995 figures, showed the value of the assets (contributions and investments) of Brazilian state-owned company pension funds was $22 billion short of covering the projected future benefits/commitments.
The ministry called the shortfall a "technical deficit."
Pension funds of state-owned companies hold assets of $55 billion - 80% of the $68 billion in total pension fund assets.
Carla Grasso, the pension fund secretary of the Social Security Ministry, said the deficit is being caused mainly by high payout levels in relation to contributions.
"The benefits provided by some state-owned company pension funds far exceed the contribution level," said Ms. Grasso. "So those pension funds need to both revise the benefits of their plans and/or increase the contribution levels of participants, though the latter is more difficult with contribution levels already being quite high. If neither of these steps are taken, those pension funds will have serious payout problems five to 10 years down the road."
As a result of the study, the Social Security Ministry has:
*More closely monitored funds running technical deficits, sometimes by appointing an outside fiscal director to provide in-house oversight of pension fund accounting procedures;
*Ordered independent financial, asset and actuarial audits of some funds; and
*Encouraged negotiations between the funds and their sponsors to erase the deficit.
The ministry is concerned because the government is legally obliged to step in if the companies can't bail the funds out of the projected liquidity crisis. Such a bailout would affect the government's growing operational budget deficit, which this year is estimated at 4% of gross national product. And a growing budget deficit fuels inflation, now being kept in check by an economic stabilization plan.
Marlene Rainer, senior consultant at the Brazilian subsidiary of Towers Perrin, said "currently the projected liabilities .*.*. have not reached critical levels because the pension funds still have the liquidity to pay contributors. But if this situation persists, they will have liquidity problems in the future."
The funds have liabilities for several reasons. Benefits often exceed participant contribution levels because participants can, as retirees, legally receive more than 100% of their salary; participants of private-company pension funds receive an average of 50% to 60% of their salaries.
Projected liabilities also crop up because state-owned companies lack the cash flow to contribute toward their pension funds. Fundacao Rede Ferroviaria de Seguranca Social, known as REFER, the fund of the federal railway company, which is now being privatized, stopped receiving contributions into the fund. The halt is responsible for more than $400 million of REFER's $900 million deficit. As a result, the government in November approved a $408 million bailout for REFER, which the federal railway company has eight years to repay beginning in 1998.
Another reason for the liabilities is relatively low-returns. Pension funds have posted an average 9% annual return over the past 10 years in U.S. dollar terms (3% above legal requirements), but, the average annual stock market return in Brazil was 27% in dollar terms during the period.
The liabilities, "though mainly due to problems on their actuarial side, are also the result of problems on the assets side," said Larry Worner, managing director for South America for William M. Mercer Co. "The asset side problems are the result of returns not being sufficient to cover requirements."
The investments are partly the blame of the government which has pressured pension funds to buy federal bonds or legally forced them to buy privatization certificates, used to buy state-owned companies. But the funds also are to blame for asset problems.
The asset problems are "in part due to government interference regarding investments," said Ms. Rainer of Towers Perrin. But some funds have "independently made bad investments, in particular, bad real estate investments, which has helped worsen their returns."
The ministry discovered the deficit of the pension fund of the federal government's data processing arm, Instituto Serpro de Seguridade Social or SERPROS, was $172 million in 1995, although SERPROS' financial statement showed projected liabilities increased to $88 million in 1995 from $10 million in 1994, according to Veja, a Brazilian news magazine. The deficit was partly blamed on real estate portfolio investments that, according to Veja, declined 22.5% in value from 1990 to 1994.
In a faxed response to Pensions & Investments, SERPROS officials claimed Veja's figures were manipulated and distorted, but refused to provide its own figures. Officials said although the company faced a "significant deficit which got worse between 1994 and 1995 because we changed the way we calculated benefits that year, we have financially solved the problem" in part, by increasing participant contributions by 14.37%.
The Social Security Ministry, aware that some fund returns are low, took the step in November of recently revising the rules regulating how pension funds invest to encourage more diversified investments, reduce risk and boost returns (P&I, Oct. 28).
To promote diversification, the revisions reduced, from 20% to 15% the amount of pension fund assets that can be invested in real estate. The revisions also increase the amount of fund assets that can be invested in variable-income instruments, like stocks, from a current 50% to 65%, as long as 15% of those investments are made into two specific types of new investment funds - real estate funds (a 10% ceiling) and emerging company funds (a 5% ceiling). This revision also promotes diversity in variable income investments.
