SANTIAGO - Despite being granted increased access to international markets, Chilean pension funds are holding back their cheers until existing burdensome regulations are changed.
On April 17, Chile's Banco Central increased the cap on foreign investments to 12% from 9%. At the same time, the limit on foreign equity investments was boosted to 6% from 4.5%.
The new 12% ceiling implies the eight Administradoras de Fondos de Pensiones, which have amassed more than $30 billion since their inception in 1981, theoretically could channel up to $3.6 billion into foreign instruments. At the end of March, however, that figure stood at $174.9 million, or just 0.58% of total system assets.
The central bank's action was coupled with other exchange-rate announcements aimed at encouraging the free flow of capital in and out of the country.
But AFP executives did not greet it with great enthusiasm. Instead, they took the opportunity to reiterate their claim that issues involving custodianship and transaction costs are the true barriers to the system diversification envisaged by AFP Superintendent Julio Bustamante.
The superintendent's office now is fine-tuning the pension regulations, which pension fund executives see as inflexible and not in step with international standards. They are confident Mr. Bustamante will heed at least some of their requests and loosen or eliminate the more intricate and burdensome regulations. The most important changes sought concern the selection and responsibilities of custodians for investments in foreign countries.
Under current regulations, AFPs investing in foreign countries must have a custodial relationship with an entity domiciled in that country, or an international firm - such as Citibank -that has subsidiaries in most developed countries, or a bank or other entity that in turn hires subcustodians in distinct countries. The AFPs' need for economies of scale and efficiency dictates only the latter two options be considered; but other rules requiring the custodian to be ultimately responsible for the actions of subcustodians and the value of the securities they possess has made it difficult for the pension funds to find a willing partner.
In fact, earlier this year Citibank's Chilean office renounced its contract with six AFPs because it couldn't accept the accountability demands required by the funds. Credit Lyonnais is one of the few other banks participating in this area, and AFPs' public solicitations for bids for custodial contracts are attracting few interested parties.
Meanwhile, regulations that require AFPs to open checking accounts in the national currency of the country where investments are being made also has limited the pool of potential custodians. Not all banks offer checking accounts in Japanese yen or British pounds. When their custodians don't offer accounts of a particular currency, the AFPs want to be able to open an account with a AAA or AA rated bank. This change likely will be granted, and a rule obligating the hiring of custodians for the purchase of mutual funds will probably be eliminated, given that fund shares are not negotiable securities and are registered in the name of the owner.
The executives are doubtful, however, that the superintendent will change the accounting procedure to allow AFPs to pass on investment-adviser fees to fund affiliates.
Instead of investing in mutual funds, pension fund managers have expressed their desire to set up discretionary accounts with international money managers and to invest in select instruments. While they are allowed to do that, the fund company must absorb all management and administration fees. Industry arguments that mutual fund fees are indirectly paid by affiliates - through their inclusion in the daily fund net asset value - have fallen on deaf ears in the superintendent's office.
The great majority of AFP investments have been directed at local government and corporate instruments. As of March 31, the AFPs allocated $12 billion to government bonds and notes, $10.2 billion to the corporate sector and $7.7 billion to the banking sector, primarily for investment in CDs.
Investment in foreign instruments has been primarily in Brady bonds, shares of Latin American companies and mutual funds.