SANTIAGO - Chile, whose revolutionary AFP private pension system set the trend for other Latin American countries, is leading the way again with the launch of a tax-deferred voluntary savings plan for individuals in which both local and offshore mutual funds can participate.
The new plan, known as locally ahorro voluntario, is one of the key ingredients in a sweeping capital market reform package proposed last April by Finance Minister Nicol s Eyzaguirre and passed in September by Congress. The measures that regulate the new industry are due out in March.
The voluntary savings plans work much like 401(k)s in the sense that contributions are tax deferred, investors are free to choose the investment vehicles, and managers can mingle flows from voluntary savings with those of existing shareholder assets.
Those able to offer products in this market include fund managers, AFPs, life insurers and banks. What's more, the mutual funds can be domiciled locally or can be a foreign fund registered on Chile's offshore stock exchange. International managers can register existing funds on this exchange and are not required to modify the funds' portfolios to conform to local rules.
Variation on concept
The concept of voluntary savings is not new in Chile, but two big disincentives have inhibited the growth of the existing plans. The AFP pension funds, which as of Oct. 31 were managing $35 billion in obligatory savings, have always offered participants the chance to save additional sums in their obligatory account on a tax-deferred basis. However, participants could not make early withdrawals on the voluntary contributions, and the AFPs could not charge management and administrative fees on these contributions. The AFPs, therefore, dedicated very few resources to the marketing of this savings vehicle.
The new framework authorized by Congress permits early withdrawals (although investors must pay a penalty plus taxes on the realized earnings), and AFPs as well as other players may freely charge fees on the voluntary contributions.
At midyear, just 0.63% of overall AFP assets, or US$217 million, was derived from voluntary contributions. Given the rampant enthusiasm the new legislation has spurred among Chilean asset managers and insurers, five-year growth projections for this segment run from US$1 billion to US$2 billion.
It is important to point out the ability to sell long-term investing has been nearly impossible in Latin America, given the sporadic blowups of economies and sharp declines that local markets endure following emerging-market crises in seemingly unrelated other parts of the world. Although it has endured intermittent recessions, Chile has enjoyed some 20 years of stability, setting the stage for a new era of development.
Players from the AFP, mutual fund and insurance segment have declared publicly their interest in entering the new segment, defending their respective sectors' strengths:
The pension funds believe they can offer the lowest-cost products among their asset-management peers and stand behind their 20-year track record. Pending approval of more capital-markets reforms by mid-2002, the pension managers should soon be able to offer up to five investment options of varied risk levels and asset mixes.
Mutual fund managers emphasize their ability to offer diverse options, including funds that invest 100% of their assets in overseas securities and managers; insurers underscore the attractiveness to workers of their products' spousal benefit packages for accidental death or injury, combined with guaranteed returns.
Meanwhile, banks - whose mutual fund management subsidiaries controlled 95% of the US$5 billion in total industry assets as of Nov. 30 - have not yet defined their voluntary-savings strategy, although their likely participation will affect the overall assets allocated among their competitors. Most small investors are accustomed to investing even their long-term savings in 30- or 90-day certificates of deposit, and banks likely will want to offer tax-deferred alternatives to preserve their market share.
The market hopes voluntary savings will provide a boost to the offshore exchange, which is not living up to expectations. Since its inception in February 2000, the volumes have been quite low. So far this year, Skandia Chile (the only manager registered) has sold a total of US$38 million in shares, while overall assets under management is around US$20 million.