RIO DE JANEIRO - The government's June 3 intervention in the country's largest pension fund was a rare move expected to make the fund more governable and reduce the volatility of its investment portfolio, according to government representatives and some consultants.
Social Security Minister Jose Cechin ordered the fund's directors be removed after the $14.6 billion pension fund of the state-owned Banco do Brasil refused to comply with a May 2001 law that changed how fund participants should be represented on the board.
The government-appointed "intervenor," Carlos Eduardo Esteves Lima, has named a six-member committee, made up of the fund's existing in-house asset managers, to make the day-to-day investments of the pension fund. Mr. Esteves Lima believes the process of electing and appointing new board members, based on the new law, will take no more than 60 days.
The fund - the Caixa de Previdencia dos Funcionarios do Banco do Brasil, and known as Previ - has been criticized by government officials for being too heavily invested in stocks. But Jose Roberto Ferreira Savoia, the head of the Secretaria de Previdencia Complementar, the pension fund regulatory agency, denied that had anything to do with the recent action.
The new law, No. 108, said the boards of all pension funds sponsored by state-owned companies couldn't have more than six members, and that there had to be an equal number of members elected by participants and appointed by the company. The law also gave the tie-breaking vote to one of the sponsor-appointed members, elected by the other two.
And it was that tie-breaking vote that was the sticking point for some of the directors of Previ.
Bylaw changes
In 1998, a change in the Previ bylaws allowed its executive board, which made day-to-day investment decisions, to have three participant-elected members and three sponsor-appointed members, with four votes needed to approve any decisions. The change also gave Previ's board of governors, which approved all investment and other decisions, four participant-elected members and three sponsor-appointed ones, with five votes needed to approve any decision. Neither board had a tie-breaking rule.
On both Previ boards, participant-elected members often took diametrically opposed positions with the sponsor-appointed members on important decisions, and deadlocks occurred. One such deadlock was whether to change the Previ bylaws to comply with law No. 108, with the participant-elected members on both Previ boards voting against compliance.
Erik Persson, who was a participant-elected director on the executive board, explained the vote against compliance: "Giving a sponsor-appointed member the tie-breaking vote in any decision would have given the government all the decision-making power on Previ's board." (He and the other removed participant-elected directors are studying whether to take legal action to overturn their ouster.)
The pension fund regulatory agency's Mr. Savoia said, "congress approved law No. 108 to make pension funds more governable, especially where pension fund bylaws, like those of Previ, created decision-making deadlocks."
Mr. Savoia also said all other 85 state-owned-company pension funds complied with the law. The great majority of those pension funds had no participant-elected members on their boards, with the rest having only one or two members.
The Associacao Brasileira das Entidades Fechadas de Previdencia Complementar, the national association of Brazilian pension funds known as ABRAPP, came out strongly against the government's intervention in Previ. ABRAPP President Fernando Pimentel said, "the best formula for governing (state-sponsored) pension funds is through understandings between the two sides, not intervention."
He added that law No. 108 "allows for management alternatives that could satisfy the interests of the participants and the sponsor." Mr. Persson agreed, saying "law No. 108 didn't make the (tie-breaking) vote a mandatory way of breaking pension fund board deadlocks, but an optional one."
But Ana Maria Martins, head of legal consulting for the Brazil office of William M. Mercer, Sao Paulo, disagreed. "Law No.108 makes the ... vote a mandatory, not an optional, one unless under special circumstances, the government" approves waiving it.
Heavy in equities
An underlying tension at the fund has been criticism of its heavy equity investments.
In 2001, when the stock market plummeted 22% in dollar terms, Previ produced a close to $1 billion technical deficit.
Speaking after the government's takeover, Mr. Cechin, the Social Security minister, said "our orientation is that, from now on, new Previ investments should minimize risk."
But Mr. Persson said Previ already has minimized risk. He said Previ now has 55.2% in stocks, down from 60.4% in mid-2000. Previ also increased fixed-income investments to 30.6% from 22%, dropped real estate investments to 5.8% from 6%, and decreased loans to participants dropped to 8.4% from 11.4% in that time period.
Previ's current 55.2% in stocks, however, still is well above the 45% maximum permitted by a 2001 law for defined benefit pension fund participants.
"Previ had, in 2001, presented the government with a five-year plan to reach the maximum 45% stock investment allocation level for defined benefits plan participants by the end 2005," said Mr. Savoia. "Given the volatility of the Brazilian stock market, that's a very long and risk-inducing time. ... Previ should have reduced its stock exposure more quickly. I believe that future Previ executive boards will more rapidly reduce the pension fund's stock exposure and meet, if not anticipate, its end 2005 deadline for doing so."
Mr. Persson said Previ's heavy stock allocation was due to the government encouraging fund officials to take part in the 1996-'98 privatizations of many state-owned companies.
"Previ was among the few local entities that had the financial resources to bid on big, for-sale state companies ... and the government needed Previ's money to do so, not just to sell the firms, but to encourage other bidders to take part in the bidding auctions and thus boost their final sales price," Mr. Persson said. "It's the government who is to blame for Previ's having such a high stock exposure position."
Many industry observers agreed with that view, in part. They added that when the bylaw changes brought participants onto the Previ board, it deadlocked not only over how quickly to reduce stock exposure, but also where to allocate money from the sales.
"As of 1998, Previ's elected members seemed more interested in allocating money to socially responsible projects rather than maximizing returns for participants, the role of a pension fund," said Luiz Roberto Gouveia, the general manager of the Brazil office of Towers Perrin, Rio de Janeiro. "The new Previ board should be able to make decisions more easily."
Lauro Araujo, the head of investment consulting for the Brazil office of William Mercer, agreed. "The government's legal basis for intervening in Previ was its non-compliance with law No. 108. But such non-compliance was the result of one of numerous deadlocks between Previ board members, who took opposing political positions ... rather than looking out for the best interest of participants."
