SANTIAGO - In a move likely to boost the presence of local mutual fund and insurance companies in the pension business, the Chilean government's omnibus capital-market-reform bill asks Congress to consider creating 401(k)-type pension plans administered by third-party pension managers.
Chile was the first Latin American country to institute a mandatory private defined contribution program in which employee contributions are pooled and invested by pension managers, known as Administradoras de Fondos de Pensiones, or AFPs. Individuals, not employers, choose the manager, or AFP, that will manage their mandatory pension savings.
Since early 2002, Chile has also had a voluntary system for individuals, similar to individual retirement accounts in the United States, that allows AFP pension managers, mutual funds and insurers to offer tax-deferred investment vehicles.
Should Congress incorporate this new, corporate measure, voluntary pension vehicles that include tax incentives for long-term savings could be offered directly to companies on behalf of their workers.
The measure has been hotly debated among Chile's money managers, with each sector touting its view via local media advertisements, press conferences and special seminars. Including the measure in the second round of capital market reforms signaled a preliminary victory for insurers and mutual fund managers.
Insurers and fund managers have pointed out that creating corporate plans could expand the overall market, as lower- and middle-income Chileans reap little or no tax benefit from the current voluntary individual retirement plan and as a result do not participate. The firms would also realize a significant cost savings by being able to deal directly with companies to offer services to hundreds or perhaps thousands of individuals.
The seven AFPs, which as of May 31 managed $38.6 billion in obligatory social security system holdings, have vigorously fought the measure, arguing through their association that the formation of corporate plans signals a break with tradition, as employers will have the discretion to select money managers on behalf of their employees, thus limiting the public's choice. Also, vesting provisions usually incorporated in such plans would limit employee mobility, the association said.
Potential conflicts a concern
"We would enter into a clear zone of conflicts of interest," said Guillermo Arthur, president of the Asociacion de Administradoras de Fondos de Pensi%F3;n. Mr. Arthur argued that plan sponsors are not likely to seek out managers that offer the best returns or security for worker savings, but rather those that can offer the sponsor some kind of side benefit. For example, since mutual fund managers are controlled by banks, many fund managers might land corporate pension accounts solely by virtue of the existing banking relationship, which would not be in the workers' best interests.
Aside from this, the association's position is likely influenced by the notion that corporate plans are bad for its business: most Chileans working in the formal economy have an account with an AFP and would probably consider the same AFP to manage their voluntary ret irement savings. Should workers begin saving voluntarily via their employer, the AFPs would lose their grip on this captive market. In short, the potential size of the individual retirement market - the domain of the AFPs - would shrink substantially, while corporate-level plans would gain in importance.
Insurers, for their part, are wasting no time in readying themselves for the new opportunities. Firms such as MetLife Chile Seguros de Vida, ING Seguros de Vida and Principal Compa%F1;%ED;a de Seguros de Vida, which already manage retirees' pension payouts in the form of life annuities, note the importance of encouraging supplemental savings at the corporate level to compensate for lower interest rates, longer life spans and the inability of low-income workers to save on their own.
Luis Valdes, senior vice president of Latin American operations of Principal International Inc., said companies will find it attractive to sponsor plans because of the benefits for higher-income executives: caps on obligatory social security withholding now limit the ultimate size of social security checks. Nevertheless, he thinks companies will be quick to offer participation to blue-collar workers, as the plans won't qualify without the participation of lower-salaried employees.