Chile's $176 billion pension fund industry is about to get a whole new range of investment options.
President Michelle Bachelet signed a law Thursday that will allow pension funds, known as AFPs, to invest directly in closely held companies and real estate for the first time, as well as buy shares in infrastructure concessions. The law will come into effect in 12 months, when all the accompanying regulations are in place.
The private pension system is battling declining returns and a lack of domestic investment options, at the same time as many Chileans are protesting against inadequate pension payments. Don't expect a sudden diversification of their portfolios though, or surge in returns, said Osvaldo Macias, the head of the pension fund regulator. The funds will need to build up teams of investment advisers before they can make use of the new law.
“It will be a progressive change, but what's important is that it will open a new world for investments that will grow over time,” Mr. Macias said in an interview in Santiago. “This shouldn't create a boom on the first year.”
The AFPs are coming late to the party. Banks, insurance companies and even foreign pension funds have been able to invest directly in infrastructure projects, property and private equity in Chile for a number of years.
"In my opinion, this could have happened before," Mr. Macias said. "Canadian pension funds, for example, noticed that returns were higher in emerging markets and did what we are doing now many years ago."
Chilean pension fund returns averaged 12.3% in the 1980s, 10.4% in the 1990s, 6.3% in the 2000s and just 4.3% since 2010.
The new rules will demand that exposure to so-called alternative assets increases to at least 5% of pension fund portfolios, from less than 3% at the moment. The AFPs currently have to invest in these assets through specialist investment funds.
"Direct investment in infrastructure or private companies is not the same as buying in the stock market in New York or London," Mr. Macias said. "Pension funds will have to decide if they want to compete by themselves or keep using intermediaries."