RIO DE JANEIRO - By year's end, Brazil's Social Security Ministry plans to revise the rules on the investment of Brazil's $65.5 billion in pension assets to spur the diversification of investments and to reduce risk.
But Associacao Brasileira das Entidades Fechadas de Previdencia Privada, Brazil's national association of pension funds, has criticized the ministry's proposed revisions as restrictive. ABRAPP prefers to give pension funds more investment flexibility rather than using rules to force them to promote investment diversity.
The objection to the Social Security Ministry's proposed new rules could result in further changes before they are put into effect by next year. In creating the revised rules, to be announced by year end, the ministry will consider ABRAPP's proposal. The ministry also is getting input from Brazil's central bank and other government regulatory agencies.
In large part, the new rules would involve changes to the current limitations on investments. Fixed and variable income investments and real estate all would be affected.
The Social Security Ministry proposes reducing the amount of pension fund assets that can be invested in variable-income instruments, like stocks, from the current 50% to 45%. But the ministry proposes allowing pension funds to invest an "additional" 15% of their assets in two new types of variable-income instruments - real estate funds (a 10% ceiling) and emerging company funds (a 5% ceiling).
Pension funds investing in both of these types of investment funds would boost their total variable-income investment ceiling to 60%.
In contrast, ABRAPP favors simply increasing the amount of assets that can be invested in variable-income instruments to 60% with no restrictions.
The Social Security Ministry also wants to reduce the amount a fund can invest in the voting capital of publicly listed firms to 20% from 25% of a company's market capitalization. The ministry believes that this change will reduce risk by encouraging partnerships.
But ABRAPP believes it unnecessary to restrict pension fund investments this way because pension funds are already forming partnerships. ABRAPP also opposes the ministry's proposal to make the new rule apply retroactively to existing investments because this would disrupt existing stockholder agreements.
The Social Security Ministry also favors reducing over a five-year period the amount of pension fund assets invested in real estate to 15% from 20% to encourage pension funds to diversify their assets. And the ministry wants to forbid funds from independently developing new real estate properties, an investment it considers risky. But ABRAPP favors simply including real estate investments within the category of fixed-income investments, for which there is an 80% investment ceiling.
"The objective of revising pension fund ceilings is to diversify pension fund investments, and thus avoid unnecessary investment risk," said Wilson Roberto Trezza, assistant general coordinator of investments for the ministry. "We are simply acting prudently."
Creston Portilho, ABRAPP's press adviser said: "Whereas the Social Security Ministry believes in encouraging more diversified pension fund investments, ABRAPP believes that pension funds need greater freedom to invest as they see fit. Why shouldn't the pension fund of a major bank, which is more savvy about fixed and variable-income investments, have more liberty to make the kind of fixed and variable-income investments it sees fits? Why should a pension fund's investment ceiling in a real estate fund be 10% of its assets if the real estate fund is a lucrative one?"
While many pension funds, especially the bigger state-owned-company ones, are savvy investors who could be given more flexibility, other pension funds with less investment savvy would be better off diversifying, which implies less risk, said Marlene Rainer, senior consultant at the Brazilian subsidiary of the U.S.-based Towers Perrin actuarial firm.
"It's difficult to determine whether the Social Security Ministry or ABRAPP has a better formula for directing pension fund investments," said Ms. Rainer. "ABRAPP's more flexible formula better suits big, investment-savvy pension funds and the Social Security Ministry's formula suits smaller pension funds which, because the lack such savvy, are better off diversifying." n
