Changes in investment regulation of Pension and Unemployment Funds
April 19, 2024
Ignacio Ruiz Rodríguez
On 15 April 2024, the Central Bank of Chile announced its decision to: i) increase the investment limits for Pension Funds in alternative assets; ii) set a new investment limit in alternative assets for the Individual Severance Fund; and iii) broaden the range of financial instruments in which the Pension and Severance Funds can invest. Each of these changes is detailed below:
1. Increase in Investment Limits for Pension Funds:
According to information provided by the Central Bank, it has been decided to gradually increase the limits on investment in alternative assets for Pension Funds. These adjustments respond to the need to promote the diversification of the Funds' investment portfolios, allowing greater exposure to asset classes such as debt and private equity, real estate and infrastructure, among others.
The gradual implementation of these new limits, in accordance with the timetable detailed in Chapter III.F.4 of the Central Bank's Compendium of Financial Regulations (CNF), aims to ensure adequate risk management in accordance with the profiles of each type of Pension Fund, and can be visualised according to the following table:
2. Determination of limits for investment in Alternative Assets for Severance Funds:
In relation to the Severance Funds, a new investment limit in alternative assets has been set for the Individual Severance Fund (CIC). According to information provided by the Central Bank, this limit will be set at 3% of the CIC as of May of this year, and may not exceed 5% of the respective fund. For the Severance Solidarity Fund, the current limit is already at the maximum allowed by law.
These limits are in line with the legal provisions set out in Law N°21.628 of October 2023, which allows investment in alternative assets by the Individual Severance Fund.
3. Authorisation of New Financial Instruments:
In addition to the adjustments in investment limits, the Central Bank has authorised the investment of Pension and Severance Funds in new financial instruments. According to the information provided by the Central Bank, investment will be allowed in:
These financial instruments will be incorporated into the investment options of the Pension and Severance Funds, contributing to the diversification and potential profitability of the portfolios, in accordance with the applicable legal and regulatory provisions.
In conclusion, while recent regulatory changes represent a positive step towards diversifying investment portfolios and improving long-term returns in Chile, it is clear that there is still a significant lag compared to other developed countries such as Germany and Denmark. Despite efforts, investment in alternative assets in Chile is projected to reach approximately 12% of the total system at the end of the transition, well below the OECD average of 18.5%. Comparatively, countries such as Hungary and Costa Rica have less than 10% of their systems invested in alternative assets, while Portugal has 10.1%. In contrast, countries such as Germany and Denmark demonstrate a significant commitment to alternative assets, investing close to 50% of their total investment in this asset class, which considerably exceeds Chilean rates. To close this gap and move towards greater diversification and optimisation of investment portfolios, it is crucial to maintain a continued commitment to international best practices in investment and asset management. This approach will not only strengthen the sustainability and efficiency of the financial and pension system in Chile, but also improve protection and income generation for beneficiaries over the long term.
At EDN Abogados, our funds team led by our managing partner Felipe Diaz Toro is at your disposal to advise you on these matters, or for any question you may have.
