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Chile wealth fund advisor slams government pension fund plan

May 16, 2014

Economist and a senior advisor at Chile’s sovereign wealth fund casts doubt on the rationale behind the new government’s plans for a state competitor to the private pension funds.

     
     
   Javiera Blanco: Minister of labor. Source: Ministerio del Trabajo  
A senior figure in Chile's sovereign wealth fund has called the Chilean government's plan for a new state-backed pension provider "a very bad idea".

The new Chilean government, which assumed office as president on 11 March, plans to introduce a state-backed pension provider to compete with private pension administrators, in what could be the biggest shake-up of the country's pension system for more than a decade.

But Arturo Cifuentes, academic director at the University of Chile's Center of Regulation and Macrofinance Stability - and president of the financial advisory committee of Chile's sovereign wealth fund (with a total of $22.19 billion under management) - said the rationale behind a new state fund was flawed.

"I think a state-backed provider is a very bad idea," said Cifuentes.

"Management fees are already fairly low, so I cannot see how competition from the state provider can reduce them even more. Pension funds returns have very little to do with the funds' management and much more to do with the amount that someone contributes while they are working. In fact, returns have been pretty decent."

President Michelle Bachelet has mandated Javiera Blanco, the new labor minister, to introduce legislation to set up the new provider, to compete directly with the AFPs. A committee of national and international advisers is to advise on other changes to the pension system.

The number of AFPs has more than halved since the 1980s. Blanco has argued the new provider should help to reduce the commissions that private providers receive through increased competition while extending the system's coverage to include all Chileans.

She has said the Chilean pension system, when it was established in the 1980s, initially set a target for the percentage of a worker's pre-retirement income that is paid out by a pension program upon retirement, at 70%. But in reality, the ratio is lower than 40% for men and lower still for women, she added.

"The state-backed AFP is planned to improve the role of the state in pension provision," Blanco said recently. "The main role of the state is to ensure that there is pension coverage for the whole population."

The minister pointed to research showing the system is efficient in terms of the profitability of the AFPs but wanting in terms of the performance of the pension funds. However, economists, including Cifuentes, have criticized the move and say they cannot see how a state-backed provider will improve performance.

For more on Latin America's pensions industry, including how the forerunner of many pensions systems in the region - Chile - might be at risk, see the LatinFinance Guide to Institutional Wealth, published in the May/June edition.



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