Chile’s long-awaited reform to boost AFPs’ alternative investments is now in effect, but pending regulatory hurdles are still stopping pension funds from returning to the asset class.
The new rules became effective November 1, but before the AFPs can invest, the country’s risk regulator has to review and approve the international alternatives managers the pension funds will be able to use. In tandem, AFPs must create their own alternative investments guidelines, which the country’s pension regulator must also assess and green light.
An AFP portfolio manager speaking on the condition of anonymity added that he doesn’t expect new investment until at least March or April, and a source at a Chilean government agency concurred with that estimate.
‘I don’t expect investment to restart immediately, mostly because we have to meet certain criteria,’ the AFP portfolio manager said. ‘The regulator is asking for some things, and we have to get our investment policies together first.’
Back and forth
Chile’s pension funds clamored for years for more access to alternatives, which could deliver high returns, as savers complained they weren’t giving savers adequate pensions.
Before the reform, alternatives counted toward the limits for other asset classes, such as equities. In addition, AFPs could only invest indirectly through feeder funds.
Speculation about the possible reforms kept the AFPs from making new investments in alternatives for about a year.
After a roughly four-year process involving the Chilean government, the country’s pension regulator, the Superintendencia de Pensiones, issued in late of October the final rules for a reform that allowed direct access to alternatives and widened the investment universe.
The new framework requires the AFPs to come up with guidelines for each type of alternative asset explaining how the pension funds will the investments, manage risk and handle liquidity, among other topics.
Getting approval for the policies could take a few months, the portfolio manager said, because the regulator provided vague guidelines for the documents, so it’s likely to request more information from the AFPs.
In an email to Citywire Americas, the Superintendencia de Pensiones said the guidelines have to first be approved by each AFP’s board of directors before being sent to the regulator, which could give feedback that must be worked into the policies.
However, if the Superintendencia doesn’t make comments within 15 days, the AFPs are free to publish the documents and invest according to their guidelines.
Turning to another issue, there is also a passage in the new framework that states AFPs will need to have ‘adequate technological and human resources’ to invest in alternatives but does not specify what the regulator would consider sufficient.
‘It’s going to be complicated, because we’re being asked for something but not for something in particular and nothing in detail,’ the AFP portfolio manager said. ‘So we’re going to try to meet this in the best way possible without having any guidelines.’
Lack of alt entrants
The old framework didn’t require Chile’s risk regulator, the Comisión Clasificadora de Riesgo (CCR), to approve international alternatives managers because AFPs could only invest in foreign vehicles through feeder funds.
However, now that the option to invest directly is also open, the CCR has to review and green light each international alternatives manager.
Managers could start applying November 2, and a person familiar with the situation said the first requests rolled in about two weeks later. Fewer than 10 firms had applied as of November 28, the person added.
Citywire Americas understands that each international alternatives manager must be sponsored by an AFP to be eligible to apply, which might have contributed to the low number of applications so far.
The CCR could release its first list of approved managers before the holidays, the person added, though the process could extend until January if the regulator requests further information from the firms.
[Update] This story has been updated with comments from Chile's pension regulator received after the article was initially posted.