Colombian pension funds will now be able to include alternative assets in their annuity portfolios following a regulation change aimed at helping AFPs better match retirees' investment profile.
An order by the local Treasury Department dated January 17 authorized pension funds to allocate up to 10% of annuity portfolios to alternative assets. Within that limit, 5% can go to local or international private equity vehicles.
While local regulation allows pension funds to invest in assets such as private equity and real estate, they are barred in its most conservative portfolios.
Colombian pension funds offer three portfolios on a scale of increasing risk, plus an annuity offering, called 'retiro programado' that savers transition to once they retire.
The annuity portfolio followed the same investment framework of the most conservative fund, which wasn't allowed to hold alternative investments.
‘Keeping in mind that the profile of retirees is different [from that of current workers], it’s necessary to define specific norms for this fund,’ according to the order.
Annuities portfolios have a time horizon of 25 to 30 years, meaning that the change will allow savers to take advantage of the long-term profile of alternative assets to access higher potential returns.
Colombia's regulation change comes as Chile works to implement its own alternatives reform, which came into effect November 1. The reform set specific limits for alternatives and expanded the range of assets AFPs can invest in.