Alternative Assets - Central Bank Finally Raises Investment Limits for Chilean Pension Funds

Alessandri - Following a recommendation made last year by the Chilean pension regulator (Superintendencia de Pensiones), the Central Bank of Chile has published on Monday April 15, 2024, its resolution raising the aggregate investment limits for all of the different types of Chilean pension funds managed by AFPs (albeit only slightly, in the case of the most conservative fund types).

The resolution will allow to gradually increase investment in private equity, private credit, infrastructure and real estate.

This is the second time the Central Bank raises the aggregate limits since Chilean pension funds were first permitted to invest directly in private equity funds back in 2017. However, this increase had been long awaited given that most Chilean pension funds had already reached or were close to reaching the existing limits, which was effectively reducing the ability for further investment in alternatives and affecting returns.

Thus, the Central Bank has provided a calendar of gradual increases in investment limits, depending on the risk profile of each different type of pension fund (Type A funds being the riskier funds and Type E being the more conservative funds), as follows:

 

Interestingly, the Central Bank resolution, as of August 1, 2027,  raises the limit to the 20% statutory maximum for pension funds type A investments in alternative assets, which even goes beyond the original request from the Superintendencia de Pensiones.

As to the so called  individual unemployment fund (CIC) the Central Bank for the first time allows investments in alternatives and has fixed the limit at 3%, as of May 1st 2024. In the case of the collective unemployment fund (FCS) the current 5% limit is already at its statutory maximum.

According to a press release from the Central Bank, this resolution is aimed at promoting an increased portfolio diversification for pension funds.

Moreover, the Central Bank stated that this resolution is consistent with its policy of raising limits gradually in order to avoid market disruptions resulting from portfolio adjustments by pension funds.

The Central Bank resolution sends a technical message to Congress where the pension reform bill sent by the Boric administration is being discussed. Indeed, it is in direct contradiction to the proposal contained in said bill to impose an aggregate cap of only 0.25% on fees for underlying funds in which pension funds invest (including alternative assets), considering that the fees in global private funds markets are typically several times said cap. There clearly is a dislocation here: while the pension regulator and the Central Bank are promoting investment in alternatives, the fee cap in the bill creates a clear disincentive for such investments.

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