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Impact Investing

IPE special report May 2018

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Chilean pensions more than half of GDP

CHILE - Twenty years after the introduction of the private pension fund system in Chile, the industry now amounts for 52% of the country's GDP, according to the latest figures by the supervisory body Superintendencia de Administradoras de Fondos de Pensiones (SAPF).

According to the SAPF, the total size of the assets under management by Chilean AFPs (pension fund asset managers), was $35.8bn at the end of 2000.
This represents around 56% of the country's stock exchange transactions and is equivalent to 100% of Chile's external debt and 200% of its total annual exports.

In 1981 Chile radically changed its old pension system introducing a fully funded privately managed individual savings accounts.
The impact that the development of the system has had on Chile's capital markets has been huge.
"Twenty years ago this market only had four different families of financial instruments and all of them were fixed income instruments from local issuers,"
says Aldo Simonetti, managing director at AFP Santa Maria, part of the Dutch ING group in Santiago.
"Now we have eleven different financial instruments, both fixed income and equity from local and foreign issuers."

In terms of investment strategies, however, Chilean pension funds portfolios are still relatively conservative.
According to the SAPF, at the end of Dec 2000 around 35% of assets were invested in government bonds and 20% in other financial institution paper.
The remaining pension fund assets were invested in domestic equities (11.6%), corporate bonds (4%) and mortgage bonds (14.4%).
Foreign investments represented around 12% of total assets - mainly invested
in foreign equity mutual funds.

The investment return of Chilean pension funds in 2000 was 4.4% (above inflation), significantly lower than the 16.3% achieved the previous year. "Taking into account the performance of financial markets last year´s returns were quite good," says Camilo Morales, planning and development manager at AFP Provida, part of Spain’s BBVA group.
"The average return for the last 20 years was 10.9% which is quite high, but it could have been much better if we didn't have such strict control and regulation regarding investment strategies for pension funds," he says.

Morales highlights the need for increasing exposure to foreign equity to
achieve better portfolio diversification and risk control.
Regulators are already looking at the issue of changing the current investment limitations, which do not allow investing more than 16% abroad.

The private pension fund system in Chile now has around 6 million affiliates, of which 50% make regular contributions to their accounts.
Approximately 340,000 people already receive a pension.
Today seven AFPs operate in the Chilean market.



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