Interview: Luis Valdivieso
How would you rate the effectiveness of the AFP reforms as they stand? What could be improved?
LUIS VALDIVIESO: It is too early to quantify the net gain from the AFP reforms because while they have brought benefits, they also contain complexities, and these have caused some confusion. On the positive side, commissions have declined by an average of 8%. The reforms have tried to expand coverage and reach groups not previously covered by the pension system, and the legal process against private debtors has been simplified, albeit not against public debtors. However, there are still missing elements that ought to be addressed. For example, to improve the coverage and effectiveness of the reforms, more needs to be done to change labour regulations, liberalise the investment regime and increase the operational limit on overseas investments.
What is your assessment of the new regulations aiming to expand AFP investment opportunities?
VALDIVIESO: This announcement by the Superintendency of Banking, Insurance and Pension Funds ( Superintendencia de Banca, Seguros y AFP, SBS) to expand opportunities for investment is very encouraging. The draft regulation relates to the elimination of prior authorisation for basic investment instruments such as high grade stocks or bonds, so that the responsibility to choose the asset in which to invest is transferred to the AFP and supervision by the SBS comes in at a later stage. Another positive aspect is the approval of the capital market reform to facilitate the listing of companies on the market, improving the prospects for investment opportunities. Other initiatives such as the alternative stock exchange and the Integrated Latin American Market will also play an important role. Public sector investment is being accelerated and procedures for the issuance of instruments in which AFPs could invest are being simplified. All these measures are being developed constructively. A further aspect to consider is the increased limit on investment overseas, but this has stalled at 36% for the time being.
To what extent does the current bidding system discourage competition? Is this effect countered by the possibility of switching AFP after six months?
VALDIVIESO: There has been a notable effect in the short term. Commissions have been reduced and a new AFP has entered the market. However, if you grant a monopoly to one player, the only immediate growth opportunity for those AFP that are no longer able to affiliate new members will be to acquire a competitor. That is what happened with AFP Horizonte: a system supposed to generate more competition actually ended up by reducing the number of participants. The possibility for new members to switch AFP after six months depends on an offer of higher net profitability from another AFP, encouraging further competition.
Will the shift from contributions to account balances become an obstacle to new players in the market?
VALDIVIESO: When commissions on balances become more prevalent, it will become more expensive for new players to enter the market since they will start with a zero balance. Entrance capital requirements will become higher and newcomers will have to work hard to capture affiliates and increase the administered funds in the fastest possible way. Some call this an entry barrier, others simply call it the investment process whereby a company must temporarily accept the costs of entering a new market. Either way the capitalisation needed to enter the system will get higher over time.
What will be the impact of mandating all self-employed individuals to affiliate with pension funds?
VALDIVIESO: Any increase in coverage has an impact on the system because the system is based on economies of scale, and the wider the coverage, the lower the administrative costs. Other economic changes such as an increase in formal employment, a rise in real wages, or the growth of investment opportunities, also make a difference. Ultimately it depends on the state of the country as a whole, not just on what AFPs do.
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