Pension Reform Bill in Chile – Cap on Underlying Fund Fees

This is one of several controversial proposals in the bill passed by the The Chamber of Deputies, now being considered by the Senate.
 

Alessandri - The Reform of the Chile Pension Fund Regime[1] (the Bill) was approved by the Chilean House of Representatives (Cámara de Diputados) on January 24, 2024. Discussion of the Bill has now moved, where it is expected to stay for an estimated of 5-6 months.

With the amendments introduced to the Bill in the House of Representatives, Law Decree No. 3500 (which establishes the Chilean Pension Regime) will not be repealed in its entirety as was previously proposed, and the CCR will maintain its role as the entity in charge of authorizing the eligible instruments in which AFPs are allowed to invest in on behalf of pension funds.

However, under the proposed Bill, the AFPs would cease to exist as such, since the roles of investing fund assets will be separated from that of administering individual accounts (i.e., collection of contributions, account administration and customer service). The creation of the following two types of entities was approved:

• Administrador Previsional (AP) (pension administrator) The AP will be a monopoly entity that will be put out to tender by the government, in charge of all the administrative tasks that the AFPs currently perform (collection, front office, account administration, pension payments, etc.). However, key provisions regarding the AP were rejected, so it is currently questionable whether it may legally collect pension contributions.
• Inversores de Pensiones (IPs) (private pension investors) IPs will oversee everything related to the investment process of the pension funds. The IPs cannot participate in the AP bidding process. Should the Bill be passed by the Senate as it is now, each AFP willing to maintain its investing task would have to be transformed into an IP and transfer the administering of the pensions account to the AP.  Hence, the investments of the AFPs in foreign funds would remain valid, only the AFPs will no longer be the ones to continue with these investments, but the IPs.

The House of Representatives rejected the proposal relating to the creation of a government owned pension fund manager (IPESA) and also rejected raising pension contributions (the proposal was 6%). Such contributions would have been funded by employers and the relevant assets (at least half) would have been managed by a new government run entity. It is likely that the executive will insist on putting back these proposals in the Senate.

Likewise, the five different types of pension funds currently managed by the AFPs (Fund types A to E, which vary from being mostly equity to mostly fixed income) will be transformed into target date funds. This will likely have an impact on the investment composition of pension funds, so focus of the legislative discussion should be on how to implement a transition that does not disrupt markets and harm portfolio performance.

The Bill also provides for a controversial statutory aggregate cap on investment fund fees of 0.25%, aside from the already existing rules on maximum total expense ratios.  As the Bill is currently drafted, the total fees charged to the pension funds could not exceed 0.25% of the total assets of the pension funds managed by each IP.  An even more controversial prohibition on payment of any fees applies to pension funds that invest more than 10% of their assets in Chilean fixed income instruments and shares of Chilean listed companies (however, it is our understanding that this would not be relevant to foreign asset managers that do not have a fund with 10% or more of its positions in Chile).

It is not yet clear if this Bill will be approved by Congress.  The Chilean House of Representatives sent the Bill to the Senate. Here the Bill is being heard by the Senate’s Labour Committee prior to review by the Finance Committee to continue its legislative process. The Boric administration is pushing for a first vote in April. Given the nature of the issues on the earlier draft of the Bill that were recently rejected in the House of Representatives, it is expected that after the Bill’s passage through the Senate (if passed), the Bill will then be reviewed and discussed by a joint committee, composed of members of both the House of Representatives and the Senate, which will have to settle the differences that occur in the vote between the two houses.

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