A former senior executive at an AFP (Pension Fund Administrator) summed up the Fund E crisis this way: "Greed won out over responsibility." El Mostrador reported the remarks without revealing his name. According to El Mostrador, the former executive spent more than a decade in the industry and previously worked in banking and insurance.
The former executive says he is a staunch defender of the system. Even so, he described himself as "astonished." Knowing the industry from the inside, he cannot understand why risk committees and boards failed to grasp the scale of what they were doing.
He also criticized the industry association for its lack of empathy toward members. "They are responding with an Excel spreadsheet and not with emotion," he said, according to the outlet.
To understand the scale of the blow, it helps to remember what Fund E is. Of the five funds offered by pension fund administrators, it is the most conservative, usually chosen by people approaching retirement. It is like keeping your money in the safest drawer in the house and discovering that this was the very one with a leak.
Between January and September, Fund E recorded a real decline of 10.39%. Much of that is explained by bets on derivatives, financial contracts whose value depends on another variable, in this case United States interest rates. The administrators bet that rates would move in one direction, and the market went the other way.
The losses, on paper for now, total US$7,700 million. Being "on paper" means they have not yet been realized because the instruments have not been sold. According to El Mostrador, the Central Bank and other financial authorities had warned about the risks of this type of transaction.
If your savings are in Fund E, the question the outlet raises is direct. Members absorb the losses, while pension fund administrators continue collecting fees and their directors keep their salaries. It remains to be seen who answers when the bet goes wrong.
The Superintendency of Pensions, the body that oversees pension fund administrators, opened disciplinary proceedings against all seven administrators on Tuesday. It seeks to establish whether they breached their fiduciary duties, meaning the obligation to look after other people's money as if it were their own. Its chief legal officer, Mario Valderrama, is reviewing investment decisions, board minutes, committees and executive incentives.
José Antonio Kast's government, which has traditionally been closer to the individual capitalization system, distanced itself. Finance Minister Jorge Quiroz backed the regulator's action. He also warned that, if negligence is proven, directors could have to answer with their own assets.
Rodrigo Vergara, former Central Bank president, researcher at CEP (Center for Public Studies) and chairman of Santander Chile, also criticized the industry. He said he was very surprised by the risks taken and questioned pension fund administrators' use of regulation as a defense, since they have investment teams and committees to prevent this kind of blow.
A director at one of the major banks described it with biting humor to El Mostrador: "The pension fund administrators are lonelier than Adam on Mother's Day." The investigations are compounded by criminal complaints from members and disclosures of directors' high pay.
The crisis comes at a delicate moment. According to the latest Cadem poll, 4 out of every 10 Chileans are very or fairly stressed, and 53% of them blame a lack of money. The Finance Ministry and market participants fear that the scandal, combined with the effects of El Niño, will hit a weakened economy.
In Congress, the governing coalition and the opposition agree. By unanimous agreement, Senate President Paulina Núñez (RN) called a special session for Tuesday, October 27. Ministers, regulators and representatives of the pension fund administrators will attend.
