According to CNN Chile, the president of the Pension Fund Administrators Association, León Fernández de Castro, estimated that the decline in Fund E would reduce pensions by between 1% and 2%. He also said that any errors made by the administrators must be disclosed and penalized. He made the remarks on Canal 13's Mesa Central program.
AFPs (Pension Fund Administrators) are the private companies that manage workers' retirement savings in Chile. Fund E is the most conservative of the five pension funds and tends to attract people nearing retirement because it invests primarily in fixed income, meaning bonds.
"We understand the discontent, we understand the concern, but above all the uncertainty this creates for those approaching retirement," Fernández de Castro said. He added that these are "their life savings".
His explanation for the decline centers on international interest rates. When those rates rise, bonds already held in portfolios lose value, just as a low-interest term deposit is worth less when others offering higher returns become available. According to the association leader, the same increase lowers the cost of pensions and offsets part of the loss. As an example, he cited the increase in the programmed withdrawal rate on October 1.
Fernández de Castro attributed interest rate volatility to the inflation left by the pandemic in the United States and Europe, and to this year's war, which drove up fuel prices and US interest rates. Asked why AFPs had not warned of the risks earlier, he replied that "in the financial world, no one has a crystal ball".
The association president defended the use of derivatives, financial contracts whose value depends on another asset, to extend portfolio duration. Duration measures how much a bond's price moves when interest rates change: the more years, the greater its sensitivity. According to the information available to him, the administrators increased it to between 15 and 18 years.
To support this, he recalled that the pension reform requires portfolios for people aged 55 to have a duration of between 14 and 18 years. He also mentioned that some Danish funds combine bonds and derivatives in a similar way.
However, he avoided saying whether AFPs had acted imprudently. He maintained that this determination rests with the authorities, through the penalty proceedings opened by the Superintendency of Pensions, the state agency that oversees the administrators. "Judgments about risk levels should be withheld until all questions have been cleared up," he said.
He was asked about former superintendent Osvaldo Macías, who initiated a process to change the investment rules after speaking with AFPs. Fernández de Castro said those meetings were part of a routine review with the regulator. He added that he did not know what was discussed because the association does not participate in investment decisions.
He also declined to comment on incentives for investment executives, although he ruled out conflicts of interest. On some experts' suggestion that AFPs voluntarily compensate members, he said it was not a matter for the trade association and that the decision rested with each administrator.
For those about to retire, the association leader recommended seeking advice from their AFP or a pension adviser before deciding. That includes the option of postponing retirement proposed by the Minister of Labor. According to him, each case depends on the urgency of the person's needs.
Fernández de Castro acknowledged that the episode damages the industry's reputation, which had recovered after the pension fund withdrawals. He said Fund E had already recovered more than two points following this week's decline in interest rates. There is still no known date for the outcome of the Superintendency's proceedings.
