According to Emol, the Superintendencia de Pensiones (Chile's pension regulator), headed by Joaquín Cortez, has opened sanction proceedings against the seven administradoras de fondos de pensiones (AFP, Chile's private pension fund managers). The regulator holds them "responsible for the investment decisions adopted", which led to heavy losses in Funds D and E.
The pressure is coming from several directions. In the Cámara (the Cámara de Diputadas y Diputados, Chile's lower house of Congress), several caucuses have called for special sessions, and the idea of an investigative committee is gaining support. Lawmakers want to summon Cortez and the AFPs to find out whether they broke the law or ignored warnings, such as those issued by the Banco Central (Banco Central de Chile, the country's central bank). On top of that, members have filed lawsuits accusing some fund managers of breaching their fiduciary duty, the obligation to look after other people's money as if it were their own.
The losses originate in contracts known as swaps. Bloomberg reported on October 13 that these agreements, tied to foreign interest rates, changed sign within twelve months: from US$1,400 million in gains to US$7,700 million in losses. That figure measures how much the contracts' value has fallen today. It is not yet a realized loss.
Fund E took the hardest hit. Between January and September it fell 10.39% in real terms, meaning after inflation. It is precisely the most conservative of the five funds (A through E), almost entirely in fixed income and designed for people close to retirement.
To understand what happened, it helps to start with derivatives. These are contracts whose value depends on another asset, in this case US interest rates. According to the Banco Central, they are used to hedge risks by locking in a future price, or to speculate on market movements. The open question is which of the two uses prevailed at the AFPs.
The most basic derivative is the forward: you agree today on the price at which you will buy or sell something later. An interest rate swap works similarly, but with many interest payments over time. Economist Jaime Casassus, of the Instituto de Economía UC, told Emol that it allows a fixed rate to be exchanged for a floating one without putting up the invested amount at the start, apart from collateral.
Former Superintendent of Pensions Álvaro Gallegos summed it up this way: "whoever is paying the lower rate wins, whether fixed or floating". The interest is calculated on a reference amount called the notional, which is not money invested. Bloomberg estimated that this notional reached a peak of US$700,000 million.
The AFPs chose to receive the fixed rate. Think of it as locking in a deposit at 4% a year for ten years: if the market later pays 5%, your contract is worth less. Casassus compared the strategy to buying long-term bonds funded with short-term financing, which he said makes sense if the goal is to protect future pensions.
The bet was that US rates would keep falling. At first they did, but then they reversed, Gallegos said. The conflict in the Middle East pushed oil above US$100 a barrel, revived inflation and led the Federal Reserve (Fed, the US central bank) to raise its rate for the first time since 2023. Multi-year Treasury bonds hit their highest level in 24 years, according to Bloomberg.
As losses mounted, banks could demand more collateral, what finance calls a margin call. Gallegos said this hit the funds directly. He described it as a zero-sum game, where what one side loses, the bank on the other side gains. "It is not the AFPs that lose, it is the pension funds, that is, the members", he said.
There is a possible partial relief. With higher rates, annuities (rentas vitalicias, pensions contracted with an insurer) pay more for the same savings, which should partly offset the damage, according to Gallegos. The available Emol text does not detail the so-called herd effect or the timeline of the sanction proceedings. The next visible step is the possible investigative committee in the Cámara.
