Through September, Fund E of the AFP (administradoras de fondos de pensiones, Chile's private pension fund managers) had posted a real loss of 10.39%, one of its worst results since it was created, according to Diario Financiero. The outlet, which broke the story in a Señal DF piece, points to the interest rate swaps the managers took out on the international market.
The blow comes at a time when the industry seemed calmer. After the pension withdrawals and the No+AFP movement, the pension reform approved under the government of Gabriel Boric had cooled the debate.
Fund E is the most conservative in the system. It is made up mostly of fixed income, especially Chilean bonds, which also suffered from rising local rates. Up to that point, nothing unusual.
The problem was in the swaps. A swap is a contract in which two parties exchange payments. In this case, the AFP received a fixed rate and paid a variable one. According to the report, the effect is equivalent to buying a long-term bond without putting up the capital.
Think of it as betting on the price of a house without buying it. If the price rises, you gain as if it were yours. If it falls, you lose all the same. That structure lengthens the portfolio's duration, that is, it makes it more sensitive to changes in rates.
The bet worked if rates fell in the United States. But they rose, driven, according to DF, by the war and tariff disputes. The fund still looked full of fixed income, but its exposure to U.S. rates had multiplied.
A senior financial industry executive, who asked not to be named, was harsh on the AFPs. "They gambled with other people's money", he said. According to him, the normal duration of these assets is seven years, not 15, and the loss of nearly US$ 10,000 million equals the capital of Chile's entire insurance industry. At an insurer, he added, the first to lose would be the owners. Here, the members lost.
Former Superintendent of Pensions Guillermo Larraín called on the AFPs to fix the lack of information. In his view, that gap only feeds speculation, fear and anger, and the managers should take a more proactive stance.
And the regulator? On April 9, the Superintendencia de Pensiones (Chile's pension regulator) issued a rule on derivatives in the funds. It set a maximum derivatives exposure limit (LED), defined as the estimated loss of that portfolio under stress, measured as a percentage of the fund.
That cap was set at 3% for Funds A and B, 2.5% for Fund C and 2% for Funds D and E. The AFPs were given 210 calendar days to comply, a deadline that expires in November. Larraín warned that during that period rates rose 20 basis points between April and June, and 50 basis points afterward.
Arturo Cifuentes, a researcher at Clapes UC, the economic research center of the Universidad Católica, questions the design of the rules. He argues that risk should be controlled with a metric for the whole portfolio, such as CVaR (which estimates how much could be lost in the worst-case scenario), rather than with caps by asset type. In Fund E, he says, there was no duration limit.
The difference is simple. Caps by asset type say how much you can hold in stocks or bonds. CVaR asks how much you could lose. According to DF, it is not foolproof against sharp moves, but it adds a filter.
The case raises questions about the generational funds created by the reform, now being implemented, although the source does not specify whether they will be exposed to the same risk. An expert consulted anonymously by DF said legal action could arise if contributors believe the AFPs breached their fiduciary duty, the obligation to look after other people's money.
