León Fernández de Castro, president of the Association of Pension Fund Administrators, defended the administrators' investment decisions for Fund E, which fell 4.92% in September and is down 10.39% this year, according to La Tercera. "Nothing reckless has been done here, nor anything outside the rules or the law," he told the outlet.
To understand why this matters, it helps to know what Fund E is. It is the most conservative of the five funds offered by AFPs (Pension Fund Administrators). It invests mainly in fixed income, meaning bonds and debt that pay interest. Many people nearing retirement choose it precisely because it is supposed to avoid sharp fluctuations.
The decline occurred as interest rates rose in the United States. When that happens, bonds already in your portfolio lose value because new ones pay more. It is like holding a deposit paying 4% when the bank next door starts offering 6%: your investment loses appeal and value.
The main criticism concerns another issue. According to La Tercera, Fund E had high exposure to interest rate swaps, derivative contracts that allow a portfolio's duration to be "extended." The longer the duration, the greater the impact when rates rise. The Superintendency of Pensions and the Central Bank had warned that this level created risks.
Fernández de Castro maintained that the AFPs took "the appropriate risk for the long-term rates that this fund needs to have." He explained that when the market does not offer enough long-term debt, derivatives help construct it, and that their use is permitted under the rules.
Former Superintendent of Pensions Osvaldo Macías had questioned the administrators' decision to take on what he considered an imprudent risk for an essentially conservative fund, saying that maturities of that length were unnecessary. The association leader responded that the regulator's new investment framework for generational funds sets maturities of between 14 and 18 years for stage 6, similar to current ones.
Asked why the AFPs increased their exposure despite the warnings, he addressed Macías directly: "If the previous superintendent had had serious doubts, perhaps he should have regulated earlier." He added that these were long-term strategies that had been working and had delivered positive cumulative returns.
He also acknowledged that there are lessons to learn. He said fixed income has proved much more volatile than it used to be and that the sector must learn to communicate and design these strategies better. "Nobody likes to see an impact like the one we had," he admitted.
If your savings are in Fund E, this year's loss is already reflected in your balance. The association leader insisted that these are long-term strategies, although the published interview does not specify how long a recovery might take. Fernández de Castro took over as president of the association seven months ago.
