Labor Minister Tomás Rau called on older adults to postpone their retirement by a few months if they are able to, according to BioBioChile. The cabinet minister made the appeal during a press briefing at La Moneda, the presidential palace, following the drop in Fund E caused by a failed bet by the AFPs (administradoras de fondos de pensiones, Chile's private pension fund managers).
"We are asking people not to make hasty decisions, to the extent that they can postpone for a few months," Rau said. He added that the government needs to see the ongoing investigation and know "whether there will be sanctions, restitution of assets or not".
According to the minister, the executive branch sent a formal request to the Superintendencia de Pensiones, the agency that oversees the AFPs, asking it to provide information. Rau said the analysis could take a few months. For now, no one knows whether members will recover their lost savings.
For those who cannot delay their retirement, the minister recommended getting well informed. He explained that adjustments may also occur in life annuities (rentas vitalicias), the option in which a retiree transfers their funds to an insurer in exchange for a fixed pension.
The problem affects the two most conservative funds in the system, which usually hold the savings of people close to retirement. Between January and September, Fund D fell 6.38% and Fund E dropped 10.39%.
The source lies in swaps, contracts in which two parties agree to exchange future payments. The seven AFPs agreed with international banks to receive a fixed rate and pay a variable one in return, tied to U.S. interest rates.
The bet only worked if those rates fell. Instead, they rose. The fund managers ended up having to pay the banks more than they received. According to BioBioChile, the contracts racked up losses of US$11 billion across the system as a whole. Rau said the AFPs are already reducing their exposure to these instruments.
The episode exposes the so-called "herd behavior": the fund managers invest in similar ways to avoid falling behind their competitors. When a bet fails, the blow hits all members at the same time.
The case comes on the eve of a design change. Next year, the multifund system will give way to generational funds, in which each person will contribute to a fund with a risk level set according to their age, with no option to switch.
Rau argued that the new structure is "different" and that under it "there would not be as much incentive for herd behavior". Even so, he acknowledged that the lessons from this crisis could also be useful in implementing the generational funds.
The next concrete step is the report from the Superintendencia de Pensiones. Its outcome will determine whether there will be sanctions or restitution of assets for affected members, a process the minister himself estimated would take a few months.