Chile's pension-fund system is admired and revered worldwide. It is the model reformers from other countries always turn to. But the system is not without blemishes. Fierce competition between fund managers has led to high-pressure sales methods and finally an industry shake-out. The gains for account holders of lower fees could be short-lived as consolidation gets under way.
Battling for survival, fund managers have recently cut an average of 0.24% off fees on individual accounts bringing them down to 2.76%. The four big managers, with accounts ranging from 400,000 to close on a million, are comfortable with the cut in fee income. They already have the economies of scale that allow them to run what is a high-volume, low-value collection business and make profits. Provida, the biggest with almost a million customers, made a 15% return on its operating costs last year. Cuprum, specializing in high-income savers, made 31%.
But at the other end of the scale there are five small funds with fewer than 100,000 accounts. All made losses last year. Augusto Iglesias, a private consultant, is among the analysts who think that, with that kind of arithmetic, by year-end the number of funds, known as AFPs, will be down from the current 12 to six or seven. "If you don't get the right economies of scale, you can't keep going," says Iglesias.
What kept the small AFPs on their feet until now was cashflow from an out-of-control "transfer industry". Over-liberal regulations, originally meant to give customers maximum free choice and help create competition, instead produced a thriving trade in AFP accounts, with an astonishing 220,000 transfer requests a month - about 15% of all customers.
There were 22,000 salespeople offering all kinds of incentives to persuade customers to switch accounts. Inducements ranged from a (strictly illegal) share of the commission to bicycles and beach holidays.
But last November the regulators finally tightened the rules. The big change was a small increase in the paperwork. Would-be transferees had to produce their most recent AFP statements as well as their identity cards.
It had a drastic effect: transfers dropped to 2,200 a month, and half the sales force was laid off within weeks of the new ruling. Monthly account costs have dropped to Ps5,700 ($15) from Ps6,900, says Julio Bustamante, the superintendent for the AFP industry. At Habitat, the second biggest fund, which is partly owned by Citicorp and partly by the local construction industry association, board chairman German Molina says: "The regulators should have done this two years ago. The churning was bringing the whole industry into disrepute."
But for the small funds the new rules are a death knell. With transfers cut, growth is limited to business from new entrants to the job market. The small funds "have no future except to buy or be bought", says Iglesias. "Or they can put in new money to keep a big sales force and operate under the new rules. But they won't recover the investment short term."
Though small, these funds still offer an opportunity. The total system manages $30 billion, and the smallest fund, Fomenta, $15 million. The biggest, Provida, manages $6 billion.
One merger has already taken place. Last month Provida snapped up a controlling 59.55% in Proteccion for $92.4 million from Banco Security, a local investment bank. Another also-ran, Magister, started by the local teachers' union, has ceded 46% of its ownership to Inverlink Preferred Markets, a US-Chilean group. The new partners will put in $2.5 million over two years to allow the fund to keep operating. At the top, Penta - a Chilean financial services group that controls one of the profitable funds, Cuprum - has brought in Sun Life Assurance of Canada as a strategic partner to boost its investment expertise. Sun Life paid $120 million for a 31.7% stake, giving it equal control.
Cuprum has carved itself a niche with high-income group savers and Sun Life's Yves Laneuville, senior vice-president for international business, sees opportunities to expand the services the AFP offers, from the single standard index fund which is all the AFP industry offers at present, to "a family of funds".
This month the finance ministry is sending legislation to congress to allow the setting up of a second fund. The new type of fund will offer only fixed-income securities. The idea is to offer stable, if lower, earnings for contributors close to retirement who want to avoid the ups and downs of the stock market. The AFPs can invest a maximum 30% of their portfolio in stock, but the Santiago bourse has been performing poorly in the past three years, and returns are below the historical highs of the late 1980s and early 1990s.
If two funds, why not three, four or five? The disincentive at present is the regulations which stop the AFPs charging for different services. Fees are limited to a proportion of account holders' contributions. Molina at Habitat thinks that if the rules were changed to allow fund managers to charge on the basis of the amount of assets they manage, they would have a real incentive to offer new services. Then there might be more competition, whatever the number of funds in the market. Imogen Mark