Pension tension

Opportunities and threats from Peru’s proposed pension reform.

The pension industry iPeru could be set for reform, posing a threat to the local private pension firms (Administradoras de Fondos de Pensiones, AFPs) but an opportunity for banks and international asset managers. 

As a response to the coronavirus pandemic, Peru permitted citizens to withdraw up to 25% of their pensionsA portfolio manager at an Andean asset manager exclaimed, “The Government should be supporting the economy by issuing bonds at 2%, instead of letting private pensions finance the crisis by selling funds that yield 11%! 

The Government should be supporting the economy by issuing bonds at 2%, instead of letting private pensions finance the crisis by selling funds that yield 11%!

Portfolio manager, Andean asset manager 

To make matters worse for the AFPs, there is an initiative to create a new institution in Peruthe Organismo Público de Pensiones (OPP), to take power from the AFPs and the public social system to promote competition amongst investment managers. 

The CEO of a local asset manager isn’t happy, “OPP proposes to take funds from the AFPs and put them out to international tender. The AFPs don’t know how, when or under what conditions this might happen so they are being forced to shift their portfolios into short-term investments: no private equity, real estate or infrastructure. 

Our sources believe the winners are likely to be the banks, “When people took money from the AFPs they put it into their bankThis OPP initiative would encourage the banks to manage pensions too. Many banks also have AFPs but they could simply close that business and shift to banking.” 

In contrast, the losers are likely to be the independent AFPs with no banking license, the same source explains, “This will hit Sura, if I were them, I would be looking at how to buy a banking license as soon as possible. Habitat AFP, their real business is in Chile so they are less exposed. 

Although AFPs have been demonised, imagine a government institution setting investment policies!”  

– Pension fund executive, Peru 

Of course, some do not believe any action will be taken and that the power grab will be tempered, a local pension fund executive says, “I don’t think they will withdraw funds from the AFPs. Although AFPs have been demonised, imagine a government institution setting investment policies! Furthermore, the congresswoman proposing the reform is now running as vice president for Acuña’s party and Acuña has already come out saying he is pro-market. AFPs will need to improve transparency and communication but they won’t close down.” 

Deheza is uniquely placed to monitor these market changes and already has much more insight than can be reported in these short dispatches. Please get in touch if you’re interested to know more. 

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