Source document: https://docs-lawep.s3.us-east-2.amazonaws.com/1698060996973.pdf (Liberia)
Pension Funds Foreign Investment – How to handle the risks?
Solange Berstein Superintendent of Pensions, Chile Chair of IOPS Technical CommiBee Seminar: Regulatory and Supervisory Challenges for Iceland Pension Industry Reykjavik, Iceland February 28, 2014 Agenda  Impact of restricNons on pension fund performance  Pension fund growth and investment regulaNon in Chile  Risk control  Investment regulaNon challenges  Conclusions Impact of RestricNons on Eﬃciency of Investment 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0 Investment in national and foreign variable income are not allowed Foreign investment is not allowed 0 4 8 12 16 20 Berstein and Chumacero, Journal of Fiscal Studies (2006) shows that investment limits produce eﬃciency costs Pension Fund Growth and Investment RegulaNon in Chile M$ 2012 80.000 70.000 60.000 50.000 40.000 30.000 20.000 10.000 % 100 90 80 70 60 50 40 30 20 10 0 Amount of Local Investment Amount of Foreign Investment % of foreign investment Stocks Shares of Investment Funds Foreign Investment Second Fixed Income Fund MulNfunds Flexible Investment Regime Investment DerivaNves 1985 1990 1992 1999 2002 2008 2011 DiversiﬁcaNon of Pension Fund Investment Aggregate Por;olio of the Pension Funds (Dec 2013) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Fund A Fund B Fund C Fund D Fund E DomesNc Equity DomesNc Fixed Income Foreign Equity Foreign Fixed Income • NaNonal equity is mainly composed by shares (82%), with a lower parNcipaNon of investment funds and others.
• NaNonal ﬁxed income includes mainly instruments of ﬁnancial intermediaNon (14%), treasury bonds (47%), bank bonds (22%) and corporaNve ﬁxed income (17%).
DiversiﬁcaNon of Foreign Investment Foreign Investment MMUS$ 69,054 (December 2013) Risk Control • Structure of Investment RegulaNon • Financial instruments and adequate vehicles to use • Foreign currency risk management Investment RegulaNon: Chilean case Investment Policies Investment Regime Structural Limits Law Pension Fund Administrators Investment PFA CommiBee Supervisor and Technical Investment Council Government and Congress Risk RaNng Council Financial Instruments and Vehicles “The Administrators must do everything necessary in order to obtain adequate returns and security in the investment of administrated funds…” (ArNcle 147, subsecNon ﬁrst and second) Return Risk Cost Indirect or Direct Investment Financial Instruments and Vehicles Indirect Foreign investment Governance and Capacity InformaNon Cost Direct Mandate Mutual Fund Return and Risk Currency Hedging  VariaNons in the exchange rate may impact returns and volaNlity of pension funds  Currency hedging strategies help miNgate the risk of pension funds  Hedging should consider: • Protect the value of the funds in the relevant currency for the payment of pensions (pesos).
• Be ﬂexible enough to allow PFAs to manage risk according to the scenario they face.

• Capture the diﬀerences in the nature of the types of foreign instruments or investment vehicles.
Currency Hedging Type of instrument Foreign Fixed Income with Investment grade Foreign Fixed Income with low Investment grade Foreign equity Minimum Coverage Maximum Coverage 50% 100% 0% 0% 70% 50% Investment RegulaNon: Challenges  Assess the adequacy of the current derivaNves limits framework for investment derivaNves  Assess the regulaNon related to “alternaNve assets”, mainly private equity.
 Assess risk raNng restricNons for foreign investment  Elaborate mechanism to allow reevaluaNon of the investment regime when there are changes in the behavior of instruments and their correlaNons with the chilean peso.
 Deﬁne the convenience of discriminaNon with respect to the investment (between strong and weak currency of the curriencies, for instance) Investment RegulaNon: Challenges Expected Replacement Rate/Standard DeviaNon e t a R t n e m e c a p e R l 140,0% 120,0% 100,0% 80,0% 60,0% 40,0% 20,0% 0,0% 0,0% 5,0% 10,0% 15,0% 20,0% SD 25,0% 30,0% 35,0% 40,0% Default -­‐Crisis at 20 years High Risk -­‐ Crisis at 20 years Low Risk -­‐Crisis at 20 years High Risk -­‐Crisis at 60 years Default -­‐Crisis at 60 years Source: Berstein, Fuentes and Villatoro, Journal of Pension and Finance (2013) Low Risk -­‐Crisis at 60 years ¿How much risk can the individual assume?
Financial advisory role Investment regulaNon: goal of ﬁnal pension level and risk: Reference porjolio Conclusions  The regulatory framework of naNonal and foreign investments must guarantee that PFAs have incenNves to seek instruments or ﬁnancial vehicles with a good mix of cost, risk and return  The important trade-­‐oﬀ between regulaNon and eﬃciency of investments should be balanced taking into account the objecNves of the invested funds (in this case, the ﬁnal value of the pension) associated with a tolerable level of risk.
 In this sense, the more alternaNves of investment that emerge allowing foreign investment increase the chances of achieving these objecNves, but impose new challenges in terms of regulaNon and supervision Pension Funds Foreign Investment – How to handle the risks?

Solange Berstein Superintendent of Pensions, Chile Chair of IOPS Technical CommiBee Seminar: Regulatory and Supervisory Challenges for Iceland Pension Industry Reykjavik, Iceland February 28, 2014