12 from the excess reserves or the AFP. A new Superintendent of Pension Funds was formed. Investment guidelines are fairly strict, with equity investments being restricted to effectively 10% of the fund assets initially and 20% since December 1995 . The commissions are not restricted. Typically, the AFPs charge fixed monthly commissions plus a variable commission based on salary. The latter has typically been of the order of 2-2.3% of salary. Until November 1995, the SAFP did not permit transfers between AFPs. It now requires a minimum contribution period of six months and a fee of soles 40 to transfer to another AFP.

**Investment Portfolio.** As in Chile, return guarantees relative to industry average have caused AFPs to invest in virtually identical portfolios, not only in terms of broad allocation between stocks, bonds, etc. but also in individual security holdings. The Superintendent of AFPs (SAFP) generates exhaustive data on individual funds' portfolios and the AFPs regularly monitor and mimic each other's portfolio. This is reflected in increasing convergence of values of AFP stocks. The variation [(Max-Min)/Average] in AFP share values was 8.1% in 1993, 6.4% in 1994, 4.3% in 1995, and 5.3% in September 1996. The portfolio is apparently unsuitable to the needs of the young affiliates. More than half the affiliates are less than 30 years old, over two-thirds are less than 35, and less than 10% are over 45. Yet over half the AFP investments are in bank CDs, and bonds of financial institutions. Some AFP managers confess that the return bands not only reduce the incentives to compete on the basis of product differentiation, specialization, or efficiencies of scale, but they find some comfort in this arrangement as it avoids likelihood of under-performance<sup>7</sup> . Following a review of the social security system under a World Bank project, in November 1996 Peruvian authorities planned to issue new regulations to drop the minimum return guarantee.

**Performance of AFP System.** AFPs and SAFP statistics used to publicize high realized rates of return, ranging from 6-8% p.a. in real terms. The returns were, however, computed before commissions. Thus most affiliates may not have been fully aware of the effective return on their savings. As part of the World Bank project referred to above, there are plans now to require AFPs to report return statistics net of expenses. Table 6 summarizes the performance of Peruvian AFPs. It shows the aggregate contributions in the individual accounts, total commissions, year-end account balances, and annual internal rates of return after taking into account commissions, for the period August 1993 to September 1996. It shows that Peruvian affiliates realized negative returns, net of

6 This limit applies to common shares with voting rights. In addition, funds are allowed to invest a similar amount in the so called "labor" shares issued by many Peruvian companies. These are non-voting shares, accounting for about 10% of the total stock market capitalization, and are rather illiquid. By and large, the pension funds are unable to invest significant amounts in these shares. There was a proposal by the securities regulator to eliminate these labor shares either by payout or conversion into straight equity or other instruments, and a separate proposal by the Superintendency of the AFPs to combine these limits and permit investment of 35% of the funds' assets in equity in September 1996.

While investment managers interviewed would not discuss their compensation in detail, it appears to be partly based on relative returns..