**Figure 9:** Selected emerging markets: Pension fund assets as shares of GDP, 2001 and 2005 (percent)

<!-- Start of picture text --> 25<br>22<br>2001<br>20 17 2005<br>15 12 12 13 12 13<br>10 8 6 6 7 7 6 8 9<br>4 4 4<br>5 2<br>0<br>0<br>ArgentinaBoliviaColombiaCosta RicaEl SalvadorMexico PeruUruguayHungaryPoland<br>% GDP<br><!-- End of picture text --> Source: Based on data from FIAP, WDI, and OECD.

**Figure 10:** Selected OECD countries: Pension fund assets as shares of GDP, 2001 and 2005 (percent **)**

<!-- Start of picture text --> 140<br>123 120 119 2001<br>120<br>103 104 2005<br>100<br>84<br>80 7279 7272 69<br>60 5656 5250<br>34<br>40<br>27<br>20 8 1511 8 9 144<br>0<br>NetherlandsIcelandSwitzerland UK USFinlandAustraliaCanadaDenmarkNew ZealandSwedenJapan<br>% GDP<br><!-- End of picture text --> Source: OECD.

# **IV.2. Overly Concentrated Portfolios**

The asset allocation of pension funds in reformed LAC countries, except for Chile, the Dominican Republic, and Peru, remains concentrated on government securities; although there has been an overall improvement in portfolio diversification. In 1999, with the exception of Peru, pension funds were invested almost exclusively in instruments issued by the public and the financial sectors. Data for 2006 show that PFAs in LAC (excluding Chile, Mexico and Costa Rica) increased the allocation of their portfolios in instruments issued by the public sector and, with regard to securities issued by other sectors, a wider set of instruments is being used (Figure 11 and Figure 12).

The only country in LAC where asset allocation of pension funds is relatively well diversified is Chile. Over the past 25 years, it has changed significantly, mainly due to relaxations of the investment regime and the domestic capital market development. Initially, pension funds were allowed to be invested only in domestic fixed-income instruments. In 1985, funds were allowed to invest in domestic equities, a regulatory change that took place in order to have their participation in the country’s privatization of public utilities. In 1990, investment limits were further relaxed and pension funds were allowed to be invested in foreign-issued instruments, whose participation in their portfolios has been increasing since then. Nevertheless, the share of funds invested in foreign-issued assets remained low considering the relatively small size and low diversification of the Chilean economy. To address it, the 2008 reform further liberalizes foreign restrictions.<sup>36</sup> In contrast, the allocation of pension funds in OECD countries tends to be concentrated in corporate bonds and stocks, which usually represent more than half of their portfolios, except for Hungary and Poland. Investments in mutual funds are particularly important for Canadian, English, and American pension funds, while the asset allocation of pension funds to government bonds respond for less than 25 percent of their portfolios. The

> 36 For Fund A, it increases the potential ceiling to as much as 100 percent. On the basis of the parameters set in the law, the Central Bank will issue a regulation specifying the specific foreign ceiling for each fund and the percent applying to the aggregate investment of the five funds.

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