conflicts of interest, and ownership concentration limits).<sup>40</sup> Figure 14 and Table 9 show quantitative investment limits by instrument for selected emerging economies.

Investment regulations have been used by governments in countries that reformed their pension systems as mechanisms to achieve policy objectives unrelated with the social security system. Several emerging economies have imposed investment floors on the investments of pension funds, which have been regarded as even greater sources of distortion of portfolio diversification and performance of investments than quantitative ceilings. In Uruguay, investment floors on government securities aimed at easing the fiscal cost of the transition to a funded pension system. In Costa Rica and El Salvador, these regulations aimed at providing housing finance while offering PFAs attractive long-term investments. An investment floor on inflation-linked securities was imposed in Mexico for Basic Fund 1 ( _Siefore_ ) aimed at ensuring a stable real rate of return to contributors.<sup>41</sup> In Argentina, the 2007 pension reform instituted a requirement to invest a minimum of 5 percent and a maximum of 20 percent of the portfolio on debt instruments that support productive or infrastructure projects in Argentina. In Bolivia, there is no specific investment floor, but the two PFAs are required to buy for 15 years (i.e., 1998-2013), in proportionate shares, up to 180 million per year in government securities that are directly sold by the government at pre-defined terms (Table 10).

**Figure 14:** Investment limits by type of fund per instrument, August 2007 (percentage of fund assets)

<!-- Start of picture text --> 80%<br>60%<br>40%<br>20%<br><!-- End of picture text --> <!-- Start of picture text --> 60%<br>50%<br>40%<br>30%<br><!-- End of picture text --> <!-- Start of picture text --> Fund A<br>Equities<br>Shares, invest funds<br><!-- End of picture text --> <!-- Start of picture text --> Fund C Fund D<br>Bonds, mortgage<br>Bonds, gov<br>Bonds, corporate<br><!-- End of picture text --> <!-- Start of picture text --> 10%<br>0%<br>Bonds<br><!-- End of picture text --> <!-- Start of picture text --> Deposits<br><!-- End of picture text --> <!-- Start of picture text --> Fund 2<br><!-- End of picture text --> <!-- Start of picture text --> Fund 3<br><!-- End of picture text --> <!-- Start of picture text --> Source: SAFP. Source: SBS.<br><!-- End of picture text --> Some emerging economies have started to recognize that strict quantitative regulations have imposed significant costs on the asset allocation strategies of pension fund managers and have been gradually allowing for greater diversification.<sup>42</sup> Policies to address portfolio diversification constraints in emerging markets include the relaxation of the

> 40 Quantitative limits have been relaxed in some LAC countries as their respective regulatory and supervisory frameworks were established or reformed to ensure a proper functioning of capital markets. 41 See Appendix 7.

> 42 For Chile, Berstein and Chumacero (2006a) constructed a (conservative) counterfactual scenarios for the evolution of total assets and returns that pension fund managers would have administered had the quantitative regulation been absent (during 1987-2002). They found that the costs have been high and that in the absence of such limits: (a) total assets under management could have been at least 10 percent higher, (b) investment limits may have been binding about 90 percent of the times, (c) affiliates might have been exposed to more volatility, and (d) each affiliate lost, on average, US$500 to US$1,000.

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