investment regime combined with the implementation of multi-fund schemes. In terms of investment limits, the main trends have been: (a) allowing for a wider set of instruments in which pension funds may invest, (b) decreasing the limits imposed on fixed-income instruments, especially government bonds, and (c) increasing the limits for variable-income and foreign-issued instruments. A recent trend in individual accounts schemes is the introduction and expansion of investment alternatives to contributors. In emerging markets, this trend has been realized through the creation of multi-fund schemes, which allow affiliates to choose among different funds with different risk profiles based on their life cycles. In LAC, Chile has been the pioneer in relaxing the investment regime governing pension funds and implementing a multi-fund scheme. Changes in Mexico, albeit more gradual, are also worth mentioning. Mexico allowed two funds in 2002 and five since 2007, a change that was combined with the gradual relaxation of quantitative investment restrictions and a value at risk measure. In 2005, Peru also introduced a multi-fund framework and has thus far allowed three types of funds.

# <u>The Case of Chile</u>

First, in Chile, since the enactment of the pension law in 1981, the investment regime has evolved in order to allow managers to increase the depth and breadth of the asset allocation of pension funds across asset classes. The recent legal reform opened the way for further liberalizing the investment regime.<sup>43</sup> Nevertheless, the regulatory regime remains fairly complex.<sup>44</sup> Figure 15 shows the evolution of investment limits in Chile by group of instruments and how pension fund administrators have in fact taken advantage of the gradual relaxations of the regulatory regime for the period 1981-2001.

Until March 2000, PFAs in Chile managed only one fund (Fund 1). Since then, another fund (Fund 2) was introduced in the system – but its resources could only be invested in fixed-income instruments. In August 2002, an amendment to the law established the multi-fund scheme and each PFA was required to offer four different funds (B, C, D and E) with the option of offering a fifth one (Fund A).<sup>45</sup> Under this new set, contributors have to choose the fund(s) that best fits their risk-return preferences and can place their balances in up to two of the five funds offered by each PFA. If affiliates do not choose the fund(s) in which they want to invest their contributions within a 90-day period after joining the system, they are automatically assigned to funds B, C or D depending on their age. The reform approved in January 2008 keeps the five fund structure but relaxes quantitative restrictions, especially on foreign securities. As of December 2006, 78 percent of active contributors to the Chilean pension system were enrolled in Funds B and C, the result of both automatic assignation rules and affiliates’ choices. The age distribution of members across the five funds is consistent with the objective of the multi-fund regime: young affiliates were primarily enrolled in Funds A and B (riskier), middle-aged affiliates in Fund C, and older affiliates in Funds D and E (more conservative) (Table 11).

> 43 The specific investment regime will be issued by the regulator (and the Central Bank in the case of foreign investments) on the basis of the quantitative parameters set in the law

> 44 For a more detailed analysis on the evolution of the regulatory regime in Chile (see SAFP 2007).

> 45 Fund C is the new name of the old Fund 1, while Fund E is the new name for the old Fund 2.

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