||**Table 8:**R|eal rates|of return,|2000-20|06 and si|nceincep|tion(per|cent)|
|---|---|---|---|---|---|---|---|---|
|**Country**|**2000**|**2001**|**2002**|**2003**|**2004**|**2005**|**2006**|**Since inception**|
|Argentina|3.9|-10.4|31.0|11.1|4.6|4.6|14.0|9.8|
|Bolivia|10.9|14.7|15.5|7.9|5.7|3.5|2.8|8.8|
|Chile|4.4|6.7|3.0|10.5|8.9|4.6|17.0|10.2<sup>a</sup>|
|Colombia|n.a.|n.a.|n.a.|n.a.|10.4|19.0|6.6|6.9|
|Costa Rica|n.a.|n.a.|7.1|9.8|2.5|4.1|11.3|6.7|
|El Salvador|7.9|7.7|2.4|4.8|2.3|1.5|1.2|8.8|
|Mexico|7.2|6.1|4.7|6.2|4.5|8.0|8.4|7.8|
|Peru|-6.7|11.1|11.2|21.2|5.6|18.4|26.8|9.9|
|Dominican Rep.|n.a.|n.a.|n.a.|n.a.|-3.8|9.0|n.a.|n.a.|
|Uruguay|7.1|5.5|40.6|27.6|6.6|4.6|9.8|11.8|
|Poland|n.a.|n.a.|n.a.|10.0|9.4|14.2|9.8|n.a.|

Notes:<sup>a</sup> For Fund C. n.a. means not available. Source: AIOS and FIAP.

# **IV.3. Factors Conditioning Asset Allocation**

# **IV.3.1. Investment Regulations**

Regulations on investments of pension funds in LAC have followed the rigid quantitative criteria set by regulatory bodies, while high-income OECD countries have adopted a behaviorally-oriented approach known as the “prudent person rule.”<sup>37</sup> A quantitative regulation is simply defined as a quantitative limit on holdings of a given asset class. Typically, instruments whose holding is limited are those with high price volatility and/or low liquidity (Davis 2001). The adoption of a regulatory framework based on the quantitative criteria has five main reasons: (a) reformed pension systems are the core of the social security systems in several emerging economies, which makes contributors more exposed to capital market volatility, (b) the lack of experience of fund managers and the absence of adequate risk assessment tools, which may lead pension funds to take undue risk, (c) underdeveloped domestic capital markets may put the sustainability of the pension reform at risk, (d) the transition cost to a fully funded system may be prohibitively high, and (e) avoiding potential conflicts of interest associated with control.<sup>38, 39</sup>

# _Quantitative Limits_

In emerging markets, countries that reformed their pension systems have opted for a mix of strict quantitative limits combined with some prudent guidelines. In LAC and some Eastern European countries quantitative limits – per instrument, per issuer, per group of instruments, and per risk factor – are the core of the regulatory framework, being combined with some form of behaviorally-oriented guidance (e.g., diversification requirements,

> 37 The reasons that justify such quantitative regulations are: (a) for most contributors, the financial resources in their individual accounts are their only financial assets and perhaps the largest assets they will manage to accumulate during their entire working life (Bolok 2003), and (b) regulation aims to create an environment in which asset management can obtain the highest rates of return at acceptable levels of risk. See Appendix 6. 38 For a summary of the pros and cons of adopting quantitative limits, see Candia (1998).

> 39 Vittas (1996) argues that portfolio restrictions might be necessary in the initial stages of pension reforms when there is a lack of qualified asset managers and capital markets lack strength and transparency.

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