results presented by the model in the previous section, and taking into consideration the long-term empirical regularities, it is proposed to create a preliminary long-term benchmark with the following characteristics:<sup>33</sup>

**Example** **<u>of Benchmark for Colombian Pension Funds (Percentage of the Fund)</u>**

||Aggressive|Moderate|Conservative|
|---|---|---|---|
|Colcap|30|20|5|
|MSCI World (hedged)|50|40|15|
|IDTEX|10|10|30|
|TESLPUVR<sup>1</sup>|10|30|50|

1 Index of long-term government bonds indexed to inflation (to be buit) 115. These percentages should be understood as referential, but in the opinion of the authors, they correspond to a reasonable approximation of the Colombian pension system. Except for methodological revisions every few years, the weight of these ratios should remain fixed over time.

116. The proposed methodology is an important difference from the current _synthetic portfolio_ used to benchmark the Colombian pension funds. Currently, the weights of the _synthetic portfolio_ reflect the effective participation of the pension funds in that class of assets. Since these weights change over time there is practically no influence of this benchmark over the investment decisions of the pension fund management companies. Probably the only conflicting factor of the _synthetic portfolio_ is the portfolio valuation of Treasury notes which is not easily replicable in the market (and whose composition is only known ex-post). The synthetic portfolio adds an unnecessary factor of uncertainty to the pension fund managers, and it does not add much value to fulfill the long term expectations of the contributors.

117. In the future, the benchmark weights should be determined by experts. In order to ensure independence in the design of a long-term portfolio benchmark, it should be done so by a high level commission that operates on a permanent basis. The members of the commission should represent the long term interests of the contributors in the system, and clear terms of reference should specify their mandate. In order to ensure independence, the members of this high level commission could be appointed by the government, and eventually ratified by the Parliament, but most importantly the members of the high level commission should not have a conflict of interest with the government or the private pensions industry. Based on technical studies and long-term considerations, this group should design long-term benchmark _p_ ortfolios.

118. From a governance standpoint, the long-term benchmark should not be set by the government, the Pension Supervisor, or the pension industry. This type of work requires a kind of capacity that probably is not present in any of these institutions. While pensions industry has developed some level of market knowledge, their focus tends to be more tactical than strategic. Even more importantly, all of these institutions have insurmountable conflicts of interest when designing these portfolios.<sup>34</sup> The

> 33 Denmark‘s ATP built their lifecycle model (SP) based on three funds of funds.

> 34 The experience in the USA previous to the crisis is that target date funds competed by returns among them by increasing the equity exposure. In the case of Lithuania, instead, each pension fund designed

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