Pensions Reform in Colombia

Project Development Objective (PDO)

This project will support the reform of the private pension industry by improving the environment for investment diversification and annuity product development. Such a strategy will result in the greater sustainability of benefits for members and claimants in the long term and, consequentially, in the growth of the private pension sector as well as the development of capital markets.


Pension funds in Colombia have a conservative portfolio allocation partly because of regulatory restrictions on eligible investments. In addition, pension funds exhibit herd behavior along a benchmark that is the average return of the industry. With the volume of resources accumulated by pension funds, they have the capacity to play a more active role in the financing of economic growth.

Policy and regulatory changes are needed to support a more diversified institutional investor base for long-term financing. In particular, changes are needed to reinforce the regulatory framework to be able to engage pension funds in long-term financing for infrastructure. With such changes, pension funds could play a greater role in the capital market development while increasing the opportunities for higher returns within acceptable risk limits. 

By law, annuities need to be above the minimum wage. In the past, they were running above inflation, which makes it impossible to hedge through market mechanisms. As a result, pension annuities tend to be overpriced, their demand is limited, and the private pension fund system is at risk because it is dependent on affordable annuities being available. 


The project team is recommending reform of the pensions system, including in the areas of minimum returns, performance fees, and incentives for the pension fund management industries. In addition, the project team is reviewing guidelines for pension fund investment to ensure that the guidelines (a) contribute to long-term financing in Colombia within acceptable risk limits and  (b) provide a regulatory framework to address these challenges. The regulation of pension funds should encourage investments in infrastructure and alternative assets. 

The team is also developing guidelines on best practices for required resources and risk-monitoring schemes. The best practices would coordinate infrastructure investments with ongoing efforts to develop innovative investment vehicles, such as project bonds. Such efforts include developing a benchmarking model that will measure the performance of pension funds against objectively defined market indexes.

Finally, the team recommends options for hedging minimum-wage risk, for increasing competition in the annuities industry, and for estimating the actuarial cost of disability and survivorship insurance for users in the private-pension scheme.

Expected Outcomes

The expected outcomes of the project in the short and medium term are as follows: 

1.  Upgraded pension sector policies and regulations

2.  Sounder and more competitive framework 

3.  Increased coverage and services for members

4.  Regulatory framework for the pension sector in place to support the sector growth,
     diversification, and competition

5.  Revised investment guidelines, regulations, and rules allowing pension funds to diversify

6.  Use of benchmarking model to increase transparency 

7.  Improved framework for annuity schemes