Chile: Strengthening Regulation of Pension Funds

Chile: Strengthening Regulation of Pension Funds

In February 2005, the Superintendence of Pension Fund Administrators (SAFP) in Chile requested technical assistance from FIRST to support the transition of the regulatory and supervisory framework of the pension sector, from one based on quantitative restrictions and controls to a modern system that emphasized the capacity to identify and manage risks.  Such request stemmed from the FSAP mission carried out by the World Bank/IMF in May 2004.

It was expected that the adoption of a risk-based approach to regulation and supervision of pension funds would lead to improvements in risk management practices and asset allocation.  This in turn should result in improvements in the risk-return trade-off.  The new approach would also reduce operating costs that result from the excessive regulatory burden.  Both outcomes might have a significant impact on replacement ratios and the welfare of future retirees. This was an essential issue in Chile, where the pension fund industry was the core of the social security system.

The report produced as a result of this project provided a diagnostic of the regulatory and supervisory frameworks for pension funds in Chile, and proposed recommendations for reforms in these areas.  Some of the key recommendations of the report would constitute the set of tasks that would be financed by FIRST in the second phase of the project.


The report entitled “Moving to a Risk Based Supervision System in Chile” represents an excellent example of a diagnosis of a relatively sophisticated funded pension system that incorporates a diverse range of investment policies for pension funds. Pension funds are allowed to invest in both domestic and foreign equities and fixed income securities. The funds are also tailored to age groups: for example, funds with a younger average age profile of membership are permitted to invest a greater proportion of the funds in equities whereas those with an older age profile of membership are obliged to invest largely in fixed income securities of highly rated issuers.

The report also includes a number of important recommendations concerning the move towards risk-based supervision.

  • Regulations on internal risk management
  • Regulations on use of derivatives
  • Regulations on out-sourcing
  • Recommendations for re-organization of the Supervisor of Pension Administrators (SAFP)
  • Development of a risk scoring-model
  • Recommendations on simplification of regulations to allow for a focus on risk-based supervision
  • Recommendations on training of SAFP staff.

This report should be of value to other Latin American countries with more advanced pension systems and also to other developing countries (albeit circumstances will vary from one to another) where a move to risk-based supervision is planned.