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Pockets of Opportunity in Latin America’s Evolving Pension Fund Picture

Pockets of Opportunity in Latin America’s Evolving Pension Fund Picture
November 11, 2021

The region is home to a patchwork of pension systems and alternative investments regulations are top of mind for allocators looking to invest offshore

The region is home to a patchwork of pension systems and alternative investments regulations are top of mind for allocators looking to invest offshore



Pension funds are by far the largest investors in Latin America and are primarily based in Chile, Colombia, Peru, Mexico, and Brazil. The funds, representing $822bn in total assets under management (AUM), have become more ambitious over the past decade, and are looking to invest greater portions of those assets in private markets, both domestic and foreign.

The ambitions of Latin American pension funds have been supported unevenly by loosening regulations in different jurisdictions. For example, Chile, Colombia, and Peru began investing in alternative assets about a decade ago, while Mexico only began allocating to alternatives in 2018. Brazilian pension funds, meanwhile, are still unable to invest in foreign alternative investments. Insurance companies and family offices are smaller investors in the region, but are gaining market share through more mature portfolios, primarily in Chile.https://www.preqin.com/insights/research/blogs/pockets-of-opportunity-in-latin-americas-evolving-pension-fund-picture

Picton estimates commitments to foreign alternative investments of $11bn per year over the near- to mid-term, out of which $9.8bn will be from pension funds and $1.3bn from insurance companies and family offices. Additionally, we see commitments of $8.2bn in private equity, $1.3bn in private debt, and $1.6bn in real assets (Fig. 2). In terms of how this will break down by country, the most active plans are in Mexico, Colombia, and Chile, with expected annual allocations of $4.2bn, $3.4bn, and $3.0bn, respectively (Fig. 1).


The cultural, political, and economic differences between countries make for an extremely nuanced alternative investment landscape, and GPs looking to attract commitments need to understand each geography. While some countries, like Chile and Mexico, are introducing more progressive investment policies and opening up to global alternative assets, others, notably Brazil, appear to be staying the course.

Regulation and policy, both new and old, are shaping the long-term strategic goals of LPs. As many pension managers in the region are looking to modernize their portfolios with global alternatives allocations, we discuss the unique situation and challenges for each economy.

Chile manages one of the largest pension systems in the region. Over the past 40 years, the Andean nation has built its pension system into seven funds, each with its own unique risk profile, currently managing a combined $206bn in AUM. But this total has waned recently. As part of a COVID-19 pandemic economic relief plan, the government authorized three legislation withdrawals from the pension funds system. As of October 2021, $50bn has been withdrawn, and an estimated additional $7bn – or about one-fifth of the plans’ total assets – could be withdrawn throughout the next few months.

These withdrawals have hit pension funds’ burgeoning alternative investment program, which has become more progressive in recent years. Policies requiring local feeder funds to gain foreign fund exposure were relaxed in November 2017, and restrictions were updated by regulators in May 2020 to allow individual private asset class allocations, having previously been packaged into a single allocation with private equity. Specifically, investments in foreign real estate and infrastructure funds were included within the private equity limit, where allocations favored higher-return private equity funds. Under the new policy, real estate and infrastructure are managed in separate allocations. The key benefit here is diversification, but it also opens the door for fund managers seeking capital from these newly created portfolios.

The Colombian private pension system opened in 1994 as a defined contribution scheme and has since grown to over $93bn in AUM. The set-up of this system is similar to Chile’s, in that it consists of two types of private pension plan, mandatory and voluntary, with each made up of four funds with varying risk profiles.

Regulators in the country do allow direct investments in alternatives, and even passed legislation in October 2020 to eliminate all subscription limits on alternatives. However, overall limits for investments in foreign alternative assets remain.

Furthermore, investments in foreign private credit and real asset funds are included within the private equity limit. Due to their lower expected returns, very little has been committed to these assets.

Peru’s private pensions system, based on individual savings, was created in 1993. The system is made up of four pension funds that manage a total $41bn. Additionally, there’s a public pension system made up of funds with different risk profiles, which currently manages about $5.8bn.

As in Chile, the Congress of the Republic of Peru approved a series of laws in 2020 authorizing withdrawals from its pension system as part of a pandemic relief plan. As of October 2021, $11bn has been withdrawn and it’s estimated that an additional $11bn could be withdrawn throughout the coming months.

In November 2020, regulators in the country published a draft regulation intended to improve flexibility in the system, proposing several changes to the investment regimes. Among other reforms, it looks to eliminate asset class subscription limits and allow funds to internally define limits within their general alternative investment portfolios.

Since investments in foreign private credit funds are included within the private equity limit, pension managers have committed to a small number of funds concentrated on strategies with higher-than-expected returns, such as distressed debt and special situations.

Life insurance companies in Peru are also part of the pension system and provide annuities to retired contributors. In total, there are 14 life insurance companies, holding an aggregate $13bn in AUM. Regulation around these companies’ portfolios has also become more flexible in recent years. As a result, life insurance companies have easier access to a variety of both domestic and foreign assets, particularly alternative assets. Currently, there’s a 50% limit on foreign investments and a 30% sub-limit for alternative investments. Life insurance companies have recently started to develop an alternative investments program.

In 1997 the Mexican pension system was transformed from a pay-as-you-go plan to a private scheme of individual savings accounts. These 10 pension funds, known as the AFORES, have $235bn in AUM and follow a ‘target date fund’ system (known as Siefores Generacionales). Under this system, a pension holder’s account will be assigned to a Siefore associated with their group age, and will remain there until the individual retires.

Until January 2018, alternative investments were limited in Mexico. After that, the investment regime was amended to allow the AFORES to invest in foreign private equity through local vehicles called Project Fiduciary Securitization Certificates, or CERPIs. The first international CERPI was created in 2018. As of today, there are 28 CERPIs totaling $11bn in size, which represents 4.8% of the AFORES’ AUM.

As such, an AFORE can acquire 100% of a CERPI, up to 3% of the fund’s total assets. Additionally, if at least 10% of a CERPI’s AUM is invested in Mexico, then 100% of its assets are considered local investments, and therefore are excluded from the 20% foreign investment limit. Currently, that foreign investment limit is at capacity.

The pension system in Brazil is supported by three pillars: two supporting public and private sector workers, and the third providing voluntary schemes. Currently, there are 244 funds with a combined $247bn in AUM. Analysts and politicians across the political spectrum have long recognized that the pension system is unsustainable while also recognizing the system’s role in improving the country’s ongoing economic difficulties.

As such, a reform of the pension fund system was approved in October 2019. The reform paved the way for an individual capitalization system, similar to that of Chile, in which the pension of each worker will depend on their ability to save throughout their working life. The new contributors are expected to adhere to this system, which should boost the private pension fund market.

Pension funds in Brazil aren’t allowed to invest in foreign alternative investments.

A Region of Potential
As a placement agent in Latin America, a region characterized by long-term partnerships, it’s essential to have a local presence in several markets. This enables the development of new relationships with potential clients and the maintenance of relationships with current clients, while also providing unique coverage and visibility, and ensuring key decision-makers are brought to the table.

Along with this regional presence, there must be a deep understanding of each client’s investment objectives and knowledge of how to navigate within their unique jurisdiction. This allows for support of clients’ due diligence processes, and for customized due diligence reports, legal opinions, and operational support.

Finally, being objective is critical. Picton’s only business with institutional clients is to act as a third-party fund distributor, removing conflicts of interests, and creating a unique level of confidence with institutional investors.


About Matías Eguiguren
Between 1996 and 2010, Matías developed and led the institutional fund distribution effort at Celfin Capital – one of Chile’s leading investment banks – where he was a Partner and board member. He negotiated distribution agreements and reached over $10bn in mutual fund investments by institutional investors and high-net-worth individuals in Chile, Peru, and Colombia. He was also responsible for Celfin Capital’s investment funds division, which he grew to over $2.5bn in AUM.

After leaving Celfin Capital, he acted as an advisor to Chile’s Ministry of Home Affairs (2011).

Between 2009 and 2010, Matías served as Chairman of ACAFI, the Chilean association of investment fund managers, and was a member of the public to private committee organized by the Finance Ministry that worked on the proposal and implementation of the Investment Funds Law (Ley Única de Fondos).

Matías holds a degree in Business and Economics from Universidad Diego Portales in Santiago, Chile, where he was awarded the Nicolas Boetsch prize as the best graduate in recognition of his professional career in November 2012.


The opinions and facts included within the above do not constitute investment advice. Professional advice should be sought before making any investment or other decisions. Preqin and Picton providing the information in this content accept no liability for any decisions taken in relation to the above.