Non-profit eyes Chile's pension industry with different model
Chilean non-profit Fundación Social Pensiones is aiming to enter the country's private pension fund industry through a tender next year with a business model that is different from the existing six pension fund managers (AFPs).
BNamericas recently sat down with Pablo Contreras, who is the brain behind the project known as AFP Colectiva, and several members of his team to learn the details of the business plan.
The main idea is to offer Chileans a different kind of AFP by sharing some of the profits with the members and also by having more transparent and easier-to-understand information, said Contreras, who added that the project has been advancing at different speeds for around three years.
There is a widespread perception today among the population that the pension system generates large profits for the AFPs and small pensions for the contributors, said Andrés Morgado, who is the foundation's director of research and finance.
Profitability in the AFP industry is currently "excessive" with the average ROE during the last 10 years being above 25%, Morgado said. So there is room for the AFPs to return some of the profits to their members, but the existing law does not allow for this, he noted.
However, the pension reform proposal that President Sebastián Piñera recently sent to congress includes a proposed change to the law so that profits can be distributed among AFP members. The reform also proposes to extend to three years from two the period that members must stay with the AFP that wins the tenders for new workers entering the labor force.
The tender mechanism was created to reduce the monthly management fees that AFPs charge and to make it easier for new AFPs to enter the market.
Fundación Social Pensiones believes it stands a good chance of winning the next tender in December 2019 since the tender in December 2017 did not attract any bidders, which indicates that the existing six players do not want to lower their fees any further. Tenders are won by the AFP offering the lowest fee and it must also be extended to existing members.
The winner of a tender gains around 700,000 members during two years, which represents a market share of around 6%. Such figures are very attractive for any start-up in any industry, Morgado noted.
AFP Planvital's increase of fees in August has also served to open more room for a new player to enter and compete on price, said Morgado. Before the hike, Planvital had the lowest fees as the result of a tender it had won.
The other five players in the system are AFP Cuprum, AFP Habitat, AFP Capital, AFP ProVida, and AFP Modelo.
The tender in December 2019 could see AFP Colectiva compete against at least one more AFP for new members.
Last month, pension system regulator SP said it had given Mario Ignacio Álvarez Avendaño, formerly of AFP Cuprum, and a firm known as Tanza, a provisional license to set up a company that would run what would be known as AFP UNO.
The winner of the next tender will be announced in January 2020 and receive the new members in August of that year.
Fundación Social Pensiones expects to obtain the SP approvals necessary to participate in the tender during 2019.
Contreras and Morgado said AFP Colectiva could enter the pension industry even if it did not win the tender since they are strongly convinced that many Chileans would be willing to change to an AFP that is sharing its profits.
Annually only around 5% of members change their AFP because there is a perception that "they are all the same," with investment return and customer service levels being very similar across the industry, said Morgado. "So you have to come in with a new and different approach."
Looking for investors
Regulations mandate that any new AFP project must have secured financing for 10 years to obtain an operating license, which translates into around US$17-20mn.
All AFPs must for example have a certain number of branches across the country to serve their members, and there are also significant costs related to a reserve requirement, employees, investment teams, and IT infrastructure.
Fundación Social Pensiones has secured part of that financing from local investors and is now looking for more investors in Chile and abroad, said Alejandro Rogers, who is in charge of the investor side of the project.
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