5.6.2. Regulation and the Pension Funds role in the Peruvian economy

The pension system in Peru is supervised and controlled by the Superintendence of Banking (SOB)¹²². The SOB sets limits for investment classes and formulates principles regarding the business of the privately managed Pension Funds.

Table 18: PFAs portfolio ceilings by main asset classes in Latin American and OECD countries¹²³

These limits, especially the ceiling for foreign investment have been increased several times in the recent past. Currently the limit for investments abroad stands at 30%; and in June 2012 the National Congress approved a limit of 50% that yet has to be authorized by the Central Bank.¹²⁴

The regulation regime is complex; the limits apply to dozens of different asset classes and are established at two different levels; the general limit is established by the Congress in the Private Pension System Act and the operational limit is established by the Central Bank in the range determined by the general limit.

The complete set of regulations is more extensive and further to the quantitative ceilings the regulation also requires AFPs to actively practice corporate governance and to appoint representatives of the funds, which must exercise the rights (and comply with the duties) that are attached to the securities held in the portfolios of the funds¹²⁵.

This is partly due to the functions the Pension Funds are to fulfil in addition to just providing stable pensions, but they are also expected to use the contributions to develop of the domestic infrastructure, the economy and the capital markets. A recent OECD report¹²⁶ supports this with its finding “that the role of institutional investors (II) in Latin America is even more critical than in many other parts of the world to support the development of well functioning markets underpinned by sound governance practices”.

A further aspect of the Pension Funds involvement in developing the domestic economy is that in emerging economies as Peru, the resources and expertise of governments are limited and could be greatly supported by Private Investors. But the number of such private investors with sufficient funds is limited and further reduced by the very long term investment horizon that needs to be aligned with governmental interest (through regulation and long term interest in growth). But for institutional investors like Pension Funds this is the perfect role to play.

Investment in infrastructure projects is complying very much with the Pension Funds agenda that dictates not only to provide for a stable income during retirement but also to develop the domestic economy and capital markets. Infrastructure, transportation, roads, utility (water, gas, sewage) distribution, power generation and transmission, open the possibility for the delivery of goods and services and are therefore the backbone of every economy and one of the first and most important element for economic growth and wealth.

Infrastructure often has a monopoly standing and as they provide for the very basic need of every economy the cash flow of such projects is least effected by market volatility. This makes infrastructure projects attractive for Pension Funds, which are looking for long term, stable and predictable cash flows. They also can further diversify their portfolio through participations.

Advantages for private Pension Funds investing in infrastructure projects can be summarized:

• Supplement or replace governmental funds
• Diversification of the funds investment portfolio
• Support domestic economic growth

¹²² Superintendencia de Banca, Seguros y AFP, www.sbs.gob.pe
¹²³ OECD/International Finance Corporation (2011)
¹²⁴ FUNDS AMERICAS, www.fundsamericas.com, 23/02/2012, Cristina Cox
¹²⁵ Resolution 680
¹²⁶ OECD/International Finance Corporation (2011), Strengthening Latin American Corporate Governance: The Role of Institutional Investors, Corporate Governance, OECD Publishing