Putting Chile's Nest Egg To Work

Its model 401(k)-style pension plan is investing heavily in key public projects

Drivers in Chile don't have to wait until they're 65 to enjoy their pension benefits. Every day thousands do so when they speed from Santiago to Viña del Mar along the Rutas del Pacífico toll road, which opened on Apr. 13 with funding from the country's deep-pocketed pension funds. A billboard reminds passing motorists: "Your savings are financing this highway, and this highway is financing your retirement."

Indeed, this year alone, the government's privately managed Pension Fund Administrators, or AFPs, expect to buy nearly $1 billion in locally issued bonds to fund projects such as the new highway. And the AFPs expect to earn a healthy return on that investment: Annual real returns have averaged 10% for the last two decades. "It's a perfect circle for everyone involved," says Alvaro González, local manager for Sacyr, a Spanish construction company that operates the highway.

The new expressway is the latest perquisite of a 23-year-old government-mandated but privately managed pension system that oversees some $50 billion in assets. That's the largest such pool of funds in Latin America, even though Chile is only the region's sixth-largest economy. The pension system's kitty has grown so fast, in fact, that the government relaxed its pension laws in 1996 to allow money to be invested outside Chile and to fund public works. Among the big-ticket projects funded recently: the extension of Santiago's highly efficient subway system, hundreds of miles of highways, and construction of nearly 500,000 homes for low-income families. "Without the AFPs, it's unlikely Chile would have the modern infrastructure it does," says Axel Christensen, an executive with Santiago-based Moneda Asset Management.

Back in 1981, during the rule of dictator Augusto Pinochet, Chile replaced its pay-as-you-go retirement system with the 401(k)-like savings and investment program, which is fully portable -- meaning workers' portfolios move with their jobs. The reform was an attempt to defuse a fiscal time bomb brought on by an aging population. Under the pension scheme, each month the 95% of Chilean workers opting into the system have 10% of their salaries automatically routed to the pension fund of their choice. Although overseen by the Labor Ministry, the money is managed by one of six private AFPs, which were initially set up by local investors as highly regulated mutual funds that invested mostly in domestic equities and government bonds.

IMITATION EQUALS FLATTERY. The Chilean government estimates that 10% of the country's growth since 1981 is directly or indirectly attributable to the new pension system, thanks to investments bankrolled by AFP funds. In the same period, the money under management at the AFPs has grown to the equivalent of 70% of gross domestic product. And since early retirement options were introduced in 1988, the average monthly pension benefit for workers retiring early has increased from $258 to $318. The average retired worker in the U.S., by comparison, gets $925 under Social Security, even though the U.S. has eight times Chile's per-capita income. No wonder the "Chilean model" of pension reform is being emulated in a wide range of countries, from Poland to South Korea.

Chile's pension system has generated a critical mass of capital that has made the country's financial markets the most sophisticated in Latin America. Hundreds of Chilean companies -- from retail chain Falabella to airline LANChile -- today depend not on the whims of foreign investors but on the AFPs, which control 70% of the local equity and bond market. The only downside appears to be the local markets' dependence on the AFP funds -- and the possibility of an asset bubble at some point.

But the bottom line for most Chileans is that they're and living better than ever in their golden years. And their economy is all the better for it.

By Joshua Goodman in Santiago

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