Estrés Hídrico (WDI)

Since August 2002,28 mandatory savings has been managed through a scheme that includes multiple funds; specifically, five types of funds with different proportions of their portfolios invested in equities. The assumption behind this differentiation is that the greater the investment

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Not all members may choose to return to the Old System, since the following requirements must first be met: not being entitled to a Recognition Bond, or being entitled to a Recognition Bond for contributions paid to a pension institution between July 1, 1979 and the date on which the member switched over to the new Pension System, with at least 60 months of contributions prior to July 1979.

26

Considering that the value of the UF on June 30, 2009 was CLP 20,933.02.

27

The readjusted maximum contribution limit enters into effect on the first day of each year, and is determined by a resolution by the Superintendence of Pensions. However, the law stipulates that this maximum limit shall be readjusted whenever the variation of the aforementioned Index is positive. If it is negative, the maximum limit shall maintain its value in UF and shall only be readjusted when a positive variation occurs. In 2009, Superintendency Resolution No. 1 established that, based on the Index variation, there would be no change in the maximum contribution limit, which would remain at 60 UF.

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in equities, the greater the risk and expected return.

The main goal of creating a multiple fund (or “multifund”) scheme in the Pension System is to increase the expected value of the pensions that members will receive. The possibility of investing in a portfolio of financial assets with risk associated to the investment horizons of members helps increase the expected value of their pensions. This allows the Pension System to achieve its fundamental objective more efficiently, providing its members with an income that can adequately replace the one obtained throughout their active lives.

The creation of a multifund system also allows members to achieve a portfolio distribution more aligned with their preferences and needs, in terms of risk and yield. Different members may have different preferences concerning the composition of their Pension Fund portfolio, and these are reflected in various degrees of risk aversion. The creation of multifunds allows members to exercise their own preferences, thereby producing increased well-being. For example, younger members may prefer a Pension Fund with a higher level of risk and expected return, in order to increase the expected value of their pensions, while older members or pensioners may prefer a fund with minimal risk, in order to minimize fluctuations in the value of their pensions.

The main characteristics of the multifund system are as follows: i. Choice of Funds by Members

With regard to mandatory contributions, there is a free choice of Pension Funds for all members of the Pension System except pensioners, male members over 55 years of age and female members over 50 years of age. Pensioners may choose one of the funds with the least relative risk (C, D and E) for these mandatory contribution balances. Meanwhile, older members who are not pensioners may choose any of the four mandatory funds for these balances (B, C, D and E). However, both groups are free to select any of the five funds for any portion of their balances in excess of the amount necessary to finance a pension equal or greater to 70% of the average taxable wage received and income declared (which is calculated according to the law). This pension must also be equal or greater to 150% of the minimum pension.29

TABLE III.1

POSSIBILITIES FOR CHOOSING FUNDS BY AGE RANGE

Type of Fund Men up to 55 years old Women up to 50 years old

Men over 56 years old Women over 51 years old

Pensioners with programmed withdrawals

and temporary annuity Fund A – Most Risky

Fund B – Risky

Fund C – Intermediate

Fund D – Conservative Fund E – Most Conservative

The reason for these restrictions is to prevent pensioners or members approaching retirement age from taking high risks on investments made with their mandatory resources, since this may produce irreversible damage to the amount of their pensions and affect the State-guaranteed minimum pensions or solidarity pensions involved.

All members who do not select a type of fund when joining the Pension System shall be assigned to one according to their age. In order to assign members to one of the funds, members are separated into three age ranges: younger members are placed in a fund with more equities and older members are placed in a fund more intensive in fixed income. This rule applies to both active members and pensioners.

Members are assigned to funds according to the following table:

TABLE III.2

ASSIGNMENT BY AGE RANGES FOR MEMBERS WHO DO NOT SELECT A FUND

Type of Fund Men up to 35 years old Women up to 35 years old

Men from 36 to 55 years old Women from 36 to 50 years old

Men from 56 years old Women from 51 years old

and pensioners Fund A – Most Risky

Fund B – Risky

Fund C – Intermediate

Fund D – Conservative Fund E – Most Conservative

These ranges were determined considering the investment horizons of members, that is, the time remaining until they reach the legal retirement age, and their likelihood of recovering from periods of low returns, in order to direct them towards the funds that are considered better suited to their needs.

Also, as they move into new age ranges, members are gradually assigned to the corresponding pension fund, transferring 20% of their balance at the time of the change, and 20% per year over a four-year period until all resources are transferred.

ii. Differentiation of the Types of Pension Funds

The differentiation between different types of Pension Funds is established primarily according to the maximum and minimum limits on investment in equity instruments that are allowed by each type of Fund.

The limits on investment in equity instruments, by type of Fund, determined by law and in the Investment Regime, are as follows:

TABLE III.3

MAXIMUM AND MINIMUM LIMITS ON EQUITY

A range was established between the minimum and maximum limits on investment in equity instruments, within which the administrator of the portfolio may maximize its investment. In effect, the limits established give AFPs the flexibility required to structure the most adequate portfolios possible for each type of Fund, considering the profile of the members assigned to each of them.

For the investment of pension funds abroad, the maximum limit on investment of all pension funds in a single Administrator is equal to the global limit established by the Central Bank of Chile for the sum of Type A, B, C, D and E Funds (30% to 80%),30 or the maximum investment limits established by the Central Bank of Chile for each type of Fund (A: 45%-100%, B: 40%- 90%, C: 30%-75%, D: 20%-45%, E: 15%-35%),31 whichever is greater.

iii. Mandatory Creation of Funds

The creation of the four funds of lower relative risk is mandatory for all AFPs. The creation of Type A funds, which are the most intensive in equity securities, is voluntary. To date, all current Administrators offer their members Type A funds.

iv. Transfers between Funds

Members may freely transfer their balances from mandatory contributions between Funds. If they transfer more than twice during one calendar year, the Administrator may charge an exit

30

The Central Bank of Chile has currently fixed the limit at 60% of the value of Funds.

31

The limits for each type of Fund are fixed by the Central Bank of Chile, according to the following rates: Type A Fund: 50% of the value of the Fund

Type B Fund: 40% of the value of the Fund Type C Fund: 35% of the value of the Fund

Type of Fund Maximum Limit Minimum Limit

Fund A – Most Risky 80% 40%

Fund B – Risky 60% 25%

Fund C – Intermediate 40% 15%

Fund D – Conservative 20% 5%

fee, which may not be discounted from Pension Fund, and which is designed to avoid excessive administrative costs and eventual negative effects on the capital market.

v. Separation of Balances

Balances from mandatory contributions, voluntary contributions, agreed deposits and voluntary savings accounts may be placed in different Funds.32 Nonetheless, the Compensation Savings Account, described in Law No. 19,010, must remain in the same type of Fund as the mandatory contributions.

vi. Distribution of Balances between Funds

Members and AFPs may agree that the balance from mandatory contributions be assigned to two types of Pension Funds. Administrators must offer their members different options for distributing their balances between Funds:

Members who have their resources in two types of Funds may choose which of these shall be the Fund used to collect their contributions after selecting the distribution of balances.

Members may request that all contributions deposited in their individual account after the date of a distribution of balances be divided by the percentages they establish. This division of contributions is a service that Administrators may offer voluntarily.

Members may request their Administrator to establish a periodical adjustment of balances in their personal accounts that are kept in two types of Funds, so that the proportion they initially selected for each Fund is maintained in the balances of their personal accounts. This option, as in the previous case, is a service the AFP may choose to offer voluntarily. vii. Contracts between AFPs and Members

AFPs and members may subscribe contracts to agree on future transfers of balances from personal accounts between different types of Funds. The goal of creating these possibilities is to achieve a better approximation of each member’s risk-return preferences, based on their individual characteristics.

viii. Minimum Yield

The minimum yield of each type of Fund is measured based on a range that considers the real average yield of the System for each one. In any case, the measuring range of the minimum yield for the two Funds with the greatest percentage of investment in equity instruments (Funds A and B) is greater than for the three Funds with a lesser proportion in this type of instrument (Funds C, D and E).33

ix. Fee Structure

32

Voluntary savings is described in Chapter IV.

33

The fee structure is uniform for all members, regardless of the Fund they choose. This aims to avoid further complexity of the System for members and to simplify the payment of contributions by employers.34

x. Transactions of Financial Instruments between Pension Funds

AFPs are allowed to make direct transfers of financial instruments between the different Funds of a same Administrator, that is, without making them through a formal secondary market, but only for amounts equivalent to the transfers of members between Funds of a single Administrator. This measure is designed to avoid unnecessary operating costs in the Pension System, given the greater portfolio movements with the multifund system.

However, in order to prevent potential conflicts of interest, AFPs are obliged to clearly report to the Superintendence all direct transfers of instruments between the different Funds managed by a single Administrator. This helps ensure the safety of investments made with pension resources. Also, AFPs may make transactions with financial instruments between different Funds of a single Administrator through a formal secondary market, but they must also clearly report any such transactions to the Superintendence.

In order to reinforce the supervision of these transactions in security markets, the Superintendence of Pensions has the authority to oversee all transactions involving Pension Funds, Administrators and individuals who, due to their job or position, have access to information regarding Pension Fund transactions.