Peru's Cabinet Unveils Changes To Private Pension Funds

Peru's cabinet has unveiled proposals to improve the nation's private pension funds, among other things aiming to lower commissions the funds charge.

The government wants to stimulate competition in the system, currently made up of four pension funds, or AFPs, that are important players in the domestic bond and stock markets.

Finance Minister Luis Miguel Castilla said that the government wants to promote new pension funds and to ensure that workers in small companies have pensions.

"We think that we can reduce commissions by 30% to 40% by reducing barriers to entry and with improved efficiencies," Castilla said.

"We can increase coverage to 50% from 36% of the economically active population," he said at a press conference late Wednesday. The executive branch's proposal will have to be approved by Congress, where more than a dozen plans to modify the pension system are under study.

A long debate has raged in Peru over how best to reform the private pension system that first started in 1993, based on the Chilean model.

Most workers in the formal labor sector now are obliged to make contributions to the private pension funds, leading some economists to say that workers should be able to choose between the private pension system, a state-run system or mutual funds.

Luis Valdivieso, president of the AFP association, said recently that there were a number of ways to improve the system to lower costs and increase profits, suggesting changing regulations to allow more companies to issue paper that the AFPs could invest in. No one was immediately available for comment at the AFP association.

There are 5.0 million people registered in the pension funds, which manage some 87.7 billion soles. ($32.4 billion)

The president of the nation's banking, insurance and pension fund regulator, Daniel Schydlowsky, was quoted Thursday in newspaper Gestion as saying: "Today the AFPs gain from having more pension holders but there is no direct relationship between the quality of how the funds are managed and the remunerations that the fund administrators receive."

The private pension funds have posted robust returns in recent years, gaining alongside breakneck growth in Peru's economy.

The most aggressive fund managed by the AFPs returned a real 121% in the six-year period between April 2006 and April this year, according to the nation's pension regulatory agency.

AFP Horizonte SA (HORIZC1.VL) is owned mainly by Holding Continental and Spain's Banco Bilbao Vizcaya Argentaria SA (BBVA, BBVA.MC). BBVA has said it could sell its pension fund operations in South America.

AFP Integra SA (INTEGRC1.VL) is owned by Colombia's Grupo de Inversiones Suramericana SA (GIVSY, GRUPOSURA.BO).

AFP Profuturo's main shareholder is a unit of Bank of Nova Scotia (BNS, BNS.T) while Prima AFP is controlled by Peru's Credicorp Ltd. (BAP, BAP.VL)

-By Robert Kozak, Dow Jones Newswires; 51-221-7050; [e-mail]