Source: República AFAP.
In line with the trend of pension reforms in the region for the implementation of multi-fund systems, the AFAPs in Uruguay have begun operating with two subfunds: the Accumulation and Retirement subfunds. The aim is to mitigate the effects of an abrupt decline in the return rate for members close to retirement.
One of the second generation reforms implemented in the social security systems of the region has been the incorporation of the multi-fund system, which allows members to choose the most suitable fund for investing their savings according to their risk profile.
In the case of Uruguay, the AFAPs have begun operating two subfunds: the Accumulation and Retirement subfunds, as of August 1, 2014. Since there is no equity market in Uruguay and investment in international equities is prohibited, the creation of funds with different degrees of risk is not viable. Nonetheless, the implementation of the two-fund system enables better management of the investment horizon and the associated risks, also allowing for more conservative exposure to credit and currency risk.
With this reform, the Legislature aims to mitigate the effects of an abrupt decline in the return rate for members close to retirement. The way the system works is that members’ funds are gradually transferred from the Accumulation Subfund to the Retirement Subfund (over a period of 5 years, at 20% per year) after members turn 55.
The rules regulate the limits of the Retirement Subfund more restrictively, limiting the credit risk to the Uruguayan Government, the Central Bank of Uruguay, local financial intermediation agencies, international credit agencies and foreign Governments with high ratings. Similarly, the risk of exposure to foreign currencies is reduced, lowering the limit to 15% (35% in the Accumulation Subfund). The regulations, in turn, reduce the price risk by limiting the term of investments to securities with no more than 5 years to maturity.
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