In mid-September 2016, FIAP submitted its comments on a column written by the Economist, Mr. Andrés Velasco, in the international magazine “Project Syndicate,” regarding the challenges facing the Chilean pension system as a result of the increase in life expectancy and the maintenance of the retirement age over more than thirty-five years, as well as the marked reduction in worldwide interest rates.

FIAP shares the opinions expressed in the column to a great extent. However, it calls our attention that he says that the Bravo Commission had reached the conclusion that the fund managers have generated high real returns for the investments of the pension funds (real annual average of 8.6% in the 1981-2013 period), but that high management fees reduce real returns to approximately 3% per year in the same period.

In this regard, FIAP confirms the high returns of 8.6% per year, over and above inflation, of the pension fund investments in the aforementioned period. Nonetheless, the calculation of the returns net of commissions that he mentions is wrong, as some prominent members of the Bravo Commission pointed out at the time. According to Law, the fees for the management of mandatory savings are charged once only when the contribution is paid in, as a % of salary, and are discounted from the latter, and not from accumulated savings. Hence, the calculation of returns net of commissions, using the IRR methodology (Internal Rate of Return), must consider the entire working cycle.

The limited information available suggests that there are serious methodological errors in the calculation of the aforementioned real annual return of 3%, among them calculating the IRR considering only a part of the period in which the AFPs managed the individual accounts and invested the pension funds of members, and not over the entire working life of the worker, thus significantly underestimating net returns. Estimates by a company specializing in pension systems, PrimAmerica Consultores, using the IRR methodology, and based on the official information provided by the Superintendency of Pensions, also including the aforementioned bias of only considering a portion of the work cycle, concludes that the average IRR of individual accounts between 1981 and 2014 was a real 5.9% per year, prior to discounting fees, and a real 4.7% per year after discounting them, which are figures significantly higher than the 3% referred to in the article.

To review FIAP’s comments in detail, please download the document submitted to Project Syndicate here (the comments can also be found in the “Comments” section of the Project Syndicate website).