Latin American Capital Markets

INSTITUTIONAL INVESTORS AND CAPITAL MARKET DEVELOPMENT 135Box 5-3 I Evolution of Chile's Pension SystemPension reform in the majority of Latin American and Caribbean countries occurred in the 1990s,and the full benefits from those reforms have yet to be realized. Chile, as the regional pioneer ofpension reform in 1981, illustrates how private pension funds may benefit local capital markets asthey mature.In the pre-neform, pay-as-you-go system, the government used retirement assets as a meansfor financing its activities by investing them in the government bond market. After adoption ofpension reform in 1981, pension fund composition remained highly restricted, with the majorityof assets invested in risk-free securities, such as government bonds. As capital markets developed,pension funds started to invest in mortgage bonds and corporate bonds (Vives 1999). Thegrowth of the corporate bond market served to attract foreign capital, further deepening themarket.Beginning in 1990, restrictions against pension fund investments in foreign securities were graduallylifted. Investments in venture capital and infrastructure funds were permitted in 1993, andequity restrictions were lifted in 1995. Since the lifting of these restrictions, pension funds havehad a significant effect on Chile's capital markets. Currently, pension fund administrators ownmore than 10 percent of all Chilean equities and are responsible for about one-quarter of alltransactions in Chile's stock exchanges. Chile's market capitalization grew over 30 percent from1993 to 2000 (Bolsa de Santiago 2001). Pension funds also facilitated the development of creditrating agencies, stabilized prices, developed innovative products, and invested in infrastructurefunds (Vives 1999).uals to enjoy a professionally managed, diversified portfolio that otherwise would beunobtainable through direct holdings. Mutual funds have served as the primary vehiclefor foreign stock purchases, allowing global diversification in the 1990s through anincreased number of international equity funds (ICI 2001).A Sound Regulatory I Legal Framework and OversightA sound regulatory and legal framework has increased investor confidence in the capitalmarkets and boosted demand for institutional products as long-term investmentoptions. The regulatory scheme governing U.S. mutual funds and other investmentcompanies demonstrates how regulation focused on investor protection, while nothindering innovation, has allowed the fund industry to flourish.These regulations playa particularly important role as mutual funds increasingly serve as the investmentvehicle for retirement assets. Chile and other countries in Latin America and the Caribbeanwith recently reformed pension schemes have adopted a similar structure forthe management of retirement assets by private investment funds, such as mutualfunds (box 5-3).Copyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub