It seems that the Chilean pension system, held up in the early days of my career as the model for emerging markets and by some for Britain, is not delivering the expected outcomes , meaning that Chileans who started saving last century are finding themselves with inadequate  pension pots and no pensions.

The FT run an opinion piece by Chilean economist, Arturo Cifuentes

The problem is simple, the money went in , the money is coming out, but what happened in the middle didn’t work. Investments are estimated to have under-performed by 2% pa, over a 35 year period this can leave people with half-pint pots when they expected the full pint.

See how many of the problem Arturo identifies could be lurking in our default funds.

At present the system consists of five investment options, known as funds A, B, C, D and E. Fund A is the riskiest, while Fund E is the most conservative. Workers are expected to transition gradually from Fund A to Fund E as they age, depending on their risk tolerance. The regulation attempted to control the risk in these funds through time-independent limits — minimum and maximum percentages by asset class — rather than portfolio-level risk metrics.

Sound familiar –  if your pension default fund uses a lifestyle programme y0u might just be using the same approach

A recent study published in the Journal of Retirement shows, for example, that in more than half of the cases Fund E outperformed Fund A. In short, participants in riskier funds were not adequately compensated for the risk they took.

At first sight, this looks as if there was a problem with he markets,  but as I read on the article , it looks as if this was more about the decisions taken around risk

regulation also discourages investments in alternative assets

So younger people are denied prime investment opportunities as they might be too risky (sound familiar to Nest investors?)

any investment not denominated in pesos must be at least partially hedged

Hedged currency strategies have consistently lost UK savers money, most recently in 2016 (Brexit) and 2022 (the LDI crisis). Currency is a risk diversifier.

The additional requirement that the hedge must be done on an asset-by-asset basis rather than at a portfolio level has only exacerbated this inefficiency.

The cost of hedging is born by the saver, the more hedges the more cost. The worst performing workplace pensions are almost all fully hedged for currency.

It could have been worse

The article goes on to consider structural issues. The Chilean system only docked wages by 10%, not the hoped for 15-17%. The argument is that higher contributions would have made up for the inadequacies of investment performance. They might have produced bigger pots but at what costs to savers who rightly can point to the failure of their managers to provide value for money.

Does this sound familiar?

The article also takes aim at inclusivity

about 30 per cent of Chile’s labour market operates informally, and many workers frequently shift between formal and informal employment. Unfortunately, during informal periods, they seldom contribute to their pension accounts.

This problem is here in the UK with our gig economy, high levels of self-employment and large numbers of adults either being cared for or caring.

Finally the article suggests that the Chileans are insufficiently aware of what they are saving into.

they do not know in which of the five funds they have their savings (most workers are assigned to a default option based on their age). Moreover, they are not aware that their funds are in segregated accounts, and do not belong to the private asset managers, or AFPs.

From a distance, I am asking myself – “why should they”. We don’t know what happens our pension savings either. Not only do we not know, but most of us don’t care, because we trust in the system.

The Chilean system depended on compulsory saving, this is the only substantive difference from the UK system. It means that Chileans, like Australians, are highly  dependent on this DC retirement saving system.

Reading the article and the blog back to myself, I wonder whether there is any fundamental difference in their approach to ours, other than the enrolment method.

Can Chile turn it round – can we turn it round?

It is silly for us to dismiss the Chilean approach as “third world”. It is our approach and we aren’t calling workplace pensions “third world”. But we continue to lifestyle, to hedge, to avoid alternative investments and to demand of savers that they understand and manage their own accounts.

The accounts that are maturing today in Chile, are full of Pesos but do not provide Pensions. The Peso to Pensions problems is not being addressed, presumably because the people who’ve saved are busy wondering what went wrong with the investment bit.

We are not quite as dependent on our workplace pensions as Chile and it sounds as if we do not have a regulatory system that encourages the group-think that has led its pension system down financial cul-de-sacs.

But we should be very conscious that in Chile the consensus is that something must be done to address the “pension problem”. Wasn’t that where Chile was 35 years ago? Might not that be where we will be in 35 years time?

The problem with the private pension system in Chile, like the workplace pension system in the UK – is that there are no pensions.

Different language – same problem