The AFP crises behind closed doors: management and boards under scrutiny

In early October, the crisis had not yet knocked on the AFPs' door. They sensed that criticism was coming, but they did not gauge its magnitude. The controversy did not even erupt when it was officially reported on October 9 that Fund E, the most conservative one, had recorded a decline of 10.39% between January and September. The questioning grew like a snowball starting last week, when it became known that part of the decline had been influenced by the magnitude of derivatives operations that the AFPs had undertaken recently, which led them to extend the duration of their portfolios beyond what is required for a person who today intends to retire with a life annuity. From the AFPs, however, they have responded to the criticism, and off the record they attribute it to a revenge against the industry, because of the wounds it has left along the way. They also argue something more: a lack of knowledge about how the fund managers make their investment decisions. An authority offers an example to illustrate the problem. The maximum speed limit on the highway is 120 kilometers per hour, but in the event of torrential rains, wet pavement, and poor visibility, a prudent driver should adapt to those conditions and take his foot off the accelerator. The example alludes to the controversy over Fund E and helps summarize the crux of the matter: the AFPs have a range of instruments to invest their members' funds, and there are limits and regulations that they did not exceed, but in the case of the interest rate derivatives they bought in the United States, they took an excessive risk, according to the authority. And that risk caused Fund E to accumulate a double-digit decline through September. That, in any case, has been partially reversing during this month. An advisor to the AFPs responds to the analogy with another one: if the regulation requires them to make a trip between Santiago and Viña del Mar in an hour and a half, they must drive at 120 kilometers per hour to meet the goal, despite the difficulties of the road. In this case, continuing with the example, the AFPs had to take investment positions that would allow matching the maturities of their portfolios with the retirement dates of their future pensioners. The goal was to fulfill their obligations to their pensioners. And in the absence of other instruments, the AFPs used what the law allowed them: extending the maturities of their portfolios through derivatives. "If the legislator requires you to reach Viña in an hour and a half, you must take certain risks to match the pensions," he says. The discussion boils down to those two positions, and they have the fund managers embroiled in a controversy unseen in years, damaging their corporate reputation and amplifying their legal risks: this week some members have already activated two avenues, protection remedies and criminal complaints. Those actions, says a lawyer who has followed the case, will have a long way to go. In the criminal investigations, the National Prosecutor's Office decided this Friday to assign the investigation to the Metropolitan Central North Prosecutor's Office, headed by regional prosecutor Francisco Jacir. But the most immediate risk is another: this Tuesday, the Pensions Superintendency announced the opening of an unprecedented sanctioning process against the seven AFPs that make up the industry. So far the fund managers have not been officially notified. Senior executives of three AFPs confide that they learned about it from the press. "The way the law establishes that the sanctioning administrative procedure itself begins is with the notification of the filing of charges," responds the superintendency's prosecutor, Mario Valderrama. And that should happen "within the next month, it could even be in a couple of weeks. We are operating with every sense of urgency," he says. The intention of the agency, which since March 23 has been headed by Joaquín Cortez, who replaced Osvaldo Macías, is to file charges soon and complete the process within nine months. During that period, the AFPs will generally defend themselves with their respective in-house legal teams. They could then activate the incorporation of external legal advisors who, in any case, have already begun to be sounded out for all angles, including the criminal ones, reveal several law firms in the market that await their future clients. Cortez knows the AFP industry up close. He was investment manager, general manager, and chairman of AFP Provida, to which he was tied for years. When he was appointed superintendent in March, he had to resign from the board of Administradora Americana de Inversiones (AAISA), the holding company that controls AFP Habitat in Peru and AFP Colfondos in Colombia. But that does not disqualify him when it comes to having to resolve this case. "The law establishes that to be disqualified one must have a personal interest, for example, having a significant part of one's assets in the fund manager, being a shareholder, or having a contractual relationship. That is not the case of the superintendent. I made that examination meticulously when he took office," explains lawyer Valderrama. Other grounds for disqualification include having a manifest enmity or a close friendship. "That is not the case either," the regulator's prosecutor points out. The boards and executives The boards and top executives of the AFPs admit to finding themselves in an uncomfortable situation. The atmosphere in the investment departments has been particularly tense, especially in the fixed income area. From three AFPs they explain that they did not call extraordinary board sessions for this reason: it was not necessary because this very week they had their ordinary sessions scheduled, in which the matter was addressed in depth. But phone calls, video calls, and meetings have not stopped, with the management and also giving explanations to their controlling shareholders. Likewise, the AFPs have focused on trying to explain to experts, financial world players, and economists the reasons underpinning their line of defense: this was not a bet, but an investment strategy. A person from the industry estimates that the authority's review could implicate more than 60 people from the seven AFPs, including in the count the boards, the general managements, and the investment managements. All of them have been on alert these last two weeks, with permanent and constant contacts, preparing their defenses. The same goes for the AFP Association, the trade guild led since April by former Habitat executive León Fernández de Castro, which is legally advised by a lawyer who has worked with the industry before: Rodrigo Díaz de Valdés, a partner at Baker McKenzie. There is no orchestra conductor in this crisis, says someone linked to the industry, who asserts that the AFPs' defense is individual, not collective. And although Fernández de Castro took on the role of spokesperson in the first week, now each fund manager had to raise its own voice to justify its investment decisions, which they began to do this weekend. The first to come out in public was Planvital. "We did the prudent thing. We took a conservative position to protect pensions," Planvital's general manager, José Joaquín Prat, told Pulso. "We are calm because the position we held seemed correct to us, it has technical foundations," he added. Several lawyers state that the fund managers have for their top brass insurance known as D&O (Directors and Officers insurance), which they could activate in a case that could compromise the assets of the executives and directors accused of negligence. The debate was raised by none other than the Finance Minister himself, Jorge Quiroz, who, in backing the superintendency's decision on Tuesday, pointed at the boards. "The nature of the sanctions, as established by law, whenever there is a breach by a director of his due duty of diligence and care — directors, let us remember, answer with their personal assets," said Quiroz. Many economists who have filled the public agenda with the same concern have asked themselves the same question: did the boards act with the diligence the law demands of them? People close to the AFPs assure that they did, and that the minutes of their meetings, which are in the hands of the authority, will show that they debated this issue. The boards are the highest corporate governance body of the AFPs. In the updated review of those boards, as of July, in the official reports of the Pensions Superintendency, there are 41 sitting directors. Five AFPs (Cuprum, Modelo, Uno, Provida, and Capital) have boards of five members and two (Habitat and Planvital) have boards of eight members. In total, there are 40 directors in office, following the resignation in August of the 84-year-old lawyer Jorge Carey from Provida's board. Of those 40 directors, 30 are men and 10 are women. And in the same proportion, 30 are Chileans and 10 are foreigners. The Chileans average 55.7 years of age. Planvital has the most foreigners, with six; and Habitat has the most female presence, with three. Among the professions, the most repeated are business administration and civil engineering, although there are nearly a dozen lawyers. There are also other professions, with one representative each: journalist, social worker, customs agent, historian, and psychologist. The underlying pressure from economists, authorities, and politicians has pointed in the direction of responsibilities and has laid bare the loneliness of the AFPs. The UDI deputies' caucus, for example, called this week for the resignation of all the boards, managers, and executives who participated in the questioned operations. Advisors to several AFPs say that is not on the table, because in addition to weakening their defense — implicitly assuming some responsibility by doing so — it contradicts their main argument: the AFPs acted with due diligence, in favor of their members, with the main objective of protecting pensions, using the existing regulations and rules. A shareholder of an AFP adds that, without the due oversight process being completed — such as the one currently underway by the regulator — no one will rush into a decision of this kind. Nor have they so far given any signs of accepting another of this week's recommendations: former Finance Minister Mario Marcel proposed that the AFPs could compensate the most affected members. "If they are as few as they say, maybe it is not that difficult," he said. Between 7% and 9% of the members of Fund E are between 60 and 65 years old: in total, that would be some 67,000, says someone with knowledge of the matter. The regulator's process is also investigating what happened with Fund D, which recorded a decline of 6.38% through September, and which has 620,000 members over 60 years old. A compensation would carry the same difficulty as the dismissals: it would mean assuming a share of responsibility that, in the future, with other potential abrupt changes in the price of the quotas, would be demanded again. "Compensating in this case is not something established in the law," adds another legal expert, although there are some precedents of specific situations in which a compensation has been equitably distributed among all the contributors of the same fund. They are few cases, but they exist. All the major ones were initiated by lawsuits activated by the AFPs: when they agreed with LarrainVial on out-of-court settlements in the Cascadas case, in 2016, or when they agreed to the payment of compensation with PwC, in 2022, in the La Polar case, after winning an extensive litigation in the Supreme Court. The law establishes that the AFPs "shall be obliged to compensate the funds they administer for the direct damages caused by them, any of their directors, employees, or persons providing services to them." The boards of the AFPs generally have fixed remunerations, but some also distribute variable amounts, mainly associated with their participation in committees. For example: for sitting directors, Cuprum pays 100 UF per month, Provida 250 UF, and Capital 126. The figure rises in the case of the chairmen, and some allow specialized advisory work, on a fee basis. Few tie remunerations to the year's results: Habitat is one of them: this year it decided at its shareholders' meeting to distribute 0.05% of the pre-tax profit of the fiscal year to each director, 0.08% to its chairman, and 0.06% to its vice chairman. Mario Marcel also pointed out last week that "it would be interesting to know what the bonus schemes were for the AFP executives who were in charge of these operations." The annual reports of the fund managers confirm that there is a fixed remuneration for their top executives (managers and sometimes deputy managers) and there is also a variable component; but they do not disclose the rules for it. Sources linked to two AFPs explain that, in the case of their investment areas, the incentives are structured so that compensation is given for achieving returns above the benchmark, but they clarify that there is no prize for taking first place, so as not to create incentives to take greater risk. They are even usually measured over longer periods than just one year. The new requirements to be a director In January, with Osvaldo Macías at the helm, the superintendency issued a general rule with stricter requirements for the managers, the professionals in charge of investments, and the boards of the AFPs, an assignment from the pension reform. In the case of the latter, the rule establishes that the majority of the directors, including sitting and alternate members, "must accredit a minimum accumulated experience of five years, acquired in companies that administer assets in an amount equal to or greater than US$1,000 million," in entities regulated by the Financial Market Commission (CMF) or the Pensions Superintendency itself. AFPs Capital, Cuprum, Habitat, Modelo, Planvital, and Provida filed a petition with the Constitutional Court (TC) to halt the rule. The TC declared it inadmissible. But curiously it accepted another petition, which is not from an AFP, but from its controlling shareholder, which halted its entry into force. The petition of unconstitutionality inapplicability filed by Sura Asset Management Chile S.A., owner of AFP Capital, argues that the rule in question affects three constitutional rights: freedom of association, free economic initiative, and property rights. And that the authority established a new regulation that was not ordered by law. The case is handled by one of Capital's directors, lawyer Germán Concha. The AFPs that failed before the TC did not give up and filed protection remedies before the Courts of Appeals, advised by lawyers Rodrigo Díaz de Valdés and Felipe Soza, of Baker McKenzie, arguing that the regulator's document is "illegal and arbitrary," in a judicial contest that continues without resolution. Already a subscriber? Log in This article is exclusive to subscribers Subscribe to read it in full and access all our journalism. 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