Sebastián Edwards: "The political way out for the AFPs is total transparency and acknowledging that a mistake was made here"

In light of what happened with the sharp drop in Funds D and E and the questionable use of derivatives by the pension fund administrators (AFPs), was there a lack of care and oversight on the part of the administrators' directors? You wrote a letter about this recently…—We don't know that. What I did in my letter was raise the possibility that such a situation may have occurred. What I say there is that the investigation must cover all aspects, including the role of the board. I serve on several boards and we have always made sure to have sufficient information to ensure that executives' decisions are prudent. It has to be investigated, because there are fiduciary duties. I have said there are three duties here: the duty of care, the duty of oversight, and the duty of loyalty, and I suggested investigating whether the duties of care and oversight may have been breached. I don't include loyalty… that is understood differently here in the United States than in Chile. The duty of loyalty is that the director must put the company ahead of their own interests, and I don't believe there was a breach of that principle in this. I don't believe anyone involved tried to profit from this. There is no fraud. So the question here is whether they were informed, whether they knew what was going on, whether they knew what the exposure was, and whether they considered that to be a prudent position—the one they would have used in managing their own money. This is especially important for independent directors. There is another duty, which is the duty of "candor," which is to say what you think and not stay silent.Your message is that directors are not there just to "warm the seat"…—Yes, that's it. Directors have to understand that they have those fiduciary obligations, especially the independent ones.What responsibility do the regulators bear in this matter?—This is a delicate topic for me because my brother-in-law is the current regulator. As far as I understand, this regulator, (the Pensions Superintendent) Joaquín Cortéz, took the bull by the horns and is the one who has made sure that exaggerated or overly broad derivative positions have to be closed before November 1st, with some intermediate deadlines that had to be met… The current regulator has been acting appropriately, as far as I know. There are more doubts regarding the previous regulator, as far as I know. According to reports that have come out through the press, he apparently asked several times for self-regulation. And you don't have to be a genius to understand that in Chile's incentive system, under self-regulation, you have to regulate the herd and not each individual AFP, given the minimum return system. But the existence of the minimum return is not the regulator's fault; it is the fault or responsibility of the legislator. There is a perverse minimum return system that incentivizes herd behavior. But the problem here at every level is that the public has not been educated.What do you mean?—The key to this whole issue is that what the public understands as a conservative fund is not what the AFPs understand as a conservative fund. If the fund that lost the money had been the riskiest one, we wouldn't be having this discussion. The problem is that the fund that lost the money is the most conservative one. So when I ask my mother and my "little old lady" aunts what they understand by a conservative fund, they tell me: 'A fund where my balance never falls.' And they add: 'I don't care if it goes up just a tiny bit, as long as it doesn't fall.' In other words, for the public it is what in the money management world is called the wealth preservation strategy, preserving your assets.12.08.2025 Moneda Patria Investments Photo Pablo Vásquez R. Pablo Vásquez R. Is there a communication deficit or poor communication on the part of the AFPs? For decades they have said that Fund E is the most conservative and the least volatile…—Two things must be distinguished: the stability of the account balance and the stability of the pension that can be bought with that balance. They are not the same thing, and a stable balance does not guarantee a stable pension. My mother, for example, wants each month's statement to show a little more than the previous one, and never less. That is perfectly understandable. But that is not necessarily what the AFPs understand by a conservative fund.How can the balance fall and the pension remain stable?—When interest rates rise, something that does not depend on the AFPs, bond prices fall and the account balance drops. But with higher rates, each peso saved buys a larger pension. In principle, the two effects tend to offset each other: the balance falls, but the pension remains relatively stable. When rates fall, the opposite happens. It's like a car's shock absorber: the wheel goes up and down, but the cabin stays stable. In Fund E, the balance is the wheel and the pension is the cabin. I believe that when the AFPs talk about low volatility they are referring, without bad intent, to the pension and not to the balance.Would it have been advisable to have an even more conservative fund, one that protected the balance?—That is another important discussion. We could have had a Fund F, invested only in very short-term deposits, what in the United States is called a money market fund. Year to date it would have returned about 3%, and my mother would have been happy. But it has a cost. The balance would have been stable, but the pension bought with it would have gone up and down with interest rates. You gain stability in the balance at the cost of volatility in the pension. There lies the heart of the communication problem. The AFPs think about protecting the pension; many members, about protecting the balance. These are different objectives, and that difference has never been well explained.How much does this episode damage the industry's reputation, and how might it revive populist temptations seeking to destabilize the individual capitalization system?—This is a very strong reputational blow. I don't think it will translate into serious efforts, beyond the "No + AFP" people and the Communist Party, to end the system, but rather into overregulation and all the rest. That is why it is important that the investigation not mean merely using a couple of 42-year-old young men and women as scapegoats and replacing them, but that the investigation go to the bottom of the problem and determine whether the investment committees on the boards have acted prudently. This entire investigation has to be broad, transparent, and ideally the AFPs themselves should form a commission of independent experts, free of any suspicion, to analyze the situation and, within a relatively short period, issue a conclusion; to propose reforms in corporate governance, in regulation, in whatever, so that this does not happen again. Today we don't know what percentage of the 10% drop is due to imprudence or to a long-term investment strategy. In any case, rates in the United States will go up and down, they will keep moving, especially because fiscal deficits are very high. This is not a black swan, not a problem that happens once; this is going to be much more common from now on.Beyond the technical solution, what is the political solution to this mess?—The political solution for the AFPs is total transparency and acknowledging that there was an error here. In the political solution there are two options: one that goes with the AFPs' cooperation and where what happened is explained transparently, which I think is the more benign option; and the other is for the AFPs to deny any responsibility, which I don't think they will do, which is a much more complicated political solution.BrakeThe Chilean economy "won't start" and inflation continues to rise, driven by oil prices that keep climbing in international markets. What is happening to the Chilean economy? Has this brake surprised you?—It has surprised me a little, but not much. In May I wrote a column called "Who's Afraid of Debt?" and nobody paid attention to me. It was about this fixation on the 45%-of-GDP debt cap, which is inexplicably mechanical. If debt is issued above 45% to deal with short-term situations, such as an economic slowdown, to finance projects that are not permanent, that's perfectly fine; it would be stupid not to issue more debt. Moreover, I was the first person to say they had to focus on employment, in a column last April in La Tercera. You have to understand that there are two rhythms to the economy: a short rhythm and a long rhythm. And what the government has done so far is focus on the long rhythm, trying to create conditions for supply to increase, for there to be more investment. But in the short rhythm, which lies in demand, a doubt arose among economic agents about the immediate future of the economy. And that was amplified by the war and external developments; there was a pullback in aggregate demand and the gasoline issue affected that. So families spent less, companies…12.08.2025 Moneda Patria Investments Photo Pablo Vásquez R. Pablo Vásquez R. Is it a self-inflicted recession, then?—I don't know, but the government's discourse and some of the government's actions contributed to a pullback in aggregate demand, especially from families, and this was amplified by the war. You said Quiroz was "a bit of a purist" in his macroeconomic actions this year…—The "bit" is amplified by the effect brought by the war, the higher oil price, the rise in long-term rates in the United States, what is happening now with the AFPs, which will affect consumer confidence; everything makes the "bit" in the action amplify and turn into a more complicated problem.Do you still have a good opinion of Minister Quiroz?—Yes, he is a great minister. He is a good minister who got trapped in this strict fiscal austerity in the short term. I never supported the US$6 billion spending cut, but I stayed quiet about it… and then I said we had to worry about employment and later I said we shouldn't be tied to the debt. Jorge (Quiroz) got trapped in this short-term austerity that, given the circumstances, was not the best strategy. Quiroz is unquestionably the most powerful minister in the cabinet. If the economy doesn't pick up in the next six months, how much can the Finance Minister's position weaken?—If a minister's portfolio objectives don't work out, the minister weakens a lot and could eventually be made to carry the can. But we are in a very special regime in which the President acts more like Queen Elizabeth than like a Chilean president; he acts as Head of State, he is above it all. It is not necessarily a bad model; it is an unusual model for us, we are not used to that. There is no obvious "Prime Minister." Mr. Claudio Alvarado (Interior Minister) must be very efficient, but he doesn't have the personality of a Jorge Burgos, a Rodrigo Hinzpeter, a José Miguel Insulza. But if the question is whether they should replace Jorge Quiroz if things keep going badly six months from now… I wouldn't rule that out. Then one would have to think about who could replace him, and it's not easy.France and the U.S.The international economy continues in turmoil and new risks are emerging, as in the case of France, where its risk premium keeps rising and the protests reach levels of aggressiveness never seen before…—I would add that if the French presidential elections were held tomorrow, Marine Le Pen (the far-right candidate) would be the next President. There is a problem in some countries that is very messed up, but I am not a catastrophist. There is a fairly widespread catastrophism, especially among the more left-leaning elites, who say the environmental catastrophe is coming, the populist catastrophe, the artificial intelligence catastrophe. All these people believe humanity and the world are going to end, and I am not in that group; I don't believe that will happen. I am very Darwinian; the survival instinct is such that we will find organic ways to survive and keep moving forward. We are in a pendulum period, where we are seeing the right in most countries.What is your prediction for the U.S. midterm elections in November? Given the policies Donald Trump has pushed, can the international economic scenario improve with a weaker U.S. President?—It is almost universally acknowledged that the Republicans will lose the lower house. The big question is what will happen with the Senate, and that depends on three states: Texas, New England, and Michigan. It is possible they will also lose the Senate, but I don't see them putting a stop to any of Trump's more extreme policies. The structural deficit is there. What the United States needs is for rates to fall, and while the war continues, that will be difficult.Already a subscriber? Log inThis article is exclusive to subscribersSubscribe to read it in full and access all our journalism. See plans