Rear-view-mirror driving in defined contribution systems: the strange formula of the Chilean pension funds

Abstract

The pioneering regulation on Chilean pension funds under Defined Contribution program requires private managing institutions to exclusively manage individual accounts and meet a minimum return to their clients. The purpose of this study is to empirically investigate the investment behaviour of pension funds and to contribute to the Social Security debate. The findings reveal the benchmark significantly explains funds’ performance. Pension funds tend to replicate their asset allocations to exhibit similarities in returns. We believe the obligation on fund managers to attain a minimum guaranteed return, based on relative performance evaluation, encourages them not to deviate from the industry's performance; indeed, the benchmark explains most of the group performance. To hold similar allocations, managers may monitor each others through their investment style.

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