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Brazilian pension funds that manage more than 450 billion reais ($250 million) will be able to put as much as 70 percent of their assets in equity investments, the country’s pension fund secretary Ricardo Pena said. 

Pension funds were previously allowed to invest only 50 percent of their assets in equity. As part of the new regulation, pension funds will also be able to put up to 20 percent in structured funds that invest in areas such as infrastructure or real estate; 10 percent in international funds approved by the securities regulator or that trade on the Sao Paulo exchange; and, 8 percent in real estate, Pena told reporters in Brasilia. 

“Pension funds have too much of a stake in the debt -- approximately 15 percent of the public debt -- which will be different in this environment of lower rates,” Pena said. “Funds will have to search out other investments. They’ll have to take more risk.” 

After the changes, pension funds will be able to move all their assets into the riskier investments such as equities, real estate and structured funds, compared with the earlier limit of 58 percent. 

As Brazil’s benchmark interest rate drops, fund managers need more freedom to mange portfolios to ensure returns stay in line with benefit payments. Managers will need to shift investment from government bonds to riskier assets to boost returns. 

Earlier Restrictions 

Pension funds, regulated by Brazil’s National Monetary Council, a three-member group led by the finance minister, were previously restricted to investing 8 percent in any kind of real estate asset. Now the funds can invest 10 percent in real estate funds and another 8 percent in real estate itself. The limit on international investment was also raised from 3 percent. 

The 70 percent ceiling on equity investment applies only if funds buy stakes in companies listed on the Novo Mercado, a section of the Sao Paulo exchange with stricter corporate governance rules. The funds will only be able to allocate 60 percent of their portfolio to companies complying with so-called Level 2 corporate governance rules, or 45 percent if they comply with Level 1 rules, Pena said. 

The central bank slashed the so-called Selic rate to a record 8.75 percent this year to combat the country’s first recession since 2003. Policy makers on Sept. 2 kept the rate unchanged, saying it was in a level adequate to spur growth without inflation 

Billions in Assets 

Brazilian closed pension funds, the ones affected by the new rules, manage more than 450 billion reais, according to estimates by the country’s association of closed pension funds, known as Abrapp. 

Brazil’s pension funds currently invest 64 percent of their assets in fixed income assets, Pena said. So-called variable income makes up about 30 percent of their portfolios, with real estate accounting for 3 percent and loans accounting for another 3 percent, he said. 

Globally, pension funds hold about 60 percent in variable income and 40 percent in fixed income, Pena said, while declining to make estimates for what percentage Brazilian pension funds will hold after the rule changes. 

Brazil’s open pension funds, which don’t restrict participation to employees of a company or members of a professional group, aren’t governed by the same rules as closed pension funds. 

Open pension funds managed about 390 billion reais of assets as of July, according to the Web site of regulator Superintendencia de Seguros Privados. 

The content of this article is general in scope and is not intended to be comprehensive. It is not a substitute for investment advice.

Published on our website on Sept.27, 2009