A Long-Term Perspective for Pension Fund
Portfolios in Chile, Peru, and Mexico

Abstract

In this article, the authors review pension fund investment returns in Chile, Peru, and Mexico with a long term perspective. They first analyze the historical returns of the private pension systems in these three countries, recorded most of the time only in one type of fund or portfolio. They then run Monte Carlo simulations to gain a glimpse into the future and evaluate potential returns from the new multi-fund schemes adopted by private pension systems, which are intended to allow investing in a number of regulated financial portfolios that vary according to different risk preferences and pension-saver age. The historical analyses finds that the financial crisis had a major effect on private pension funds—these funds experienced sharp drops in returns, particularly those with the highest proportions of equities. These effects were transient, however, and currently the historical returns of pension funds remain at positive levels, making them among the savings alternatives with the best returns in their respective countries. In this regard, private pension funds, with their diversified investment portfolios and provision of liquidity for different markets, companies, and productive projects, have proven to be a significant stabilizing factor for economies. Looking into the future with their simulations, the authors find that the multi-fund scheme has the potential to continue to offer attractive returns on average for pension-savers in the three countries. However, the authors warn that pension levels and replacement rates in the long term do not depend simply on returns, but rather densities of contribution and contribution rates are key factors, particularly for the countries analyzed. Indeed, the densities of contribution and contribution rates are perhaps the most important variables for increasing pension well-being in that they are not random in nature and therefore may be affected by public policies.