Chilean pension funds face crisis over Fondo E losses

Chilean pension fund administrators (AFPs) are facing intense scrutiny following significant losses in the 'Fondo E', the system's most conservative investment tier. Reports indicate the fund saw a negative return of approximately 10.39% between January and September, with losses estimated by some sources to exceed US$ 7 billion.

The downturn is attributed to the excessive use of financial derivatives, specifically interest rate swaps, which were intended to manage risk but instead amplified exposure to international interest rate fluctuations. Reports suggest that AFP executives had previously requested regulatory restrictions on such volatile derivatives, yet continued the practice due to a 'herd effect' to maintain competitive returns.

Political and regulatory pressure is mounting. Lawmakers have requested information from the Superintendencia de Pensiones and the Contraloría General de la República to investigate potential negligence. While the AFP association argues that assets will eventually revalue as rates normalize, critics and former officials question why such high-risk strategies were permitted in a conservative fund, especially after warnings from the Central Bank.