In the current very positive Brazilian economic scenario, with ever stronger investment prospects for the coming years, the country’s National Monetary Council has revoked the regulations hitherto applicable to the closed complementary social security entities’ investment policy (the so-called ‘Pension Funds’), having replaced them with more modern and flexible standards.
The new resolution, passed by the National Monetary Council at the end of September, stems especially from the Brazilian government’s awareness of the desirability of investing Pension Fund reserves in productive activities, leading to an incentive to the Brazilian economy. This is the compelling reason why the government has for some time been fostering partnerships between Pension Funds and national companies.
According to the Statistical Report published by the Complementary Social Security Secretariat (SPC), there were, in April 2009, 371 closed complementary social security entities in operation, of which 83 were public, 272 private and 16 institutors. Total assets of these entities comprised, at the time, approximately R$468.5 billion, the world’s seventh largest in asset terms. The Brazilian Pension Funds’ total asset evolution (in nominal R$ billion) is depicted in the chart below.
Still, according to data by the Brazilian Association of Closed Complementary Social Security Entities (ABRAPP), published in the Jornal do Commercio on 1 October this year, the expectation for 2010 is for the Pension Funds’ investment portfolio to reach approximately R$546.6 billion, attaining the threshold of R$1.644 trillion in 2021, taking into account an 11% average growth rate and 2% Gross Domestic Product growth per year.
One should not question, taking into account the immense financial equity held by Pension Funds, the interest towards enlarging their investment possibility, especially in view of their time horizon, even more so when one envisages the current reduced interest rate environment in Brazil.
In this industry’s current outlook, except for Previ (the Banco do Brasil’s employee pension fund, Latin America’s largest fund), the other Brazilian Pension Funds bear a variable income allocation still lower than the international averages, notwithstanding the last decade’s substantial increase. This condition stems from a high interest rate scenario (as happened at the time of Plan Real), in which a greater risk exposure was not deemed necessary, as fixed income yielded a more than adequate return to fulfilment of actuarial targets.
Thus, it was in this context of incentive to a greater partaking of Pension Funds in Brazilian economic development, and of reduced interest rates, that the National Monetary Council passed Resolution CMN n° 3,792, dated 24 September 2009 (‘Resolution CMN nº 3,792’), aimed at enhancing the forms of investment allowed to Pension Funds, providing them with alternatives to raise their profitability through more active financial management. Conversely, the new regulations have imposed stricter diligence and transparency rules to be complied with by those entities, such as, for example, the need for certification by all persons participating in their investment decision process, so as to professionalise their financial management.
The new resolution, among other issues, has reduced and altered the government-set limits to the application of Pension Fund reserves, a fact which not only benefits them on account of diversification possibilities for their portfolios, but also by reducing compliance costs regarding the supervisory body.
The prior resolution (Resolution CMN nº 3,456) established 55 limits to the Pension Funds investment policy (some redundant or overlapping). Currently, there are 30 limits (quantitative) to be complied with, as per the new regulation.
The variable income investment limit (in which are included corporate stakes) has increased from 50% up to 70% in the case of publicly held companies listed in the Novo Mercado – a differentiated corporate governance level on BM&FBovespa, with lower sublimits according to the companies’ transparency and corporate governance. Priority was given, therefore, to investment in companies adopting higher corporate government standards.
The limit for acquisition of shares with voting rights of a single company has also been increased, from 20% to 25%.
Another relevant change was the extinction of the maximum limit of 40% for joint participation of Pension Funds and their sponsors in specific purpose companies. That is, according to the new rule, the Pension Funds and their sponsors are not compelled any more to seek partners (and accept conditions imposed by these) for those projects which they intend to implement through an SPE, as they may now be their sole shareholders, within the maximum 25% limit applicable to Pension Fund participation.
Resolution CMN nº 3,792 also institutes two new investment segments, named ‘structured investments’ and ‘overseas investments’. Authorisation for structured operations was considered by the market as one of the most relevant changes from the new regulation. On the other hand, the overseas investment option will not bear great relevance, according to specialists, as the wide range of investment opportunities in Brazil, where risk is already known, discourages investment overseas.
The structured investment segment includes quotas from private equity investment funds, emerging company funds, real estate funds and multimarket funds. The investment limit is 20%, with a specific 10% limit in the case of real estate funds and multimarket funds. It is important to highlight that the investment in real estate funds has been transferred from the real estate investment segment (limited to 8%) to this new structured investment segment (limited to 10% as previously mentioned).
‘Overseas investments’ were created in accordance with OECD regulations, and allow for investment in assets issued abroad, belonging to funds comprised in Brazil, in investment fund quotas classified as foreign debt, in overseas index fund quotas admitted to negotiation in the Brazilian stock market, in Brazilian Depositary Receipts (BDR), and in MERCOSUL- based foreign company shares.
Additionally, the new rule included the following new financial assets to the Pension Fund investment list: export credit notes and certificates, agribusiness warrants, securitisation agents’ certificates, emission reduction certificates, ETFs, and loans to participants with savings reserve consignation.
Another relevant innovation introduced by Resolution CMN n° 3,792 entails the possibility of Pension Fund participation in the socalled public offerings of securities with restricted efforts (public offering of debentures, closed fund investment quotas including credit rights, promissory notes and real estate receivable certificates, among others in which no need exists for previous distribution registration with the Brazilian Securities and Exchange Commission, the CVM, if meant for a specific number of investors).
Unlike the previous resolution which expressly set forth that Pension Funds could only take part in the offerings which had been filed with the CVM, the new resolution, broader and more generic, refers only to obligation of compliance with the CVMs and Brazil’s Central Bank.
The Pension Funds’ possibility of access to public offerings with restricted efforts has very much pleased Brazilian companies, which now expect to be able to rely on investments from these partners in a faster and less costly manner. Several companies have given up this fund-raising mode because of the requirement for CVM-registered public offerings, usually a protracted, exhausting, and expensive process.
The above briefly broached changes are, in our view, of the greatest importance. Anyway, it is worthwhile pointing out that, despite having brought about a certain stir in the market immediately following its issuance, Resolution CMN nº 3,792 will not, in the specialists’ understanding, cause any impacts in the short run, as there is a term for adapting the Pension Funds’ investment policy to the new fund investment limits, which will depend, in great part, on approval by Pension Fund investment committees.
Notwithstanding, taking into consideration the issuance of Resolution CMN nº 3,792, which has granted greater freedom for Pension Fund investment portfolio diversification, and for the upkeep of a reduced interest rate environment in Brazil, the expectation, albeit in the medium and long terms, is that Pension Funds diversify their investment portfolios and that the pace of evolution in investment migration from fixed income to variable income continues to grow, thereby contributing to the development of the Brazilian economy and ensuring greater return to pensioners.