Momentum to overhaul the AFP pension systems in the Andes has stalled amid dwindling public support for the ruling parties in Chile, Colombia, and Peru, fortifying opportunities for external managers. Asset managers with private equity or other alternatives will find opportunity to capitalize on pension fund appetite for long-term, low-volatility products with low correlation to existing benchmarks, according to Cerulli’s report, Latin American Distribution Dynamics 2023: Latin America's Leftward Tilt and Its Impact on Retail and Institutional Asset Gathering.

According to the research, produced in conjunction with Cerulli’s research partner for Latin America, Latin Asset Management, Chilean AFP holdings of cross-border funds and ETFs total USD73 billion, Colombian USD40 billion, and Peruvian at USD8.6 billion. Despite calls by recently elected left-leaning populists in Chile, Colombia, and Peru to limit the participation of privately owned managers in the pension sphere, broad-based drastic reforms are being rejected in the region. “There’s consensus in the Andes that the region’s pension systems need to be updated in order to improve payouts for retirees, as well as include others who did not contribute to the system during their working years, but there’s little appetite for eliminating the AFPs or returning pension systems to state control,” states Thomas Ciampi, director of Latin Asset Management and author of the report.

While government-mandated emergency withdrawals in Chile and Peru dissuaded AFPs from locking up assets in long-term vehicles such as a real estate development or infrastructure projects, they have since increasingly allocated to alternatives as the response to COVID-19 has ended. Including Mexican Afores, alternatives penetration in the AFP/Afore pension fund segment jumped to USD71 billion in mid-2023, from USD46 billion at the close of 2020. Excluding Mexico, the increase was more moderate—to USD36 billion from USD27 billion over the same period. “Peruvian and Mexican private-pension managers are already allocating a larger percentage of their portfolios to alternatives than to cross-border mutual funds and ETFs,” remarks Ciampi.

External managers have secured their place in the AFP system for now, but the challenges they face in the pension segment—attractive yields on local, onshore fixed-income securities, and the uncertainty surrounding the future of the AFP—will continue to loom. Managers that offer exposure to alternatives such as private debt, private equity, and real estate will be better positioned for mandate wins.