Pensions in Brazil
The Economist, February 15, 2001
TWO of Brazilís chronic economic problems are that its people do not save enough for their old age, and that its companies struggle to raise long-term financing. One solution to both is to get more firms to set up pension schemes for their employees to which both firms and workers contribute: the employees would have an attractive means of saving for retirement, and the contributions would provide the Brazilian economy with a growing source of long-term funding.
Though Brazilís pension funds have grown steadily in recent years, they are still very small in relation to the economy, under 15% of GDP. The great bulk of firms still lack a pension scheme. The government wants to boost the growth of pension funds as part of its plans to develop the countryís stunted capital markets. It is trying to update the pensions law in ways that would encourage more pension funds to be set up, improve transparency and toughen the penalties for mismanagement and fraud.
Yet rows within the governing coalition mean that the proposals are stalled in Congress, along with many other needed financial reforms.So in the meantime, the government is trying to sort out scandals and financial problems that have long festered at existing pension funds. Last November it appointed Solange Vieira, a young high-flyer in the civil service, as the chief pension-fund regulator. There has since been a flurry of rule changes as well as an unprecedented amount of intervention in the affairs of the pension funds.
Most recently, on February 7th, Ms Vieira fined eight funds for exceeding the limits for investing in the shares or bonds of any particular company. On the same day she asked public prosecutors to file criminal charges against TransBrasil, an airline, which has been collecting pension contributions from its staff but not paying them into its fund. The problems are worst at the pension funds of publicly owned companies, long prone to political meddling and corruption. These funds have a history of blowing huge sums on property speculation and failed business ventures.
Sharpening the fundsí regulation seems reasonable. All the same, the fundsí bosses are furious with Ms Vieira, whom they accuse of making hasty and ill-thought-out decisions. Instead of building public confidence in pension schemes, they say, she undermines trust by exaggerating the scale of the problems. Ms Vieira, in turn, complains of fundsí reluctance to admit to the shortcomings: they should, for instance, be putting more realistic values on property ventures that have bombed. By her reckoning, merely to value pension-fund investments at book value would mean an injection of 9 billion reais ($4.5 billion) to meet future obligations.
The biggest fuss has been over the regulatorís announcement last month that the minimum retirement age will be raised in stages, from 55 to 65 (Brazilians are now living longer than they used to). The funds complained that the move would stop companies that needed to restructure from being able to offer early retirement to a greying workforce. The regulator responded by putting out a further instruction. The funds say it is an about-face. Ms Vieira says she was simply clarifying their misunderstanding of her first announcement, which says early retirement can be granted, provided the regulator deems that the fund can pay for it.
Shortly before this row there was yet another, over a ban on pension schemes putting money into investment funds that charged performance-based fees. Again, the pensions bosses protested, and a fresh regulation was issued that seemed to countermand the original. Ms Vieira says it was another financial regulator, the National Monetary Council, that put out the first regulation; she realised they had erred, and issued another to overrule it. Performance fees are now acceptable only so long as the investment fund outperforms the yield on government bonds, which are currently around 15%. Regulators suspect that some investment funds have bribed pension-fund bosses in return for over-generous performance fees.
The pension-fund bosses complain that Ms Vieiraís edicts, heavy-handed and incoherent, actually discourage companies from setting up schemes. In principle, they are perhaps entitled to be sensitive to this problem: Brazilian governments have traditionally suffered from legislative incontinence, issuing a constant stream of ill-considered and badly drafted laws and rules. In practice, years of slack supervision, in which pensions problems have mounted, give Ms Vieira every reason to act. A pity that communication between her and the funds has broken down.
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