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Abstract
This article examines the regulatory framework for managing the credit risk of pension funds in Brazil. We believe that the current framework is not very effective at controlling credit risk, and also overly limits the investment possibilities of pension fund managers. We consider the regulatory framework for banks as an alternative approach for future developments, and propose that the rules on credit risk exposure of pension funds and banks be made uniform. The resulting regulatory framework would be more effective and easy to monitor, facilitating the work of external supervision and auditing. Finally, we present a numerical example using real data on six Brazilian pension funds to illustrate the proposal.
Highlights
Pension funds are extremely important as vehicles for forming internal savings
We present some practical examples as a way to illustrate the existing fragility of Brazilian regulation on credit risk management by pension funds
As a reflection of the evolution of the regulatory framework for banks in Brazil, below we set out a proposal for the credit risk evaluation of pension funds that is based on the standard method of Pillar I of the NBCA
Summary
Pension funds are extremely important as vehicles for forming internal savings. Their assets represent roughly 18% of Brazil’s GDP according to the Brazilian Association of Private Closed Pension Entities (ABRAPP (2006)). Two examples stand out: In November 2004, some pension funds held investments in bank certificates of deposit in Banco Santos. A paradigm shift and the significant improvement in Brazil’s economic fundamentals, combined with a benign external scenario, are causing the expected real interest rate on these investments to fall, in the short, medium and long term Faced with these expectations, various pension funds have been changing their investment strategies by increasing their investments in long-term bonds issued by the private sector. We present some practical examples as a way to illustrate the existing fragility of Brazilian regulation on credit risk management by pension funds. We examine the main advances in credit risk management in the banking sector, to base possible improvements in the regulation of pension funds. The fifth section contains a proposal for regulatory change, along with a practical analysis of some Brazilian pension funds, and the sixth section concludes
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