Disaster at Fund E: Following the herd to the precipice

Chile’s pension regulator has initiated a historic sanctioning procedure against all seven private pension fund administrators, known as AFPs, following the severe value losses recorded in conservative investment funds D and E. The Superintendency of Pensions announced this decision after concluding its oversight actions regarding the financial downturns that particularly affected these specific funds. The regulatory body stated that it must investigate whether the administrators failed to uphold their duties of loyalty and diligence. This legal obligation is defined under Article 147 of Decree Law Number 3500 from 1980 and the General Norm Number 340 issued on July 18, 2025. The regulator explained that Article 147 requires administrators to perform all necessary management tasks to ensure adequate profitability and security for the funds they manage. It mandates that operations involving the acquisition or sale of securities using fund resources must exclusively serve the interest of the funds. Furthermore, General Norm Number 340 unified existing regulations and introduced a new chapter on fiduciary duties within the Pension System Norm Compilation. This norm defines fiduciary duty as the conduct required of persons managing or safeguarding interests belonging to others, whether arising from trust relationships or special legal obligations. Under these rules, AFPs have explicit duties of care and skill regarding the management of affiliate resources. Key responsibilities include safeguarding pension funds, detecting and avoiding conflicts of interest, and incorporating standards of diligence into their core activities. Recent data reveals that Fund E suffered massive losses across the industry. Between January and September 2026, the fund accumulated a real return of negative 10.39 percent. The performance was strikingly similar among all administrators. Model recorded a loss of 10.93 percent, while Capital lost 10.76 percent. Cuprum saw a decline of 10.43 percent, Provida dropped 10.35 percent, PlanVital fell 10.10 percent, Habitat decreased 10.02 percent, and Uno lost 9.91 percent. Analysts point to the incentive structures governing these funds as a potential explanation for this uniformity. A portion of the evaluation depends on how each administrator performs relative to peers. For funds C, D, and E, the benchmark is the annualized real return over the last 36 months. The minimum required performance for each AFP is calculated as the lower of two values: the industry average minus two percentage points, or that same average minus half of its absolute value. If an AFP falls below this floor, it must cover the difference with its own resources. This can be done using a reserve called equity, which belongs to the administrator and is invested in the funds. If the administrator fails to cover the difference or replenish the equity within established deadlines, the law mandates the dissolution of the entity. Critics argue that this rule creates pressure to mimic competitors, potentially leading to collective risk-taking behavior. The complexity of designing such rules does not exempt administrators from explaining their decisions or acknowledging errors made. Reviewing incentives and demanding accountability from managers are tasks that should proceed simultaneously. The primary responsibility lies with the administrators who decided how to invest and what risks to assume with contributors' savings. They must address the public with full transparency. Explaining their incentives does not absolve them of the need to justify those decisions. Managing preventive savings requires meticulous evaluation of the risks associated with each strategy. The current situation highlights the need for clarity in how these financial instruments operate during periods of market stress. The Superintendency of Pensions emphasized that the sanctioning process is unprecedented in scope, targeting every participant in the system. The investigation will focus specifically on whether the investment decisions adopted violated the statutory duties of care. The regulator noted that the recent losses in Funds D and E were significant enough to trigger a comprehensive review of compliance. The outcome of this procedure could result in penalties or other corrective measures depending on the findings of the investigation. The authorities aim to determine if the administrators prioritized competitive positioning over the safety of affiliate assets. Market observers note that the similarity in losses suggests a lack of diversification in strategies across the sector. When one fund takes a position, others often follow, creating a herd effect that amplifies systemic risk. The regulatory framework attempts to prevent excessive risk through minimum return requirements, but critics suggest it may inadvertently encourage conformity. The ongoing sanctions process represents a critical test for the enforcement mechanisms designed to protect pensioners' wealth. The final determination will hinge on evidence gathered during the completed oversight phase. Administrators face the prospect of formal charges based on their adherence to the newly clarified fiduciary standards. The resolution of this case will set a precedent for future accountability in Chile's pension system.