In 1981, Chile introduced a mandatory defined contribution pension system. Employees are required to contribute 10 per cent of their salary and choose a private Pension Fund Administrator (AFP). AFPs are chartered as pension providers by the Chilean government and compete for individual accounts. This pension system has become known as the ‘Chilean Model’ and versions of it have been implemented in other Latin American countries. The public disclosures of the largest Chilean private sector Pension Fund Administrators (AFPs) were reviewed. 

AFP investment programs are dictated by regulation. AFPs are allowed to offer up to five investment funds, called Funds A to E, which have different proportions of their portfolios invested in equities. All AFPs must offer funds B to E, while fund A, the highest equity/highest risk fund is optional. All funds operate within regulated investment limits that cover investments in various asset classes and investment vehicles. AFPs must meet a minimum level of return for each fund that is tied to the average return for all funds of that type. There is a guarantee obligation that requires AFPs to top-up their underperforming funds. Not surprisingly, most AFPs invest in a similar way to ensure they are not required to inject capital into their funds.

AFPs set the administration fees they charge members, but the fee must be the same percentage of salary for all their members. These fees are known as commission and are applied to contributions into the funds. Commissions are intended to cover all AFP costs and generate a profit margin.