SANTIAGO, Chile — With six years to go before retiring, Gloria Bure suddenly found that $20,000 of the savings she had tucked away over the decades had vanished.
A privately managed pension fund — which she had been forced to give 10 percent of her salary each month — lost the savings in the stock market. And it wasn't going to give it back. The additional 3 percent of her salary that Bure and 8.4 million others had to pay to pension funds as a commission fee stayed in the pockets of the fund's owners.
Bure's situation is now common throughout Chile, as private pension funds are reporting huge losses.
On Jan. 12, the superintendent of pensions released grim figures for 2008. The pension funds had lost $21.6 billion of people’s savings in the stock market due to the global financial crisis. Worst hit were those who placed their money in high-risk investments abroad, and were told all year long by pension fund executives not to shift their savings to more stable investments.
The pension fund disaster comes after recent attempts to reform Chile's pension system.
Early into her term, Chile's current president, Michelle Bachelet, pushed through reforms aimed at increasing state-subsidized pensions, assuring social security for low-income homemakers and requiring independent workers to contribute money to the private pension system voluntarily, something most are not willing to do.
The much-heralded pension reform placed an even heavier burden on the budget, but didn’t overhaul the system as expected. The private pension funds continued having the time of their lives, profiting from generous annual returns. Until now.
The private system began in 1981, when Augusto Pinochet's military dictatorship privatized the pay-as-you-go social security system. Private companies would manage social security contributions, investing them in stocks and corporate and government bonds.
Workers were able to choose between staying in the old system or changing to the new one, and most made the change without turning back. That was the only time Chileans could choose between the systems: From then on, anyone entering the workforce had to enter the new, privatized pension system (the funds are referred to in Chile as pension fund administrators, or AFPs). Members of the military are the exception — they have their own system, and their pensions are among the best in the country.
Although the companies reaped enormous profits, the pensions they provided were low. They also left out a huge portion of the population: 30 percent of Chileans couldn't contribute enough to make them eligible for a pension from the private system. Most of those workers ended up receiving state-subsidized minimum pensions.
Hence, Bachelet's attempt at reforms.
For Bure and millions of other contributors, the current failure of the private funds has been a disaster. Bure, a dentist at a public hospital, called her pension fund last year when she was concerned about potential losses. They advised her against changing to a less-risky fund. She obeyed. Pension funds did the same with other customers, assuring them that things would improve.
Then came the debacle in October. In just one month, the funds lost more than 21 percent of the savings they were handling. By then, Bure had already lost more than $10,000.
“I started checking my savings online every day," she said. "I was losing more than $1,600 daily. On Oct. 6, I finally asked the AFP to change me to a less risky fund. In the eight days they took to do that, I lost another $10,000.” By the end of 2008, she had just $65,000 of the $85,000 she put away for retirement.
Now her pension fund says it will only be able to pay her a monthly pension of $430, far less than her current monthly salary of $1,460.
“It’s ridiculous," Bure said. "I have a colleague who remained in the old system and retired a year ago with a pension of more than $1,000. The AFPs are a fraud. They should assure a minimum 4 percent return on investment or else compensate us."
In fact, there are regulations requiring the private funds to tap into their own capital to guarantee minimum returns, but apparently the superintendent of pension funds hasn’t been swift to enforce them. Twice this month, 55 members of Congress tried to establish a committee to investigate how the superintendent handled the crisis. Both attempts failed.
The current situation “will produce direct and absolutely irrecoverable effects on those who will be retiring during at least the next five years," Chilean Sen. Carlos Ominami said during a special session in December to discuss the losses. "Their pensions will be an average 36 percent lower due to these losses."
But who will make up for what is already lost? The government has been silent. Superintendent of Pension Funds Soledad Berstein has said the pension funds aren't at fault. Asked about the nearly $10 million the pension funds spent on advertising and promotion in the midst of the crisis last year, Berstein only said that her office didn’t oversee those expenses.
And the pension funds have turned a blind eye.
Some are now seeking compensation in court. In mid-December, the Central Workers Union filed suit against the pension funds on behalf of 500 union members. Several weeks later, the National Confederation of Municipal Health Service Workers filed suit against the state for $845 million in compensation — the group argued that the state should be held responsible for allowing these private companies to administer pension funds.
And Bure is seeking help from Chilean Sen. Alejandro Navarro, who is signing up people to file a class action suit against the funds.
Meanwhile, momentum for a state-managed pension system is growing. Last November, a survey conducted by the Institute for Research in Social Sciences found that 67.2 percent of Chileans want a state-owned system. A few months earlier, a group of senators introduced a bill to create one.