SAO PAULO: The Brazilian government cut the target rate of return for pension funds for the coming six years on Thursday in a move long awaited by money managers following a fall in borrowing costs to record lows.
Industry watchdog National Pension Council, known as CNPC, will lower the so-called actuarial target rate of return for state- and private-sector-run funds by 0.25 percentage point per year between 2013 and 2018. Currently, funds have to post a minimum return rate of 6 percent on top of the benchmark IPCA consumer price index.
According to CNPC, about half of pension funds in Brazil have been working with actuarial targets below the 6 percent limit. About 42 percent of pension funds were still using the 6 percent benchmark. Funds in Brazil manage a total 626 billion reais ($298 billion) of retirement money.
"The decision reflects the current scenario of lower interest rates in the Brazilian economy," CNPC said in a statement.
The move underscores one of the many long-term implications of lower borrowing costs in Brazil, where for years fixed-income investors and retirees earned the highest returns of any in the world's 20 biggest economies. Apart from reducing the cost of credit for companies and individuals, lower rates might also fan risk-taking among investors to counter a decline in returns.
The central bank on Wednesday kept the Selic benchmark overnight lending rate at a record low 7.25 percent. A decade ago, the Selic was around 26 percent.
In the statement, Jaime Mariz, a senior pension ministry official, said the move also aims to encourage funds to diversify their assets and "move their investment focus from government debt solely".
Investors including Paulo Corchaki, who as chief investment officer of Ita Asset Management manages 300 billion reais in assets, said that from now on pension funds will have to boost purchases of corporate debt, exchange-traded funds and shares in funds made up of asset-backed securities to beat the returns offered by the most traditional asset classes.