Governance at Risk in the State-Linked Pension Funds in Brazil: MORAL Constraints on Labor Union Movements As Board Members.

Friday, June 24, 2016: 10:45 AM-12:15 PM
639 Evans (Evans Hall)
Luiz Carlos Brito Lourenco, Universidade de Brasilia, Brasilia, Brazil

Conflicts of interest have high costs and moral hazard issues may arise in unbalanced principal-agent relationship. Incentives to agents are ways to align interests to reduce information asymmetry and the risk of non-performance of principal’s objectives. The purpose of this paper it to shed a light on the harmful influences by the State in the governance and autonomy threatening sponsors and beneficiaries' rights and voices in major Brazilian Pension Funds (PFs).

                  During the sixties, military regime reassured the social security regime granted by the "Estado Novo" dictatorship (1930-1945) by extending to all professional categories, and consolidated in one national institute (INSS). Once restored democracy, the worker's rights embedded the Constitution of 1988, including universal health assistance. The evolution of capital markets in Brazil structured the industry by law of 1977 which formed "opened" and "closed" PFs. Amid the economic miracle of seventies, state-owned corporations built robust own systems representing one fifth of the workforce expenses. 

                  Thus, the most prominent PFs in Brazil are directly linked to the State. Established in the first half of the last century, and designed to benefit state-companies' retired employees, PREVI   and PETROS represented one third of the total investments of the industry in the country in 2013, composed by a total of 256 institutions. Coveted by capital markets, on the eve of the millennium PFs were asleep in fixed income and real state. Discovered as institutional investor government's arm with an unexplored source of domestic savings, they promoted the privatization process in mining and telecom amid the early years of the Plano Real. Almost two decades after agents led to diversify theirs portfolios in shares of commodities' exporters or buying papers issued by non-traditional private investments funds as well.

                  In 2001 sponsoring organizations have formally come to rely on casting votes to persuade decisions on future investments in the PFs' boards. Loosing ground seemed an outrage if we consider employees as principal, and PFs' boards of directors as their agent. PF’s directors in charge are partially appointed by their sponsor companies. However, in 2003 labor union movements took posts at the boards of administration wherever State was present. Investments were then run according to the interests of the central administration. Equities have assumed more than half of assets in the case of PREVI, although interest rates payed by Treasury were consistently high.

                  Respecting central guidelines, evidences of bad choices are reflected in the PFs performances especially since 2009. Aligned in favor of a so-called 'new developmentalism', the market fundamentalism was in fact what oriented decisions to convert portfolios on bankrupted private investment funds or junk bonds.Facts and figures show that labor union movements' representatives have been empowered to operate as expected by the interests of the federal government.

                  Although opportunities in the capital market may improve the retirement benefits in order to meet the needs and expectations of participants, government selected discrectionally champions firms already supported by BNDES, the official long-term development bank.  Even though CFOs affirm that their decisions are based on the use of portfolio´s efficiency frontiers inspired by Markowitz and Sharpe, results suggest different weights of political origin.

                  In Congress an investigation is supposed to close in march 2016 to reveal failures and mismanagement in PFs. First reports suggest that PREVIC, a surveillance agency has limited expertise if compared with the Central Bank, and the Stock and Values Commission.  During the crisis in 2009 there were penalties on board members for derivative transactions. Moral risks are supposed to be prevented by introducing  transparency and commitment arrangements, and also safe instruments but far away of the ordinary corporate governance practices.                

KEY WORDS:  Governance; Pension Funds; Moral Economies


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PREVI assists Banco do Brasil's  191,000 active and passive bank officers; and PETROS assists Petrobras's  159,000 members of the national oil corporation.

"Plano Real" was the well-succeeded stabilization program which introduced the new Brazilian currency in 1993.

Cases widely covered by specialized press are OGX (Eike Batista's oil and gas company) which caused USD 1 billion in losses to Postalis (130,000 Post Office members), and BVA, a second-class bank damaging more than 70 pension funds in the country (most of them participated by municipalities' civil servants).

PREVI has three tiers "investment philosophy": "(a) the adoption of key assumptions of management of assets and liabilities, also (b) articulated classes of assets and their respective importance in the portfolio, and (c) clear parameters of risk and return , which should be systematically monitored and reassessed." A "frontier efficiency" with features the choice of methodology for portfolio optimization  based upon the diagnosis that volatility risk increases as the need for liquidity becomes increasingly intense movements of asset sales. (PREVI Annual Report 2013).