The more than one thousand territorial entities (municipalities and governors) bring a legacy of pension systems that have been withering away since the implementation of Law 100. However, these entities maintain pension commitments acquired previously, which is reflected in a projected future liability, usually several decades into the future. The entities have been fulfilling the task of funding this liability, and the MHCP is in charge of managing these funds, grouped in the FONPET. Under the auspices of the Multilateral Bank, Quantil support was sought to collaborate with the design of specific elements of the new contracting of third parties specialized in portfolio management that the MHCP sought to carry out over the course of 2023. These elements, which included the structure of commissions and incentives payable to third parties, investment guidelines and limits, penalties for poor performance, alignment requirements in terms of own resources invested in the fund, the possibility of segmenting entities according to their future commitments and risk limits, required a quantitative and financial analysis in line with portfolio optimization theory, the ALM paradigm of aligning assets with liabilities, relative risk quantification and contract design theory.
The analysis began by describing the objective of the fund, in the sense of optimizing the coverage it can provide for future commitments. The stochastic projection of these commitments lent itself to quantifying the risk of investment portfolios in terms of their deviation; in essence, a high deviation puts the liability coverage at risk. This relative analysis required an assertive modeling of the relevant risk factors, highlighting fixed income instruments, but generally encompassing the universe of permissible investment instruments. With this model, the design of the contractual elements could be determined on the basis of the risk profile of the entities, since it allowed to propose a maximization of their expected utility, which depended on the behavior of the economic agents, who in turn respond to these contractual elements to maximize their own expected utility.
Considering the high uncertainty inherent in the time frames analyzed, the study yielded robust conclusions regarding the contractual scheme that would optimize the benefit to the entities. These points were presented in several rounds to different stakeholders and decision makers, who included the conclusions of the model in a subsequent analysis that could include additional elements of political, legal, operational, and general practicality to make decisions on the steps to be taken.
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