6.3 Pension funds as responsible investors in Brazil

The Brazilian pension system is based on a three-pillar pension model. Since the nineties it has been subject to reforms to restructure an “overgenerous” pension system created after the end of the military rule in 1988.1213 The first pillar consists of a pay-as-you-go social security system.14 This system is called the General Social Security Regime. It is a public and mandatory system which provides for defined benefit pensions for private sector employed workers, self- employed professionals and elected civil servants.15 It is financed by the payroll taxes, which are shared by the employer and the employee, revenues from sales taxes and federal transfers.16 The second pillar consists of voluntary Pension Regimes for Government Workers for public-sector employees. These are generally financed on a pay-as-you-go basis by the employees’ contribution through the payment of a percentage of their salary.17 The third pillar consists of the voluntary Complementary Pension regime, also called private pension regime. It comprises voluntary occupational corporate and individual pension plans, which may be offered by employers (single or multi-employer basis), insurance companies, pension funds, labor unions and class associations. It has the objective of generating additional income to the beneficiary in the future.181920 Closed pension funds in Brazil are non-profit organizations set with the single purpose of financing retirement pension and related death and disability benefits.21

The occupational pension system is offered by two types of institutions, (1) the open pension funds (in Portuguese, Entidade Aberta de Previdência Complementar); and (2) the closed pension funds (in Portuguese, Entidade Fechada de Previdência Complementar).22 The open pension funds resemble the private pension plans of the third pillar in other countries, as in the Netherlands, which is open to all individuals. In Brazil, these are supervised by the Insurance Supervisory Authority (Superintendencia de Seguros Privados), which is a semiautonomous body subordinated to the Ministry of Finance.23 The closed pension funds are similar to the foundations in the Netherlands (see below in section 4.3), and they are supervised by the Complementary Pensions Secretariat (Secretaria da Previdência Complementar, SPC) part of the Ministry of Social Security.24 Closed pension funds, like the PREVI, are restricted to certain professional groups that are part of companies, union labors or class entities. The pension regulator for the occupational pension in Brazil is the National Superintendence of Complementary Social Security (or PREVIC). The PREVIC was created in 2009, it is an autonomous organization and it is financed by fees paid by the pension funds based on their assets under management.2526

The supervision, regulation and policy development of pension funds in Brazil is under the responsibility of different entities. The supervision of pension funds in Brazil is of the responsibility of the National Superintendence of Private Pension Funds (“PREVIC”) established in 2009 and subordinated to the Ministry of Social Security.27 The PREVIC supervises, among others, the governance, disclosure, investments and fees of closed pension funds.28 The PREVIC is a semi-autonomous agency and administered by a board. The regulation of the Brazilian pension system is part of the responsibilities of the National Board of Complementary Pensions whereas policy development is part of the responsibilities of the Secretariat of Complementary Pensions Policies.29 As for the investment regulation, Resolution n. 3.792/2009 of pension funds, was passed by the Brazilian Monetary Council (Conselho Monetario Nacional – “CMN”) in 2009, requiring closed pension funds to use due diligence, comply with the law and adopt high ethical standards in investment process and decision-making.3031 Article 16, chapter V (investment policy), paragraph 3, section VIII of the Resolution requires closed pension funds to inform through their investment policy whether they integrate environmental and social risks in their investment practices.32 The PREVIC, as part of its supervisory duties requires pension funds to include in their annual reports if they comply with Article 16 of the Resolution.33

Resolution n. 3.792/2009 has been criticized (PRI, Fiduciary Duty in the 21st Century, 2015) given the recent developments of political uncertainty and instability caused by the impeachment crisis.34 The PREVIC has started to review Resolution 3.792.35 This revision has been carried out by the PREVIC in consultation with the Ministry of Finance, the ABRAPP and other relevant entities in the Brazilian financial markets.36 The objectives of the new Resolution include, a new model more adequate to the integration of ESG risks in the pension funds investment policies, similar to the Brazilian Central Bank’s Resolution No.43275 requiring financial institutions to adopt a Social-Environmental-Responsibility Policy since 2014 (see Chapter 3). The PREVIC was expected to pick up the revision works in the second quarter of 2017 but no updates have been made public. In May 2017, the PREVIC has published Instruction nr. 5, 29/05/2017, creating a new pension fund category, the “Systemically Important Entity” (in Portuguese, Entidades Sistemicamente Importantes - ESI), differentiating pension funds according to their size and relevance for the pension system.3738 In May 2017, the PREVIC categorized 17 pension funds as Systemically Important Entities. In an effort to strengthen the Brazilian pension system, these Systemically Important Entities will therefore, be subject to higher scrutiny on monitoring, governance, reporting and to a permanent supervision of their activity.39

Other relevant regulation pertaining pension funds in Brazil include, the Complementary Pension Law No. 108/2001 (“LC 108/2001”) covering pension funds’ governance structure and the Complementary Pension Law No. 109/2001 (“LC 109/2001”) together with the Complementary Pension Law (“Conselho de Gestão de Previdência Complementar” - CGPC) CGPC Resolution 28/2009 covering the accounting aspects. These complementary laws aligned Brazilian pension system to international pension systems.40

Brazilian pension funds do not follow the prudent person rule; they are required to follow the investment quantitative limitations set by the Brazilian Monetary Council (CMN) Resolution No. 3.792/2009 (Articles 35 to 40, Chapter VII, Section I).4142E.g. 100% for fixed income, 20% structured investments and 70% listed companies. Brazil has, however, been moving from a strict quantitative limitations to the prudent person rule.43

In Brazil, fiduciaries have to comply with their duties under Article 4 (I, II, III and IV) of the Brazilian Monetary Council (CMN) Resolution No. 3,792/2009. This article 4 establishes that pension funds’ managers, in their administration duties, shall observe the principles of transparency, among others, carry out their activities in good faith, with loyalty and diligence, follow high ethical standards and adopt practices that ensure the compliance with their fiduciary duty towards the beneficiaries.44

The Brazilian National Bank Employees Pension Fund (PREVI) is a non-profit closed pension fund entity, based in the city of Rio de Janeiro, in Brazil.45 The PREVI is the largest pension fund in Latin America with USD$ 62,7 of investments or assets under management in 2014 and USD $55,6 as of 2015.46 In 2016 was ranked, by SITAWI, Finance For Good,47 in the first position as the top pension fund in Brazil and reported to have USD 48.71 billion (R$ 166.593.634.000) of assets under management.48 The PREVI is a pioneer investor integrating ESG risks into their investment processes. The PREVI’s commitment to responsible investment has not been yet influenced by its members’ demand. The communication department conducted research to ascertain whether ESG was considered relevant to its members. Although the result was positive, as members recognized the importance of these themes they did not make any related demands.49 Part of PREVI’s strategy as a responsible investor and showing the commitment of the pension fund to responsible investment, it has developed a Social and Environmental Responsibility Policy and a Code of Corporate Governance Practices (Yamahaki & Gaban, 2015).50 This two responsible investment tools help PREVI to incorporate ESG risks in its investment policy, to select sustainable investee companies, fosters ESG practices within the investee companies and promotes responsible investment to its peers.

The PREVI is the most sophisticated Brazilian (and Latin American) pension fund in terms of ESG practices and responsible investment.51 It incorporates ESG risks across different asset classes and participates in numerous national and international sustainability and responsible investment initiatives. As an example, PREVI is a signatory of the PRI52 part of the PRI board, is very active the engaging with its Brazilian peers and frequently participates in debates, conferences and other circles on responsible investment and sustainability reporting.

Besides the relevant work of the Ethos Institute,53 Global Reporting Initiative, UN- supported Principles for Responsible Investment, UN Global Compact and the Stock Exchange B3, former BM&F BOVESPA, in Brazil, which have greatly driven awareness of responsible investment and ESG best practices along the Brazilian responsible investment chain, there are three other organizations who have contributed to scale-up ESG best practices amongst investors. 1) The PREVIC, the pension funds’ supervisory authority, which have encouraged responsible investment through guidelines such as, the Guides for Best Practices in Pension Funds; 2) The ABRAPP, the Brazilian Association of Pension Funds which have also published relevant engaging principles such as, the Basic Principles of Social Responsibility. Another initiative of the ABRAPP is the Social Report (“Relatório Social”), which was developed in collaboration with the Brazilian Union of Pension Funds (SINAPP). The Social Report was published for the first time 2007, and the latest report was published in 2010.54 It was published representing the common interest of pension funds and to aid pension funds to integrate ESG risks in their investment processes. In 2014 ABRAPP published the Guide for Writing Sustainability Reports directed at the closed pension funds in Brazil.55 In this guide the ABRAPP recommends the GRI reporting guidelines, as a benchmark, to be used by pension funds and their investee companies in their sustainability reports.56 And, 3) the Brazilian Financial and Capital Markets Association (ANBIMA)57 founded in 2009. The ANBIMA published the first sustainability report in 2016, in this report the ANBIMA addresses ESG risks in the investment processes by asset managers.58 This report is a landmark in the Brazilian responsible investment arena. It recognizes the growing ESG risk awareness among pension funds and the responsible investment chain in Brazil, different maturity levels of implementation, a significant number of pension funds not yet engaged, a trend of continuous growth of ESG risk integration in the pension funds investment strategies, the direct link between ESG interest from ESG asset managers and consultants and the investors, the similarity of the development of ESG integration among Brazilian pension funds to others, internationally, the relevance of international commitments such as the COP 21 to drive responsible investment, also in Brazil.59