Brazil: Investment By Brazilian Complementary Pension Funds

The main purpose of the Brazilian Complementary Pension Plan Entities ("CPPE") is to create private pension funds complementary to the public Social Security benefits, upon contribution of its participants, their employers or both.

The CPPE may be divided into open entities and closed entities, according to their relation with the beneficiaries.

Closed CPPE are accessible exclusively to employees of a company or a group of companies, who are denominated 'sponsors', or to associates or members of professional entities, the later called founders. The closed CPPE are organized as foundations or civil associations and their activities are controlled by the Social Security Ministry.

Open CPPE shall be formed as corporations (sociedades anônimas) and shall have as main purpose the operation of benefit plans created with contributions either through one sole payment or continuous payments, and accessible to any individual.

Complementary Law 109, of May 29, 2001, established the basic rules governing the Private Pension Fund Regime in Brazil. Resolutions 2829 and 2850 of the Central Bank of Brazil (the "Central Bank"), dated, respectively, March 30, 2001 and July 2, 2001, established the alternatives and limits for investment of funds by closed CPPE and Resolutions 2639/99, 2522/98 and 2518/98, basically, provide for the general rules relating to investment of technical reserves by Brazilian open CPPE.

I Closed Complementary Pension Plan Entities

According to Resolutions 2829/01 and 2850/01, the funds of a closed CPPE may be invested in any of the following alternatives, which are explained in more details herein below:

  • Fixed Income Investment
  • Variable Income Investment
  • Real Estate Portfolio
  • Loans and Financing Portfolio

1. Fixed Income Investment

For the purposes of the CPPE rules, fixed income investment may be divided into low, medium and high credit risk.

The low risk portfolio includes:

  1. bonds issued by the National Treasury or the Central Bank, credits guaranteed by the National Treasury and bonds issued by the States and Municipalities that have been refinanced by the National Treasury;
  2. bonds issued by the States and Municipalities and classified with a low credit risk;
  3. certificates and bank deposit receipts and any other fixed income bonds and securities issued by financial or other institution authorized by the Central Bank to operate in Brazil and classified with a low credit risk;
  4. savings accounts' funds deposited with any of the financial institutions referred-to in (iii) above;
  5. debentures, certificates of real estate receivables, certificates representing commercial purchase and sale's agreements (according to Resolution 2801/00 1), and any other fixed income securities issued by corporations (sociedades anônimas) which distribution was registered with the Securities and Exchange Commission (Comissão de Valores Mobiliários - CVM) and classified as low credit risk; and
  6. quotas of funds of investment abroad, according to Resolution 2111/94.

Medium and high credit risk investments include:

  1. bonds issued by the States and Municipalities;
  2. certificates and bank deposit receipts and any other fixed income bonds and securities issued by financial or other institution authorized by the Central Bank to operate in Brazil (not with low credit risk);
  3. savings accounts' funds deposited with any of the financial institutions referred-to in (b) above;
  4. debentures, certificates of real estate receivables, certificates representing commercial purchase and sale's agreements (according to Resolution 2801/00 2), and any other fixed income securities issued by corporations (sociedades anônimas) which distribution was registered with the Securities and Exchange Commission (CVM) and not classified as low credit risk.

Derivative instruments that result in pre-fixed income are considered as fixed income investments for the purposes of CPPE rules. Therefore, closed CPPE are allowed to negotiate derivative instruments in the stock exchange or securities and commodities exchange exclusively under the modality "with guaranty".

1.1 Applicable Limits

Funds of the closed CPPE invested in fixed income portfolio are subject to the following limits:

  1. up to 100% of the investment in portfolios with low credit risk described in (i) above;
  2. up to 80% of the investment in the portfolios described in (ii) to (v) above;
  3. up to 10% of the investment in the portfolios described in (vi) above;
  4. up to 30% in medium and high credit risk portfolios, for defined contribution plan;
  5. up to 20% on the remaining medium and high credit risk portfolios.

The funds of the closed CPPE invested in fixed income are further subject to the following diversification requirements (except for bonds issued by the National Treasury or the Central Bank and those guaranteed by the National Treasury):

  • The totality of the bonds and securities issued and/or with co-obligation of a same State or Municipality, of a same non-financial legal entity, its controlling shareholder, companies directly or indirectly controlled thereby and affiliates or other companies under the same corporate control may not exceed 20% (twenty per cent);
  • In case of investment in bonds and securities issued or with co-obligation of financial or other institution authorized by the Central Bank to operate in Brazil and in case of savings accounts' deposits, the total amount of the issuance, the co-obligation or the liability of a same institution may not exceed:
    1. 25% of the net worth of the issuer, in case of an institution with low credit risk; and
    2. 15% of the net worth of the issuer in any other case.

2. Variable Income Investment

Investments by closed CPPE in variable-income funds may be classified as (a) Stocks Portfolio, (b) Participation Portfolio, and (c) Variable Income Portfolio - other assets.

Stocks Portfolio includes:

  1. stocks, subscription bonuses (bônus de subscrição), receipts of stock subscription and certificates of stock of open companies acquired in stock exchange or over the counter market by a company authorized by CVM;
  2. stocks subscribed through public issue or upon the exercise of the first refusal right.

Participation portfolios are composed of quotas of investment funds in emerging companies and other investment funds on participation.

Variable Income Portfolio - Other Assets includes the following alternatives of investment:

  1. securities' certificates of deposit guaranteed by Brazilian Depositary Receipts;
  2. shares issued by companies headquartered in Mercosur countries or certificates of deposit of such companies listed in stock exchange in Brazil;
  3. debentures with profit sharing and which distribution has been registered with CVM;
  4. certificates representing physical gold according to the standards negotiated in the securities and commodities exchange.

Closed CPPE may invest in variable income derivative instruments in stock or securities and commodities exchange exclusively under the modality "with guaranty".

2.1 Applicable Limits

The following limits shall apply to investments in variable income portfolio by closed CPPE:

  1. In respect of the totality of investments:
    1. up to 60% in case of plans with defined contribution;
    2. up to 45% in any other case.
  1. In respect of Stock Portfolio:
    1. for stock issued by companies in compliance with CVM's corporate governance rules and negotiated in the special segment of the São Paulo Stock Exchange ("BOVESPA"):
    2. a.1) up to 60% in case of plans with defined contribution;
      a.2) up to 45% in any other case.

    3. for stock issued by companies in compliance with CVM's corporate governance and disclosure rules (classified as Level 2 by BOVESPA):
    4. b.1) up to 55% in case of plans with defined contribution;
      b.2) up to 40% in any other case.

    5. for stock issued by companies in compliance with CVM's corporate governance requirements (classified as Level 1 by BOVESPA):
    6. c.1) up to 45% in case of plans with defined contribution;
      c.2) up to 35% in any other case.

    7. for stock issued by companies not listed in (a) to (c) above:
    8. d.1) up to 35% in case of plans with defined contribution;
      d.2) up to 30% in any other case.

  1. In respect of Participation Portfolio, the limits of 20% and 10% apply, respectively, for plans with defined contribution and for any other plans.
  2. In respect of Variable Income - Other Assets, the investment by closed CPPE is limited to 3%.

In addition to the limits provided above:

  1. the total amount of the investment in stock of one company may not exceed:
    1. 20% of the relevant voting capital;
    2. 20% of the relevant total social capital;
    3. 5% of the totality of the funds of the CPPE, provided that such limit may be increased to 10% in certain specific cases.
  2. for Participation Portfolio, the total amount invested in stock of one company may not exceed:
    1. 25% of the net worth of the fund, in case of inversions of the closed CPPE;
    2. 40% of the net worth of the fund for inversions of he closed CPPE together with inversions of the relevant sponsor.

3. Real Estate Portfolio

Investments in Real Estate Portfolio may be divided among the following portfolios:

  • Development Portfolio: investments under co-operation regime in real estate projects for eventual commercialization
  • Rent and Income Portfolio: investment in real estate projects to receive revenues in the future such as rent or participation revenue
  • Real Estate Funds Portfolio: investment in quotas of real estate funds
  • Other Real Estate Investment Portfolio: inversions in real estate for own use, real properties received as payment in kind or as payment for outstanding debts or guarantees, lands and other real estate properties

3.1 Applicable Limits

The totality of the funds of closed CPPE invested in Real Estate Portfolio may not exceed:

  1. 16%, for the years 2001 and 2002;
  2. 14% for the years 2003 and 2004;
  3. 12% for the years 2005 and 2006;
  4. 10% for the years 2007 and 2008;
  5. 8% from year 2009 on.

4. Loans And Financing Portfolio

Investments in Loans and Financing Portfolio are classified as follows:

  • Loans to Participants - loans advanced by the CPPE to its participants
  • Real Estate Financing to Participants - financing of real properties between the CPPE and its participants

4.1. Applicable Limits

Funds of the closed CPPE invested in Loans and Financing Portfolio are subject to the limit of 10%.

General Conditions and Limitations

Except as otherwise provided by applicable regulation, closed CPPE era not allowed to:

  • act as financial institution
  • invest in day trade operations
  • invest in derivative instruments with leverage above the relevant net worth
  • act as incorporator of real estate projects (either directly or through an investment fund)
  • trade with stocks through private negotiations
  • act in operational activities or negotiate with trade bills or credit instruments
  • invest in stock issued by companies not registered with the stock or over-the-counter markets
  • invest in stock of companies not in compliance with requirements of BOVESPA when so required
  • invest funds abroad
  • issue guaranty, aval, acceptance or in any way undertake co-obligations
  • loan, borrow, pledge or secure bonds and securities of its own portfolio

II Open Complementary Pension Plan Entities

The investment of the technical reserves of open CPPE may be made in any of the following modalities:

  1. Fixed Income Funds;
  2. Variable Income Funds;
  3. Public Notes issued by States and Municipalities and refinanced by the National Treasury and any credits guaranteed by the National Treasury 3
  4. Certificates of Deposit for Brazilian Depositary Receipts - BDRs (investment limited to 10% of the funds of the open CPPE) 4
  5. Public Notes issued by the National Treasury and/or the Central Bank, irrespective of its term5
  6. Certificates of Real Estate Receivables6

Applicable Limits

The non-committed funds (fundos não compromissados) of open CPPE may be invested in accordance with the following limits:

  1. up to 100% in notes issued by the National Treasury and/or the Central Bank;
  2. not more than 80%, severally or cumulatively, in the following fixed-income investments:
    1. notes issued by the State or Municipal Treasuries;
    2. time deposits, debentures with public issuance, foreign exchange notes, debentures pledge notes, mortgage notes, real estate notes, mortgage bonds, promissory notes issued by corporations, notes issued by BNDES, Rural Debt Notes, Economic Development Notes;
    3. savings account deposits, physical gold, quotas of financial investment fund.
  3. not more than 50%, severally or cumulatively, in the following variable income investments:
  4. x. stock issued by open companies, subscription bonus and certificates of deposit of companies domiciled in the Mercosur;
    y. quotas of mutual investment funds or financial investment funds;
    z. stock issued by closed companies and acquired under the privatization program

  5. not more than 30%, severally or cumulatively, in urban real property or rights arising out of sale thereof or real estate investment funds;
  6. not more than 10%, severally or cumulatively, in loans to participants of the plan.

The committed funds (fundos compromissados) of open CPPE may be invested in accordance with the following limits:

  1. up to 100% in notes issued by the National Treasury and/or the Central Bank;
  2. not more than 60%, severally or cumulatively, in the following fixed-income investments:
    1. time deposits, foreign exchange notes, mortgage notes, debentures pledge notes and notes issued by corporations and destined to public offering;
    2. saving account deposits, physical gold, quotas of financial investment fund.
  3. not more than 50%, severally or cumulatively, in the following variable-income investments:

x. stock issued by open companies
y. quotas of mutual investment funds or financial investment funds.

The technical reserves of open CPPE may not invest be invested in notes, securities and mutual investment funds issued, guaranteed or managed by related parties.

In addition to the limits provided above, the open CPPE may not:

  • act as financial institution
  • issue guaranty, aval, acceptance or in any way undertake co-obligations
  • negotiate with trade bills or credit instruments
  • invest funds abroad
  • loan, borrow, pledge or secure bonds and securities of its own portfolio

Footnotes

1 Resolution 2801 of December 7, 2000, enacted by the Central Bank authorizes the investment by the CPPE in certificates representing purchase and sale's agreements described therein.

2 Resolution 2801 of December 7, 2000, enacted by the Central Bank authorizes the investment by the CPPE in certificates representing purchase and sale's agreements described therein.

3 Resolution 2734, June 28, 2000, of the Central Bank

4 Resolution 2717, April, 12, 2000, of the Central Bank

5 Resolution 2639, August 25, 1999, of the Central Bank

6 Resolution 2518, June 2, 1998, of the Central Bank

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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