Chile's central bank prepares investment measures to mitigate pensions withdrawal

SANTIAGO (Reuters) - Chile’s Central Bank said on Friday that it will intervene to mitigate a possible uptick in market volatility with a second drawdown by citizens from their privately held pension funds, aimed at alleviating the economic impact of the coronavirus pandemic.

FILE PHOTO: An empty street in a commercial sector of Santiago, during a preventive quarantine following the outbreak of coronavirus disease (COVID-19), in Santiago, Chile, April 16, 2020. REUTERS/Pablo Sanhueza/File Photo

The bank said in a statement that the process, as happened with the first withdrawal approved in July, would result in “an important liquidation of assets” by the Pension Fund Administrators (AFP) to comply with the payments.

As a result, it said it would reopen programs deployed during the first citizen drawdown from the pension funds to buy up to $16.250 billion in shares, term deposits and securities that could be offloaded by the AFPs.

The programs will be in effect between Dec. 9 and Feb. 15, the bank said.

Chile’s congress approved a fresh withdrawal of 10% of funds on Thursday night after intense negotiations with the government to prevent it from blocking the initiative, which was originally proposed by opposition lawmakers.

Congress approved a first withdrawal of funds in July, with the support of government legislators but amid staunch opposition from the Pinera government itself, as a way of dealing with the economic crisis.

The government warned that eating into pension funds as an emergency COVID-19 measure would diminish or wipe out altogether already low payouts to retirees, and that citizens should rely on its own package of measures instead.

The central bank president last month told congress that the first withdrawal had a positive effect in reducing household debt and bolstering the struggling local economy. He said a second drawdown would make markets nervous about such raids becoming a new norm, and its positive impact on the local economy would be less.

Signing the new withdrawal bill into law on Thursday, President Sebastian Pinera reiterated his warning about the “negative effect” on current and future pensioners.

He appealed to senators to fast-track a pension reform bill introduced by the government to bolster official and company contributions to pensions.

Reporting by Aislinn Laing; editing by Jonathan Oatis