Nearly a fifth of employer-sponsored plans show shortfall as bond-heavy portfolios face test
Billion-real deficits at Brazilian pension funds are drawing scrutiny and raising concern as interest rates are expected to decline this year. Data from the Ministry of Social Security show that 233 of the country’s 1,129 pension plans had accumulated a combined deficit of R$28 billion as of September 2025, the latest available figure.
The most problematic are defined benefit (DB) plans, the oldest and often structurally flawed. They account for 55% of the pension funds’ total assets and posted a deficit of R$2.7 billion through September last year. However, cyclical issues in variable contribution (VC) and defined contribution (DC) plans have also fueled concern and weighed on overall sector results.
A survey by the National Superintendence for Supplementary Pensions (Previc), requested by Valor, shows 199 deficit equalization plans are under way at 89 closed supplementary pension entities (EFPCs). These are entities sponsored by public or private companies, or with multiple sponsors, that have been charging additional contributions to rebalance assets and liabilities, most of them implemented through 2024.
Alcinei Rodrigues, Previc’s director of regulation, said the concentration of 86% of pension funds’ portfolios in fixed income, almost entirely in federal government bonds, “is an aberration” that worries the regulator.
“With real interest rates over the next two years, it will still be comfortable to meet the actuarial target,” he said. “But markets anticipate events, so the best investment opportunities arise early, and you have to move ahead with the correct diagnosis.”
Slow portfolio shift
Rodrigues said the regulator’s concern is that to remain solvent and secure in 2028 and 2029, funds must begin preparing this year. “I am worried about this migration. Pension funds do not make U-turns. They are like ocean liners moving slowly.”
He added that pension funds have lost the expertise to manage risk assets and need to rebuild that capacity. In 2010, equities accounted for 33% of sector assets; by 2025, that share had fallen to 8%. Globally, he noted, pension fund portfolios tend to be roughly evenly split among equities, private fixed income and alternatives such as private equity, structured products and real estate. “There is no allocation to government bonds. But in Brazil, pension funds rushed into the easy returns of high interest rates, which mask performance by delivering high yields on risk-free assets such as sovereign bonds. Now, with the market expecting the start of monetary easing, we will return to normality,” he said.
In 2025, high interest rates helped funds move from a R$9.8 billion deficit in December 2024 to a small surplus of R$10 million as of September, Ministry of Social Security data show. The R$2.7 billion deficit in DB plans, while still significant, marked a sharp improvement from the R$11.2 billion shortfall in December 2024.
Only variable contribution plans posted a surplus last year, totaling R$3.2 billion. Defined contribution plans posted a deficit of R$558 million through September 2025.
More vulnerable
Rodrigues said smaller pension funds with DC plans require closer monitoring, as their exposure to government bonds is even higher. DB plans, by contrast, are larger, have greater allocations to risk assets and maintain bigger, more qualified teams. “Conventional wisdom says DC plans outperform DB plans, but in terms of returns the reality is the opposite.”
He cited data showing that over the past 15 years, cumulative returns reached 397% for DB plans, compared with 337% for DC plans and 370% for VC plans. Of the 4.1 million participants in pension funds today, 887,000 are in DB plans, 1.9 million in DC plans and 1.3 million in VC plans.
Rodrigues said the concentration of actuarial deficits in DB plans often stems from rising liabilities triggered by decisions beyond plan management, such as changes in career and salary structures or increases in life expectancy.
Governance disputes
One example is Fapes, the pension fund for employees of the Brazilian Development Bank (BNDES). In 2002 and 2004, BNDES, its investment arm BNDESPar and its financing unit Finame signed debt acknowledgment agreements and later injected R$5.8 billion, in updated values, into Fapes’ defined benefit Basic Benefits Plan (PBB) in 2009 and 2010.
The amount unilaterally covered actuarial deficits caused, among other factors, by a 1989 reduction in the contribution ceiling for Brazil’s National Social Security Institute (INSS), which increased supplementary benefit payments, as well as job reclassifications and position unifications.
In addition, a change in employees’ contracts increased the daily work schedule by one hour, which, a Federal Court of Accounts (TCU) report said, “required the establishment of an actuarial counterpart corresponding to the increase in Fapes’ mathematical reserves, in the total amount of R$337,833,460.58.”
The Secretariat for Coordination and Governance of State-Owned Enterprises (Sest), formerly known as Dest, opposed the injections and said “what exists in the PBB [Basic Benefits Plan] is an actuarial deficit, originating from insufficient funding of the plan and from recent negative investment results that failed to meet the actuarial target, and which must be funded by the sponsor and participants in proportion to their contributions.”
The TCU also ruled the injections were irregular because they were unilateral, without matching contributions from employees.
After a decade-long legal dispute, a 2024 agreement between Fapes and the BNDES set the terms for reimbursement. The pension fund will repay up to R$1.55 billion over 30 years.
Plan participants may migrate to a defined contribution plan. Those who switch will have their share deducted from the R$1.55 billion established in the agreement.
Migration deadline
Fapes declined to comment, but on a dedicated website created for the issue it says that “after the migration, the final amount to be repaid by the PBB to the sponsors will be determined and a specific Deficit Equalization Plan (PED) will be implemented for that repayment.” Participants have until midyear to decide whether to migrate.
Another high-profile case is Petros, the pension fund for employees of state-owned oil giant Petrobras. Its defined benefit Petrobras System Plans (PPSP), which cover 52,000 participants, have a R$42 billion deficit.
Sponsors, participants and retirees already receiving benefits are currently paying additional contributions ranging from 17% to 20% of their gross monthly income and 30% of their 13th salary to cover deficits from 2018, 2021 and 2022.
The company, the pension fund and participants are negotiating a migration to a defined contribution plan, in talks mediated by Previc and Sest and monitored by the Federal Court of Accounts (TCU). Discussions now center on ending lawsuits seeking coverage of the deficit.
Petrobras said it “values open dialogue with labor unions” regarding the PEDs (Deficit Equalization Plans). “The search for a solution to the issue remains under study by a multidisciplinary group, which includes representative entities of participants, and the work is ongoing.”
Petros said it “is sensitive to the impact of equalizing the PPSP-R [Petrobras System Plan] and PPSP-NR plans for participants and treats the matter as a priority. The search for a solution is being conducted within the Quadripartite Commission, which includes representatives of participants, the sponsor and supervisory bodies.”
The pension fund added that it has adopted an investment management approach with “greater predictability of returns and consistently contributes to delivering solid results.”
Stable despite deficits
Devanir Silva, president of the Brazilian Association of Closed Supplementary Pension Entities (Abrapp), stressed the distinction between structural and cyclical deficits in the sector, the latter caused, for example, by declines in equities.
In his view, roughly R$28 billion in both types of deficits does not endanger the system, which has total net assets of R$1.4 trillion. “There is no alternative but to equalize, and a solution cannot be postponed when it exceeds the limits set by CNPC Resolution 30/2018 [which establishes criteria for calculating and allocating results], but it is not something that undermines the system’s stability.”
Brazil currently has 264 closed supplementary pension entities and 1,129 plans, Ministry of Social Security data show.
Last year, Previc proposed to the National Supplementary Pension Council (CNPC) changes to the current model for calculating results to determine whether deficit equalization plans should be implemented and how surpluses should be allocated.
The proposal creates a tolerance period of up to three years for pension funds to resolve problems and return to target without charging extra contributions to participants. The idea is to give pension entities time to absorb temporary fluctuations in their solvency ratio. It also recommends that the combined normal and extraordinary contributions be capped at 35% of salary or pension benefits.
In addition, the regulator revised the parameters of its Annual Supervision and Monitoring Program (PAF) and, since 2024, has expanded oversight of funds to prevent problems.
Longevity risk
Giancarlo Germany, president of the Brazilian Institute of Actuaries (IBA), also said the system is balanced and benefits from predictable returns due to the large share invested in government bonds.
He noted that rising life expectancy is a risk not yet fully priced into pension fund accounts and will require measures to avoid future deficits. The pace at which longevity will increase, however, remains uncertain.
“In the late 1990s and early 2000s, there was a migration from DB plans to individual plans, DCs and VCs, which were not well designed,” he recalled. “Those participants are now reaching retirement without sufficient savings, lacking adequate pension coverage.”
Germany said other countries are seeking a new sustainable model, but few have reached firm conclusions. The idea is to find a middle ground between DB and DC plans, with risk shared between companies and employees.
In Brazil, there is also debate over hiring reinsurers, with risk premiums paid collectively to provide coverage in the event of deficits caused by increased longevity.
Another option would be to use surpluses to build reserves for future shortfalls instead of returning money to participants. “It is a challenge to be faced, but the new models are still being tested around the world and we do not know whether they will succeed,” he said.
*By Liane Thedim — Rio de Janeiro
Source: Valor International
https://valorinternational.globo.com/