Measure wasn’t on wealth managers’ radar; government aims to safeguard income and prevent insurer imbalances

02/21/2024

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Debora Mendeleh — Foto: Divulgação

The restrictions on exclusive and restricted pension funds mark a continuation of government efforts to curtail tax avoidance practices among the ultra-wealthy. This initiative began with the biannual tax—known as the “come-cotas”—which targeted fixed-income, multimarket, and foreign exchange portfolios, as well as closed investment vehicles tailored for wealth management. Along with this came the introduction of a tax on offshore entities, along with restrictions on the issuance of real estate and agribusiness credit bills and certificates: real estate credit bills (LCI), real estate receivables certificates (CRI), guaranteed real estate letter (LIG), agribusiness credit bills (LCA), and agribusiness receivables certificates (CRA), a move aimed at stemming the tide towards tax-exempt securities.

The series of measures reached a new milestone on Monday evening during an exceptional meeting of the National Private Insurance Council (CNSP), which introduced a prohibition on the establishment of exclusive family pension plans for individual accounts exceeding R$5 million, effective immediately. This development, which wasn’t anticipated by the investment community, emerged amid broader discussions on open pension plan reforms during a public hearing.

According to a source closely monitoring the situation, this specific regulation was proposed by the Ministry of Finance as a strategic addition to the regulatory framework. The prompt for this action was an announcement by a leading financial institution about a new exclusive pension fund, raising concerns over the use of such structures solely for tax postponement. Additionally, there was apprehension within the insurance sector regarding the potential impact on pension fund balances from a substantial influx of capital.

With a combined total of approximately R$750 billion in exclusive and restricted closed-end funds, plus an additional R$1 trillion in overseas investment structures, the pension fund emerged as a key target for the reallocation of assets following the introduction of new tax legislation at the end of the previous year.

Debora Mendeleh, the head of distribution at Principal Claritas, interprets the government’s strategy as a dual effort to safeguard revenues while simultaneously stemming the tide of investments into funds that do not truly serve the purpose of accumulating long-term savings. She remarked, “It seems there was a realization akin to ‘Houston, we have a problem,’ leading to a proactive approach to address the issue head-on, given the pension fund presented an evident solution for these assets.”

While it appears that existing family-established pension funds, which have already been contributed to, will not be impacted by the new regulation, a definitive guideline from the Superintendency of Private Insurance (SUSEP) is still awaited. Current estimates suggest that approximately R$60 billion is held within these specialized structures.

Resolution 464, as detailed in Brazil’s Official Federal Gazette, sets forth specific criteria concerning the allocation of assets within pension plans and related investment funds. Specifically, it stipulates that when the calculated reserves for future benefits (PMBaC) for an insured individual exceed R$5 million in a single plan or in a specially created investment fund (FIE) linked to that plan, the assets cannot be exclusively or predominantly allocated to that individual and/or their immediate family members. Immediate family is defined to include a spouse, domestic partner, or relatives by blood or marriage up to the second degree of kinship.

A plan or FIE is deemed primarily dedicated to a single policyholder or a select group of policyholders if the reserves designated for an individual or the group—either individually or collectively—surpass “more than 75% of the total PMBaC of the plan or allocated to the FIE, respectively.”

In essence, the regulation prohibits the formation of new exclusive investment vehicles where individual balances exceed R$5 million. According to Ms. Mendeleh, “The core objective here is to prevent unchecked expansion through the shifting of mandates, ensuring that the pension fund remains true to its intended purpose as a means for accumulating long-term savings.”

The recent directive from the National Council of Private Insurance (CNPS) concerning exclusive pension funds caught industry stakeholders off guard, as acknowledged by Carlos André, President of ANBIMA, the body representing capital and investment markets. During a media luncheon, Mr. André remarked, “From a business standpoint, this decision eliminates certain opportunities. However, it’s premature to ascertain its full impact.”

Similarly, the National Federation of Private Pension and Life (FENAPREVI), which advocates for the personal insurance and open private pension sectors, was taken by surprise. Edson Franco, president of FENAPREVI, noted that while the published text is still under review and awaits further regulatory details, he emphasized that “leveraging exclusive closed-end funds for capital raising has never been a tactical focus for the industry.”

Mr. Franco highlighted the sector’s decade-long growth model that has propelled its assets to R$1.4 trillion by 2023, amounting to 13% of Brazil’s GDP. This growth has been driven by the attraction of long-term investments, distinct from general investment strategies. He acknowledged that while some market participants might have considered exploiting this avenue, pursuing fiscal advantages has not aligned with the sector’s growth strategy. Mr. Franco stated, “Our focus remains on identifying alternative pension savings solutions to the public system.” He also compared pension assets’ share of GDP in Brazil to other nations, pointing out that at 25%—including the R$1.3 trillion in closed-end funds—Brazil’s ratio is significantly lower than in countries like the U.S., where it exceeds 100%, and Chile, at around 60%.

For Carlos André of ANBIMA, who also serves as the executive vice president of Santander’s wealth management division, the constraints placed on exclusive pension funds represent another phase in the ongoing transformation of the financial market. This shift is in response to several challenges, including the phasing out of tax deferrals on exclusive and restricted closed-end funds, the implementation of taxes on offshore entities, and restrictions on the issuance of tax-exempt securities.

Exclusive pension funds were anticipated to become an essential avenue for reallocating assets from closed-end funds, in addition to managed portfolios and various other investment vehicles. Mr. André points out, “Open pension funds are equipped to accommodate such transitions, but exclusive closed-end pension funds present an appealing option as well. The industry is actively exploring a range of solutions tailored to these specific client needs.”

Two months into the enactment of policies targeting affluent families, Mr. André observes a nuanced investor response. The decision-making process, he notes, isn’t solely influenced by tax considerations. Despite the opportunity at the end of the previous year for investors to recalibrate their gains in local closed-end funds to benefit from a preferential 8% tax rate, the anticipated shift in asset allocation has been gradual. With tax payments stretched out until March, the market has yet to witness significant movements.

Evandro Bertho, co-founder of Nau Capital, characterizes the recent regulatory actions as a concerted effort to target the affluent investor segment. “There’s definitely a tightening of regulations. All these measures target the affluent investor,” he remarks, suggesting that “the capital flow towards exclusive investment vehicles prompted a similar response from regulators as seen with other recent changes.”

Mr. Bertho views the government’s strategy as an attempt to preserve the essence of pension funds as vehicles for long-term savings. He explains, “Historically, exclusive [pension] funds were seldom utilized, as the advantages they offered were marginal compared to those of closed-end funds.”

Furthermore, Mr. Bertho highlights the continuity of succession planning benefits across both traditional and exclusive pension plans. He notes, “Instead of altering the tax regulations of pension funds—which would adversely affect the smaller investor—the decision was made to restrict exclusive plans exceeding R$5 million. This ensures they remain within the broader category of pension savings plans.”

Mr. Bertho acknowledges the potential for the newly introduced rule to apply retrospectively to investment vehicles established prior to the enactment of Resolution 464. In a preliminary reading, the orientation for investors to consider reallocating a portion of their investments to non-exclusive pension funds. “The main drawback is the inability to directly purchase assets and leverage specific [tax] advantages. The shift necessitates moving from direct bond investments to DI funds managed by third parties, and investing in companies like Petrobras and Vale through equity funds. While this adjustment may diminish the tailored experience of exclusive funds, the overarching pension strategy continues to provide valuable benefits,” he explains.

Ms. Mendeleh, of Principal Claritas, concurs, pointing out that transitioning from exclusive to pooled (or condominium) funds does not pose significant challenges for shareholders. In pooled funds, investors can benefit from a 10% tax rate [after a decade, under the regressive tax table], a more favorable rate compared to the 15% tax on multimarket funds after 720 days and the same rate on equity fund redemptions, albeit without the semi-annual “come-cotas” tax. The trade-off, however, is the loss of investment strategies tailored to individual family needs. “Achieving this level of personalization is more complex within a pooled fund context,” she notes.

Natalia Destro, the head of wealth planning at Julius Baer Family Office, emphasizes the impact of the CNPS resolution on family-oriented pension funds. The regulation necessitates a strategic pivot for those who previously aimed to capitalize on such funds. “While families can still invest in open-ended [pension] funds, they must now defer to the fund manager’s judgment, losing the ability to personally adjust their investment allocations or profiles. Should the need arise to modify their investment strategy, they would need to transfer to a different fund,” she states.

Gustavo Biava, co-founder and investment director at ID Gestora, overseeing R$5 billion in assets, concurs with the sentiment that the government is tightening the reins on these investors, “who are unfamiliar with the constraints of come-cotas and are actively seeking out new options.” Mr. Biava points out that, besides managed portfolios of tax-exempt securities such as incentivized debentures, CRIs, and CRAs, which have seen a significant influx of capital in recent months, these investors are increasingly considering structured products. These products offer unique tax benefits and include real estate funds, investment funds in credit rights, Fiagros focused on the agribusiness sector, and infrastructure funds, all of which present distinctive income tax treatment advantages.

*Por Adriana Cotias, Liane Thedim — São Paulo and Rio de Janeiro

Source: Valor International

https://valorinternational.globo.com/