The seesaw battle for control of Latin America’s biggest pension fund mirrors -- and magnifies -- the deep left-right schism in Brazilian politics. The latest twist won’t be the last.
By Colin Barraclough
October 2002
Institutional Investor Magazine
Brazilian politicians of the left and right have been crowding into the center in a bid to appear more moderate for this month’s national elections (Institutional Investor, September 2002). But the underlying economic and political divisions within this extraordinarily variegated country can still be seen in raw form in the fight to dominate Latin America’s largest pension fund: Banco do Brasil’s Previ.
A five-year experiment in which workers ran the fund ended with a letdown on August 4: The government of President Fernando Henrique Cardoso wrested back authority over the fund and handed it to officials appointed by the bank. Two months earlier Brazil’s social security minister, José Cechin, had ousted Previ’s management team and installed a caretaker administration under former deputy pensions secretary Carlos Eduardo Esteves Lima. The government also pushed through new bylaws to bar worker-elected directors from retaking control of Previ.
Yet the war over the fund -- and the political spoils it represents -- is by no means finished. Analysts say that if Partido dos Trabalhadores candidate Luiz Inácio (Lula) da Silva wins the presidential elections, the leftist former union boss would no doubt want to return Previ to worker control. The other left-wing candidate, Ciro Gomes, won’t comment on the fund, and the candidate of Cardoso’s conservative Partido da Social Democracia Brasileira, José Serra, supports Banco do Brasil control of Previ.
“The battle over Previ is part of the historical struggle between left and right,” says Lourdes Sola, head of political research at Tendências Consultoria Integrada, a São Paulo consulting firm. “Brazil’s political parties are converging so quickly toward the center that there are few issues left over where the traditional political sides are fighting it out. Previ is one.”
But much more is at stake than just political advantage. Previ’s 38 billion reais ($12.2 billion) in assets under management as of July represent roughly one quarter of all Brazilian pension assets. The fund is among the country’s biggest institutional investors. It holds sizable stakes in such leading Brazilian companies as aircraft maker and No. 1 exporter Embraer (a 27 percent holding); the world’s largest steel maker, Companhia Vale do Rio Doce (10 percent); and the top Latin American beverage company, Companhia Cervejaria Brahma (also 10 percent). In all, Previ has significant holdings in 65 leading Brazilian companies.
All of the fund’s investments, moreover, are domestic. Roughly 35 percent of Previ’s assets are in variable-income investments, chiefly stocks; another 35 percent goes into corporate bonds; 15 percent is in government bonds; 10 percent is in real estate; and the remaining 5 percent consists of loans and other financial instruments.
Previ’s pension constituency represents further political clout. The fund has 141,000 active members, all current or former employees of Banco do Brasil, the country’s biggest financial institution.
But what makes Previ such a prize for politicians is that, like other public sector pension funds, it represents a potential trove of campaign funds and political slush money. “Brazil’s pension funds are all plagued by political corruption,” says Luciano Dias, an analyst with Góes e Consultores Associados, a political consulting firm in Brasília. “But Banco do Brasil and Previ in particular are tools used by whichever government is in power. Look at Previ as a huge pot of government money, sitting in one place, with very little in the way of legal control, and you’ll start to get the idea.”
The fund has a history of allegations of graft. During the administration of Fernando Collor de Mello from 1989 to 1992, Previ was implicated in a number of political scandals. More recently, in the aftermath of the 1998 election, a former Banco do Brasil director was accused of having raised campaign funds indirectly through Previ. Allegedly, he directed the fund to invest in companies owned by businessmen associated with the ruling Partido da Social Democracia Brasileira; they then purportedly presented large donations to the party and its candidates. The director, Ricardo Sérgio de Oliveira, is the target of no fewer than three parallel investigations by public prosecutors.
Indeed, it was largely to eliminate abuses -- or, more cynically, tip the Previ honey pot in the opposition’s direction -- that employees of Banco do Brasil, supported by their unions and the Partido dos Trabalhadores, took advantage of the bank’s travails to gain effective control of the fund in 1997.
The opaque dealings between Previ and its sponsoring bank provided the opportunity for a worker putsch. Banco do Brasil needed a fast $1.77 billion from Previ to cover a shortfall in operating revenues, and the fund was required by law to consult its members before agreeing to the loan. Urged on by bank unions, the membership set a single condition for approving the deal: Banco do Brasil employees had to be given a majority of the seats on Previ’s managing board, which oversees investment decisions, and on its auditing board.
Previ’s president, Luiz Tarquíno, who had been appointed by Banco do Brasil, was allowed to remain chairman of the board. But the bank employees’ four seats on each seven-member board gave them -- and union officials -- real power over the fund.
It was an unprecedented arrangement -- and politically explosive. Labor leaders and leftist political parties encouraged workers at other public sector pension funds to follow the Previ example. “The deal meant that bank workers could actively participate in the running of their own pension fund,” says João Vaccari Neto, president of the São Paulo Bank Workers’ Union, which represents many of Banco do Brasil’s employees. “It was an enormous gesture towards greater democracy in the fund.”
The employees declared that they would make Previ a model for other public pension funds. Then, using their new clout, worker-elected directors began investigating Previ and Banco do Brasil officials for supposed abuses of their authority for political and personal gain. “We found that some officials were involved in a number of political scandals,” says Sérgio Rosa, whom bank employees had elected Previ’s director of investments in June 2000. “Previ officials used the prestige and influence of their position to win financial support from businessmen and private companies for their candidates.”
Says one well-placed observer: “The opposition gained a very strong position in running the fund and tried to use it against the government by pushing for greater worker control in other [public sector] companies. If they had won this struggle, it would have been very disturbing for the Brazilian investment climate.”
Inevitably, Previ’s skewed management board devolved into conflict. “The management model was simply inappropriate for running the fund,” maintains Tarquíno. “As chief executive I had no say in the choice of my team, and it’s very difficult for any CEO to commit himself when he does not have full command.”
The management crisis at Previ came to a head in May 2001: Brazil’s Congress passed a sweeping measure, known as Law 108, that grew out of a constitutional amendment enacted in 1998 to reform Brazil’s social security system. Among other things, Law 108 established a minimum retirement age of 60 for men and 55 for women, a ceiling on pension payments of $385 a month and a limit of one pension per person. Many Brazilians had been able to wangle multiple pensions by working for a few years at one public sector entity after another, thereby qualifying for a full pension from each.
But Law 108 also singled out Previ by stipulating that public sector pension funds be restricted to a maximum of six management board members -- three chosen by pension participants and three by the government body sponsoring the fund. Critically, one of the sponsor-appointed board members had to be deemed president -- and exercise an extra, tiebreaking vote.
Funds had one year to change their statutes to ensure that worker-elected directors could not hold a majority of board seats. “Law 108 changed everything,” says union head Neto. “It gave the deciding vote to the government. It killed democracy.”
In the meantime, Previ’s performance started to deteriorate. Brazil’s stock market had been tumbling all through 2001, as fears of contagion from Argentina combined with Brazil’s energy crisis to set back share prices. The September 11 terrorist attacks in the U.S. added momentum to the slide. For the year Brazil’s Bovespa index was down 11 percent, and Previ posted a $658 million deficit, defined as the difference between outlays and income. Unfortunately for the fund, the downturn took place amid a wider struggle between the government and opposition parties over social security reform.
In the late 1990s pension funds had begun to feel the pressure of long-term trends, such as increasing life expectancy and slower population growth, meaning fewer workers to support more retirees. The impact was compounded for public sector funds by the downsizing that accompanied Brazil’s privatization drive. What’s more, the country’s pension system set no minimum retirement age and didn’t link benefits to contributions.
As funds could no longer pay for generous benefits out of ongoing contributions, they started to post crippling deficits. By 1998 Brazil’s total pension shortfall was $13.5 billion, equivalent to more than 5 percent of gross domestic product and to two thirds of the entire government deficit.
Public sector funds accounted for the bulk of the deficit. Historically, public sector pensions were on average eight times larger than those in the private sector. No rules limited either the size or the number of pensions that civil servants could draw -- their pensions were often higher than their salaries. In 1999, 17.4 million private sector pensioners received combined payments of $14.8 billion. By contrast, just 2.6 million former civil servants were paid $16.4 billion.
President Cardoso, keen to show international investors that he could tackle a basic structural problem, undertook social security reform and homed in on public sector funds. Although opposition politicians howled in dismay, the administration slashed the overall pensions deficit to $5.5 billion in 2000 and to $1.6 billion the following year.
Under Law 108 public sector pension funds had to adopt a new formula for calculating retiree payments that created a closer link between contributions and benefits. The law also encouraged workers to continue to work even after they met the criteria for retirement.
Gratified, government ministers sought to sustain the reform momentum. In January 2002 social security overseer Cechin demanded that the 93 of Brazil’s 125 public sector pension funds that were still posting deficits borrow from banks to cover their losses rather than beg for a government bailout. And he warned that funds failing to present a plan for cleaning up their books by May 31 would be inviting government intervention.
Of the 93 funds, only Previ failed to submit a plan; the ever-contentious board couldn’t agree on one. This gave the government the opening it needed to take matters in hand. The May 31 deadline, in fact, had been aimed squarely at Previ all along, even though it applied to all public sector funds. Ministers feared that Previ’s shaky financial state could jeopardize the sale of 16 percent of Banco do Brasil on the nascent Novo Mercado stock exchange that was scheduled for September. In the end, political uncertainty in the run-up to the October presidential election and a dearth of investors on Brazil’s capital markets forced the bank to delay the long-planned $320 million share offering until later in the year.
When the May deadline came and went and Previ had presented no plan -- or any evidence that it was complying with Law 108 -- the government acted swiftly. On June 3, after obtaining hasty judicial approval, the Cardoso administration swept aside Previ’s entire management board. The government insists that the Previ purge had nothing to do with politics but was prompted solely by the need to uphold the reform law. “The law required more than 90 public pension funds to change their constitutions in accordance with Law 108,” declared social security minister Cechin at the time. “Previ was the only one that failed to reach an agreement to apply this law. All the other funds have submitted new constitutional rules; they are currently under inspection. If by any chance they are not accepted, we will be forced to intervene in other funds, too.”
Banco do Brasil officials say that the struggle for control of Previ is over at last. “The issue at Previ was a governance problem that has been resolved by the government,” contends Marco Geovanne Tobias da Silva, the bank’s investor relations manager. “It was a legal procedure, and it is now finished.”
Previ’s ousted employee-elected directors and the union bosses who supported them see the intervention differently. “The government went back on its word because it didn’t want the workers to participate in pension fund management,” says onetime Previ investments director Rosa. “It’s as simple as that.”
Nothing about Previ is simple. Not its finances or its politics. And the fund’s future is sure to be just as complicated.
