Revitalizing Chile's Pension System through Tokenization and Innovation

For decades, Chile has served as a testing ground for pension reform, with its 1980s overhaul based on individual capitalization transforming retirement savings across Latin America. The mandatory contributions, managed by private pension administrators, led to the development of one of the region's deepest capital markets, turning Santiago into a financial hub. However, the system's prestige has waned due to low self-financed replacement rates, with a median of 17% between 2015 and 2022, leaving workers dissatisfied and distrustful of the high fees charged by pension administrators for mediocre returns. The pandemic further exacerbated the issue, with Congress authorizing three extraordinary withdrawals that resulted in over $50 billion being drained from individual pension funds between 2020 and 2021, representing more than 20% of the funds accumulated by 2019 and 16% of Chile's 2022 GDP. This not only provided a lifeline for households but also led to a significant decrease in liquidity, a slowdown in issuance, and a reduction in the pool of long-term savings. In response, Congress approved a long-awaited pension reform in March 2025, replacing the 'multifund' model with generational funds that adopt a life-cycle investing approach. This new system allocates young savers to equity-heavy portfolios, gradually shifting towards bonds as they age, aiming to reduce mistakes and produce more stable outcomes. The reform also introduces employer contributions, enhances the Universal Guaranteed Pension, and promotes competition among pension administrators by auctioning affiliates to the lowest-fee providers every two years. While these measures are expected to increase replacement rates, reduce costs, and improve efficiency, the reform remains cautious, with generational funds making portfolios more rational but savers more passive, and transparency, switching providers, and engagement remaining limited. The most promising innovation for Chile's pension system lies in tokenization, which represents bonds or shares on digital ledgers, offering faster settlement, lower costs, and greater transparency without altering the underlying asset. Europe has launched its DLT Pilot Regime, and Switzerland's SIX Digital Exchange has already begun issuing tokenized bonds. Chile has also taken steps in this direction, with the creation of a regulated framework for open finance and crypto firms in 2023 and the launch of AUNA Blockchain, Latin America's first corporate blockchain consortium, to test tokenized bonds and shares. If managed prudently, this shift could transform Chile into a regional hub for institutional crypto investment, making initiatives like ScaleX Santiago Venture, CORFO, and Start-Up Chile more dynamic by channeling digital savings into startups. Tokenization would not only reduce costs and speed up settlement but also increase transparency, improve liquidity through fractional ownership, and expand market access, giving pensions safer exposure to innovation and nudging Chile's financial infrastructure towards greater efficiency and global integration. However, the inclusion of crypto in pension savings is more controversial and would require explicit recognition as an eligible instrument for investment, approval from the Central Bank, and enforcement of standards for custody, valuation, and risk. Even then, exposure should be cautious, with direct coin holdings clashing with prudential rules, and instead, exposure should be through regulated ETFs or ETNs with strict caps. Chile could strike a balance with a dual path, treating tokenized bonds and equities as equivalent to conventional ones if issued on regulated venues, and allowing crypto exposure, if permitted, only through ETFs or ETNs, initially capped at 1% but potentially reaching up to 25% of the equity allocation, with mandatory licensed custodianship, segregation of assets, and insurance, as well as full disclosure of volatility and downside risks. This roadmap would open pensions to innovation without jeopardizing stability and could accelerate the digitalization of Chile's financial services ecosystem. Nevertheless, technical fixes alone cannot rebuild trust, and reforms should go further to address legitimacy concerns, such as performance-based rebates, 'open pensions' platforms, sandboxes to test tokenized fund shares and smart contracts, and allowing a portion of savings to serve as mortgage collateral, which could ease intergenerational tensions and keep retirement goals intact. Chile deserves credit for moving forward, but the stakes are high, and the balance between prudence and innovation is delicate. Generational funds will make Chile's pensions appear modern on paper, but without deeper innovation in technology, transparency, and citizen engagement, the system may remain analogue at heart, and pension design today is not only about adjusting contributions or tweaking commissions but also about harnessing technology, safeguarding trust, and giving citizens an active role in shaping their financial futures.