Mexican pension funds in a charm offensive

Mexican pension funds have launched a campaign to increase awareness of their compatriots about the advantages of long term savings and to convince more of them to enrol in their schemes. Assets managed by private pension funds have been growing at a healthy rate in the country, where participation in a fund is mandatory for workers in the private sector. Despite this, few Mexicans actually contribute regularly to their pension pots. A mix of high informality, a mobile labour market and little knowledge about how pension schemes work have all helped to dampen participation levels.

Now Asociacion Mexicana de Administradores de Fondos para el Retiro (AMAFORE), the association of private pension funds, is engaged in tackling the latter cause by investing in the financial education of Mexicans. To that end, it has designed a campaign with an initial budget of MXN35m ($2.9m), and which was launched in December in collaboration with Mexico’s economy minister, Ernesto Cordero Arroyo.

According to the association’s executive chairman, Oscar Franco, the education effort will target media, schools, universities and other opinion makers over the long term. “There is an enormous opportunity in terms of investment culture in Mexico,” Franco said. “And even more for everything that is related to pension funds.” At first AMAFORE is focusing on research and polls that will ascertain the extent of the problem and the best ways to tackle it. By the second quarter of the year, more concrete measures should begin to develop. The educational effort is expected to last several years.

Behind the initiative is the realisation that workers have very little idea about how the pension system can help them to guarantee a comfortable retirement. “The problem is that people are not really involved with the system,” Franco argued.

“The fact that it is possible to increase contributions and to manage how the money is invested is still not understood by the population.” But AMAFORE also wants to draw into the system an army of millions of potential participants who remain out of it. Even though contributions are mandatory for workers in the private sector, it is estimated that 60% of all working Mexicans don’t have any kind of pension pot.

Increasing contributions
Few Mexicans contribute to the system, and those who do, pay very little into their accounts. The rate of contribution is 6.5% of monthly wages. As a result, Afores, as the pension fund managers are called, are not able to guarantee the kind of retirement income that would engage the interest of more people. The current estimates are that participants can expect to earn between 40% and 60% of their salaries after they retire. “Contributions are insufficient and much lower than international standards,” Franco said.

He notes that in other Latin American countries, contributions range from 10% to 15% of monthly wages. “The Mexican ratio is far too low to generate a replacement rate that could enable pensions to be higher.” In comparison, Mexico’s public sector pension scheme, ISSSTE, collects 7% of its participants’ wages each month, and the ratio will go up gradually in forthcoming years until it gets to 11.5%, he said.

The communication drive aims to push this point forward not only towards workers, but also legislators. AMAFORE would like to see the mandatory contribution for private pensions gradually raised in the same way that it is happening in the public sector. If contributions one day reach something like 12%, pension schemes would be able to offer a more attractive retirement income to their participants.

But the Afores are also engaged in showing savers that if they voluntarily put some extra money aside, they can enjoy a more comfortable retirement. Not an easy task though. “We have to persuade workers that long term saving is a good thing and that it can be maintained by voluntarily putting some extra money in their pension funds,” Franco said.

Further incentives to participants could also help. At ISSSTE, participants also enjoy a generous boost to their pensions pots that is paid into their accounts by the federal government. For every peso voluntarily contributed by participants, the government adds MXN3.25. When the 11.5% rate kicks in, Franco said, public workers could reach savings equivalent of almost MXN20 out of every MXN100 earned by contributing two extra pesos voluntarily to their schemes. By comparison, the 6.5% collected by the Afores looks decidedly puny.