Mexican pension funds in a charm offensive

“That’s a subject that we want to tackle in our campaign,” Franco said. Politicians will have to be recruited to the cause. Changes in the social security system depend on legislative action in the Mexican Congress. As of today, not much movement is taking place in the corridors of power though. “The macroeconomic situation is not propitious to pushing this matter in Congress at the moment,” he said. “But we have to keep this discussion alive in the Mexican society, and our campaign will help us to do it.”

The need for reform
The Mexican pension sector was reformed in 1997, when a public system gave way to a Chile-like set up based on private pension funds. Even though only workers in the private sector have their pensions managed by the Afores, the numbers of the system look impressive at first sight. The 14 members of the association manage a total of 41 million accounts, totalling assets worth MXN1.1trn ($115bn). But the potential of the market still remains to be tapped. In fact, Franco points out, only 15 million accounts are active at any given moment. This means no payments are made into more than 60% of the accounts every month. As a result, Mexico’s private pension funds amount to only 11% of GDP, while in Chile, the model for most market-based reforms of Latin American pension systems, the ratio is more than 65%.

Franco attributes the high level of inactive accounts to the fragmented nature of the Mexican labour market. People change jobs frequently, and the market is further distorted by the millions of Mexicans who move North to work in the United States and leave a track of abandoned pension fund accounts behind. Many workers also drift in and out of the formal labour market, as the black economy remains widespread in the country.

With all the obstacles to the full development of their businesses, the Afores have already become the most important institutional investors in Mexico, Franco pointed out, having left insurance companies and mutual funds behind. Their combined assets under management represent between 15% and 20% of all assets in the financial system, and the funds’ long-term investments prevented the impact of the global financial crisis from being worse than it was.

The contribution to the economy has also been boosted by a growing allocation of assets away from government bonds. More than four out of every MXN10 from the portfolios managed by the Afores are already invested in vehicles like equities and corporate bonds, both in Mexico and abroad. “Diversification has progressed in a very significant way,” Franco said.

Regulation for pension fund investments has been gradually relaxed in Mexico. Back in the mid-1990s, when the current system was established, practically all assets had to be invested in government bonds, Franco recalled. “But today, we can invest in basically all kinds of financial vehicles. There are exceptions, like commodities or credit options, but only a few of them,” he said. There is still some way to go in terms of mitigating risk by means of diversification. BBVA, a Spanish bank that has a leading position in Mexico, has highlighted in a recent report that Mexican pension funds have only 4% of their assets invested abroad, while the ratio is 23.4% in Peru and 45% in Chile.

The freedom to invest is also important because in 2008 Mexico implemented a multifund system where participants can choose how much risk their pension funds can take in their search for returns. For instance, the most aggressive funds, which are aimed at younger savers, can allocate up to 35% of their assets to equities. The Afores sound determined to take on a little more risk, if they are allowed to.

“We are happy with the current limits, but we believe that in the future more adjustments can be made, gradually and with caution,” Franco stressed. Funds have been growing by rates of 30% a year, he said, and as they get bigger, managers need to have more ability to find new investments.

Helping participants to understand how they can make their money work hard is an important goal of AMAFORE’s campaign. The same goes for the fight against some myths that still persist in the collective imagination of Mexicans, according to Franco. Just like plenty of other fellow Latin Americans, many Mexicans don’t feel completely secure about the fate of large amounts money that they have tucked away from their mattresses. That’s why one of the most important measures of the 1997 reform of the pension system was to crystallise into law a pledge that nobody is going to confiscate their pension pots.

“People often think that there is no guarantee that the savings belong to the participants,” Franco said. “It is very important therefore that a legal framework guarantees that participants are the owners of their funds.”