Trouble is brewing for the Mexican government as it attempts to overhaul the country’s pension fund system. Theresa Braine reports from Mexico City.
The battle lines have been drawn in the pensions field in Mexico and potentially Chile as governments seek to move the industry forward to ensure a more secure future for workers and a larger pool of local capital for investment, while the funds themselves complain about the heavy-handed state interference.
In recent years, Latin America’s pension systems have grown and evolved, becoming more sophisticated and allowing investment in stock exchanges and foreign markets, among other new freedoms, while helping cultivate a savings culture in societies whose members have traditionally distrusted its institutions and financial systems. Now though, commission fees are being attacked – not unlike what is happening in more developed systems such as the UK and the US – while fund managers chafe at what they say are strict investment parameters.
Pension markets throughout Latin America have developed very quickly, analysts say. “It’s been surprising how fast these funds have grown, so fast that ... local capital markets are too small to absorb investment needs,” says Alberto Ramos, a Goldman Sachs economist based in New York. “In the beginning, they were heavily regulated. Slowly the regulatory watchdogs are easing some of these regulations.”
Developed systems
Mexico’s system, managed by Afores (administrators of funds for retirement), holds mandatory accounts for 13.5 million private-sector workers, one of Latin America’s biggest systems. All the large Mexican banks are involved in the high-growth sector, where they hope to reap major profits. This includes Banamex’s Afore Banamex, Bancomer’s Administradora de Fondos para el Retiro Bancomer, Serfin’s Santander Mexicano, and Banorte’s Banorte Generali. The Mexican system is now drawing comparisons with Chile’s system, which turned 25 in 2006 and is considered the most developed in Latin America.
In Mexico, the system is being tested by federal regulators who want to consolidate fund administration into one third-party organisation. Meanwhile, the Chilean congress is mulling over mid-December’s government legislation designed to lower fees, stimulate competition and increase participation among working-age people outside the formal labour system. It has found that the country’s much-lauded pension system needs major improvements in the face of issues such as increased longevity.
“In Chile the management fees are a big issue. They believe it’s one of the reasons why so many people aren’t participating in the system, because there’s not enough competition among the funds,” Mr Ramos says.
Mexico’s system has been in place since 1997 and fees have dropped as competition has increased. Nevertheless in November 2006, Mexico’s antitrust commission, the Federal Competition Commission (CFC), charged that fees were practically cancelling out returns on Afores accounts. The agency suggested contracting the administrative tasks to the lowest bidder, putting them together under one umbrella organisation.
Currently in Mexico,1.5% to 3.5% of a worker’s salary is taken out for commission fees. Even the Afores’ governing body, the National Commission of the Retirement Saving System (Consar), acknowledges that, despite a 46% decrease since 2002, these fees are still too high. The mandatory contribution rate is 6.5% of base salary, and subtracting even 1.5% of the overall salary as commission from the 6.5% that is being contributed means that a large portion of contributions is going toward fees.
Chile has high fees, too, but they are levied on a mandatory contribution level of nearly 13% of base salary – and those prices are nearly equal to Mexico’s when averaged out over 25 years, former Consar spokesman Carlos Ramírez pointed out in an interview with The Banker late last year.
In its November 2006 ruling, the CFC said that Consar “has delivered important advances within the legal requirements” with the reduction of average commissions from 3.53% in 2002 to 2.48% in October 2006.
The ruling continued: “Nevertheless, competition restrictions remain. In 2005, the commissions that workers paid as a percentage of their funds were more than double in Mexico than in the rest of Latin America; as a consequence, the net annual earnings on individual accounts were practically cancelled out in real terms from 1997 to 2006.”
The CFC proposed separating the administration of accounts from the Afores themselves. “Account administration is a routine activity that can be centralised in one administrative system to take advantage of economies of scale,” the CFC added. “The administration should be put out to bid to generate the lowest possible commissions.”
Afores managers say this is antithetical to the commission’s mandate. Alfredo Honsberg, director general of Afore Azteca, a division of Grupo Elektra, admits there is a legitimate controversy between the fees and net returns, but says: “It’s a case of mathematics and should not be politicised. The CFC is proposing a monopoly. It’s totally contrary to its mandate.”
“It’s a question of focus,” says José Juan Casarrubias, strategic planning manager of Afore XXI, an Afore owned by the Mexican social security institute and the Mexico offices of New York-based Prudential Financial, which disputes the methodology used.
Disagreement over data
The CFC comes up with returns close to zero in real terms, system-wide, says Mr Casarrubias, but it fails to reflect real returns of 3.23% generated by the Mexican pension system, he adds, quoting Consar figures. The answer to the CFC, he says, is to reach new levels of efficiency. “If prices drop, we look for better technologies to produce [lower costs]. We accept the premise that we have to drop commissions. But we do not agree with the calculated rate of return.”
Moreover, says Carlos Noriega, manager of Afores Ahorra Ahora, the CFC was using data from December 2005, which does not take into account the several Afores that have set up shop in the past year, among other changes since then. Ahorra Ahora, loosely affiliated with Mexico’s Grupo Monex, opened in 2006, for example.
“We have the impression that what the CFC said was based on an incomplete diagnosis. Its diagnosis ends in December of last year; and in the past 12 months, five new Afores have set up,” Mr Noriega says. “So what the commission is noting in the report has been overcome by reality.”
The list of players in the sector is lengthening. There are now 21 Afores, up from 10 in 2002. Hoping for a competitive edge, many of the 10 newest Afores charge the least. Whereas before only banks had pension arms, now retailers such as Elektra, the parent of Banco Azteca, are getting involved – with Afores Azteca, a three-year-old addition to Banco Azteca’s financial product line, as one example. Also opening in 2006 was Afores Argos, part of the locally run Seguros Argos, a Mexican life insurance company.
“We are moving in order to be able to attract not only the traditional private-sector formal workers but also those of the public sector and those who in Mexico we refer to as working in the open economy, in the sense that they are neither working for the formal private sector or for public sectors – professionals who work for themselves or workers whose companies have no plan,’’ says Mr Noriega.
“So we’re trying to take advantage of the changes in the law made in 2002 allowing all workers, regardless of where they work, to be able to open an account in an Afore.”
Mr Noriega also takes issue with the CFC judgment for “going beyond its mandate in proposing reform. The reason for the lack of competition is gone now, plus that’s not justification for the type of reform that it is proposing.
“We feel it is basing its proposal on false premises, and the way it is presenting their arguments is wrong.”
The regulatory climate is already too strict, many Afores managers say. They complain that pension managers cannot invest more than 5% of their managed assets in one bond. They can only invest in investment-grade bonds in local currency and in AAA, AA and A in foreign currencies, with up to 100% in AAA, 35% in AA and 5% in single A.
“There has been an excess of control that doesn’t necessarily benefit the client at the end of the day, because we haven’t seen a regulation that improves the Afores, that translates into better services and [brings] more benefits for the client,” says Mr Honsberg. “The authority should work for the client.”
Support for regulations
Not all the pension funds are dissatisfied. The newest Afore, Argos, started up in December 2006, and general director María Luisa Fernández does not see current regulations as too stringent. Rather, she says, these and the fees will straighten out as the system evolves.
“I think they’re pretty open,” Ms Fernández says, pointing out the 20% that is allowed in international investment and the 15% that can be put into stocks since new regulations were passed in 2004. “Portfolios can be very different.”
She also notes Mexico’s recent issue of a 30-year fixed-rate bond – its first – and says that it was snapped up, including by Afores – a sign they are “trusting that the country is going to be okay in 30 years”.
What all fund managers agree on is that workers must contribute more. Ms Fernández has high hopes for a proposal under the new right-of-centre Felipe Calderón presidential administration that additional, voluntary worker contributions be deducted from their pay packets in the same way that mandatory contributions are.
Mr Honsberg notes that increasing the mandatory contribution will lower fees proportionally, while given the present rate of saving and increased life expectancy, 6.5% of salary is not enough. “We’re pressing the wrong button,” he says. “We shouldn’t drop commissions, limiting the profitability of the Afores, because that’s going to push down services. What needs to be done is increase the required contribution. This is what has to grow.”
