LA PAZ, Bolivia - After a yearlong process that culminated in a televised bid opening, two administrators were selected to launch Bolivia's private pension system.
The first pension fund administrator, or AFP, is a consortium combining the talents of international money manager INVESCO PLC with the Spanish banking group and pension fund administrator Argentaria. The second AFP is another Spanish entity, Banco Bilbao Viscaya, which has more than $100 billion in assets and is a strong presence in the commercial banking, insurance and money management sectors in Europe and Latin America.
Global fund manager Templeton Investments and its joint-venture partner, Provida Internacional, a subsidiary of the Chilean AFP, Provida SA, also participated in final bidding on Jan. 23.
The bidding was done with an unusual air of transparency, as the submissions of the three groups were audited in full view of journalists, television cameras, government officials and the public. But unlike Banco Bilbao, Templeton refused to match the low fee of $2.39 per affiliate per month that INVESCO-Argentaria had offered, and so the two companies were left to divvy up the 2.8 million potential affiliates to the Alps.
As part of the spoils of victory, the two groups have a monopoly for five years - not only from outside competition but to some extent from each other. This mostly rural country of 7 million residents was divided into two exclusive zones, with the cities La Paz, Santa Cruz, El Alto and Cochabamba defined as common areas.
The Bolivian model is distinct from the systems of Chile and Argentina because it will combine a system of worker contributions with a $1.8 billion capitalization fund consisting of equity and dividend proceeds from partially privatized companies. The state has retained a 50% stake in the state industries that have been sold off to private firms since the sale of Empresa Nacional de Electricidad in 1994.
Government equity positions in the companies will be turned over to the AFPs to be administered and eventually sold off. Given the right market conditions, the AFPs can opt to sell portions of their stake in private placements or offer the shares publicly and have them listed on overseas exchanges, all with the goal of maximizing fund size and retiree returns.
According to John J. Monahan, global partner with INVESCO and its leader in the AFP project, INVESCO's primary role in Bolivia will be to advise the AFP on the relative valuations of the equity held in the capitalization fund. Argentaria, experienced in the pension fund arena in Spain, will handle the retail, marketing and back-office efforts. Also part of the consortium are AFP Magister, which will lend its experience from the pension systems of Chile, Mexico and Peru to develop an administration system; a local insurance company, Allianz; and a non-profit agricultural association, Fadez, which will help in product distribution in this agrarian nation.
Benefit payments to 300,000 current eligible retirees begin in May, with the initial benefit estimated at $250 per year per person, about 30% of the average annual salary, according to official figures from the Ministry of Capitalization.
Also in May, workers and their employers will begin contributing 13% of employee salary to the AFPs, of which 10% will go into the capitalization fund, 2% to a disability fund and 1% to a workers compensation fund. Between $30 million and $40 million is expected to be collected per month, although this figure could vary depending on participation rates. (The traditional pay-as-you-go state pension system is notorious for its non-compliance, with just 40% of the workforce making payments every month.)
Some factors still need to be ironed out, most importantly the limitations that the government will impose on AFP investment portfolios. Given the country's illiquid markets and the lack of investment alternatives in the local market, rules governing foreign investment are expected to be much more liberal than in the Argentine and Chilean systems. INVESCO is hoping to be able to roll the AFP's assets into several of its mutual funds, said Mr. Monahan. Although Mr. Monahan would not confirm the figure, INVESCO reportedly will receive an administration fee of between 20 and 25 basis points on the first $1 billion of assets.
Meanwhile, to improve the chances of success of the new system, the government already has taken steps to help strengthen the collection power of the two groups, said Evelyn Grandy, undersecretary of pensions at the Ministry of Capitalization.
While under the old system a 40-agency network was responsible for collections, the government has streamlined the collection function to Bolivia's internal revenue service, making non-payment much more difficult to accomplish and much easier to trace.
It also has offered amnesty from penalties on the overdue debt of firms that enroll in the AFP system during the first two years and has vowed to give the AFPs access to the names of delinquent companies.
The government is not worried about threats by some worker groups bitterly opposed to the AFP reform to try to block the start of the system, given that the reforms were approved by the Legislature and have been supported by the judiciary. Nevertheless, the groups, arguing the government lacks authority to hand control of state property over to third parties, plan to file a nullification request against the appointment of the AFPs.