MEXICO CITY - Mexico's chief pension regulator has a lot to smile about these days. Pension privatization is off to a running start, making pension management a hot industry and holding potential benefits for domestic financial markets.
"The affiliation process between workers and Afores (pension management companies) shows the system has been accepted by a large number of people," said Fernando Sol¡s Sober¢n, president of the National Commission of the Retirement Savings System, in a recent interview.
"Almost 5.3 million people have registered with an Afore, and an average of 90,000 people per day have been signing up in July, which would be the highest rate we've seen."
With the first stage a success, there is still plenty to do in the next few months. The system officially took effect July 1, and the first contribution from employers, workers and the government will be made Sept. 17. In October, the transfer to workers' Afores accounts of $4 billion from a similar but smaller retirement savings system known as the SAR will begin.
The CONSAR is consulting with the Finance Ministry on how to make that transfer - Mr. Sol¡s expects a new government instrument to be created for the purpose - and on the need for additional inflation-indexed public bonds and new private sector bonds.
"Today, 80% of private debt issues in Mexico are by banks, and 80% is short-term debt, with maturities of less than a year," said Mr. Sol¡s.
"There will need to be new kinds of private-sector paper available."
But with the system off to a good start, long-term challenges remain.
"The challenges now are supervision of the investment funds, making the investment regime more flexible, and the constant revision of the operating system to see if there are ways to cut costs," said Mr. Sol¡s.
Regulation of the Siefores, the Afores' investment funds, made a key advance when investment rules were announced in late June, but close supervision will be crucial, especially in the system's first year of operation.
Investments during the first year will be very conservative, with more than half of total resources required to be invested in government or private bonds indexed to inflation. But probably in 1998, the CONSAR will draw up rules for new Siefores, which may invest some of their resources in higher-risk bonds and even stocks, which should give the Mexican Stock Exchange a boost as well.
As the investment regime is liberalized and the Afores grow, Mexico's volatile financial markets should grow deeper and more stable, particularly because of the Afores' expected demand for long-term debt. The CONSAR estimates the Afores will receive a total of $3 billion to $4 billion per year in coming years, besides the one-shot payment from the SAR. By 2022, the Afores may control resources worth up to 40% of gross domestic product.
Another challenge is to keep Afores' operating costs in hand. Much of that task depends on the Afores themselves, of course, but also on the system's rules. In Chile, for example, the high rate at which people change pension managers has generated substantial costs, requiring higher commissions.
In Mexico, Mr. Sol¡s hopes to avoid that problem with the rule that allows a customer to change Afores only once a year, and perhaps only in person.
"If people want to change, they should be really convinced that doing so is worth it," he said.