MEXICO CITY - The Mexican government is inching toward allowing the country's AFORE privatized pension funds to allocate at least a small portion of their assets to equities before the end of 2001.
According to Vicente Corta, president of the National Retirement Savings Commission, investment limits could be "prudently" modified and authorized before the end of the year, giving Mexican workers' their first chance to invest their retirement savings the local stock market, the Bolsa Mexicana de Valores.
Mr. Corta stressed that the opening of the $18.7 billion private pension market would be handled with extreme caution, as critics from populist political factions and unions have charged the bolsa is far too speculative and subject to wild swings in prices. That criticism has evaporated as the government, the securities exchange and the Mexican Pension Fund Association have come out strongly in support of Mr. Corta, who has held a series of talks with labor groups to calm fears and spell out the advantages of diversifying investments.
In the process, however, a potential opening for the pension funds to invest in international stocks has been put on hold. This was done to avoid having political groups accuse the government of forcing underpaid Mexicans to finance blue-chip U.S. companies.
Like most privatized pension systems in Latin America, Mexico's requires the participation of the working population. The workers' monthly contributions are channeled to private pension managers, known as AFOREs, which are controlled by local and international financial services firms. The state-run National Retirement Savings Commission, or CONSAR, dictates the investment menu to which the pension fund managers must adhere. The system was launched in 1997.
Want to diversify
Most of the AFOREs favor a widening in the investment spectrum, arguing the current, almost-exclusive exposure to Mexican sovereign debt carries risks. They also cite examples of more mature pension markets - such as Chile and Argentina - that have not had problems after adding stocks to the investment mix.
"The experience of South America was very similar to ours. Practically all of them started with very limited investment options, but as awareness increased and the pension funds gained credibility in society, they were given the chance to invest in other areas, said Oscar Franco L¢pez Portillo, sales director of AFORE Bancrecer-Dresdner. "Our feeling is that not diversifying would be a blow to the interests of Mexican workers."
Up to now calls to diversify have been muted because of the consensus among economic analysts that the retirement asset flows have been needed to help shore up the country's debt situation. But now there are fears of oversaturation as the pension funds are the majority holders of government obligations.
As of the end of May, the AFOREs had a full 91% of their assets allocated to Mexican sovereign debt, with the rest divided between corporate bonds and bank notes.
"Mexico has always suffered from a lack of long-term internal savings and the priority has been that AFORE financing serve to fortify the economy," said Eduardo Silva, president of the AFORE association. "Nevertheless, my impression is that every day there is more agreement that this is the moment to open the pension fund system and allow other alternatives."
`How' still in question
With the decision to allow equity investing having basically been made, it still remains to be decided just how to include stocks. Given its late start in the private pension area, Mexico was one of the few countries to incorporate in its original law the possibility of a multifund approach, whereby, for example, specific funds manage strictly fixed-income instruments, equities or cash, and affiliates choose the proper investment mix. Under existing law, equities would theoretically have to preclude the launching of other funds, as the existing one is limited to fixed income. Nevertheless, under discussion at the moment is allowing 5% to 10% of the current portfolio to be allocated to stocks of the most solid companies that enjoy high liquidity on the exchange. This would alleviate the need to embark on the opening of a second fund, which most agree is not politically feasible now.