BUENOS AIRES - Argentina's 3-year-old recession and the country's effort to save itself from debt default have seriously eroded the integrity of the AFJP private pension fund system, which could well become the region's first failure among countries with privatized pension funds.
The erosion is evident in terms of: the rising number of delinquent accounts, as many workers have stopped contributing to the mandatory funds; the failure of the AFJP funds to stimulate a boom in new issues in the local capital markets; the government's huddling with AFJP executives to have the pension funds buy additional, extremely risky, public debt; and the backtracking on promises to allow the pension funds to diversify into foreign markets.
The country's recession has provoked delinquency in monthly retirement payments, especially among independent business people who are required to send in a check at the end of each month to cover their retirement costs. Meanwhile, companies are hiring fewer full-time workers to avoid the cost of social security, which amounts to 22% of a full-time worker's salary, a cost that is evenly divided between the employer and worker. (The country allows workers to choose between staying in the social security program and opening an individual account with one of the AFJPs.)
The president of the Private Pension Association, Carlos Peguet, said figures showing that only four in 10 workers made a payment toward retirement in June were troublesome for the country, as well as for the AFJPs themselves. The AFJPs as a group earned $105 million in the year ended May 31, which represents a 49% drop from the year-earlier period. Operating profit was $233 million for the year.
"Our costs are higher because the system must have at least 75% participation" instead of the current 40%, Mr. Peguet said. "In practice, this has turned into a voluntary system, given that the government doesn't penalize those who don't contribute or people who accept getting paid under the table, and only those who feel like it end up contributing."
Because the privatized systems throughout Latin America are meant as a replacement for social security rather than as a supplement, the government eventually could wind up doling out emergency benefits to more than half of the working population if the delinquency rates stay at current levels. "The state will have to give these people a social security benefit," said Mr. Peguet, who is also the vice president of the second-largest AFJP, Consolidar, which manages $4.4 billion. "But certainly not a full retirement package at 80% of their salary."
The government's tinkering with the AFJPs' investment limits to help the country finance itself is serving as a "shock absorber" to Argentina, Mr. Peguet said. "International financial markets are closed, while we continue to finance the government at attractive interest rates."
He argued the AFJPs have had this role from the launch of the system in 1994, when the investment limit on public bonds was put at 50%. Recently, however, a rise to 60% in this category has been weighed while the government has packaged more debt in financial trusts, where the AFJPs can now invest up to 20% of their assets, up from a previous limit of 14% (Pensions & Investments, May 28). Meanwhile the Pension Fund Superintendent, the agency that regulates the AFJPs, has tabled talks to allow a 10% investment in international mutual funds, which could have provided a measure of diversification.
The added AFJP exposure to the sovereign debt of Argentina - whose international debt stands at $123 billion and country-risk at 1,500 basis points over U.S. Treasuries - signifies workers' pensions are once again dependent on the solvency of the government. Should the country default on its debt, the valuations of the bonds in the AFJPs' portfolios would fall drastically, trimming the worth of workers' retirement savings.
Want contributions suspended
Meanwhile, populist cries from distinct sectors have called for temporary suspension of contributions to jump-start consumption, allowing workers to borrow from their retirement accounts and use the assets as a down payment on home purchases, and even calling for a return to the failed state-run system.
In August, the Argentine Construction Association presented a plan to allow couples to make down payments on their first-home purchases with pension fund savings, while ex-Central Bank President Javier Gonz lez Fraga floated a plan in the local press to suspend worker contributions to pension funds, which would inject $2 billion a year into the economy. These measures both were rejected by the pension fund associations, which have urged the government to better combat tax evasion and force workers to stay current with their contributions.
Workers contribute 11% of their salary, but are charged by the AFJP an additional 3.4%, on average, on their salary as a front-end load. No additional management fee is charged.
Juan Jose Guaresti, an economics professor at Buenos Aires University and a longtime critic of the AFJPs, who backs a return to a state-run system, claims the AFJPs - owned by such companies as Citicorp Pension Management Ltd., Administraci"n de Bancos Latinoamericanos Santander SL, Banco Bilbao Vizcaya Argentaria SA and HSBC Bank Argentina - also "misinform" affiliates by calculating worker returns after extracting these commissions.
"Foreign companies have a double ethic," he said. "In their home countries, they would never engage in this type of conduct, but here they play differently because of the lackadaisical approach of our controlling institutions."
$7.5 billion in fees
Referring to the $7.5 billion in fees that pension fund managers have collected since 1994 on pension fund assets that now total $23 billion, Mr. Guaresti recently wrote, "the pension funds hide what they really charge because if they didn't do this, no one would sign up."
Arguments like his are countered by Emilio Cardenas, the executive director of HSBC in Argentina. While Mr. Cardenas acknowledges AFJP earnings have been positive, "they certainly haven't been extraordinary," if one considers that 33% of the commission paid covers disability and accidental death survivor insurance, and that each AFJP must finance, out of its profits, a reserve fund equal to 2% of assets under management.
Given the blame-searching that has accompanied Aregntina's dire predicament, criticisms like Mr. Guaresti's are getting increasing play in the local media, hurting the system's credibility.