MEXICO CITY - In a scenario of slumping returns, Mexican pension funds were authorized to invest in an expanded menu of instruments, which still leaves out equities and mutual funds but includes derivatives and higher-yielding bonds of corporate and government-owned enterprises.
The consensus in the financial sector is that the new investment regimen spelled out in Memorandum 15-1 of Mexico's National Retirement Savings Commission could take effect as early as Jan. 1, following publication in the country's Official Gazette.
The most significant changes are:
* Loosening restrictions on investment in privatized entities and in paper issued by states and municipalities;
* Permitting investment in bonds of government-controlled companies with debt ratings of at least BBB-, the minimum investment-grade rating;
* Allowing the acquisition of Mexican corporate debt issued not only in dollars, but also in yen and euros;
* Lengthening the average maturity of government debt holdings to 2.5 years from 182 days.
At the moment, pension funds, known as Siefores, allocate 91% of their US$24.7 billion in assets in locally issued short-term federal government notes. The rest is divided between corporate bonds and bank notes.
Liberalization of the investment menu has been an ongoing industry demand. Even regulators are quick to point out the difficulties of working within the framework of the extremely conservative law authorizing the new Afore system in 1998. Under the Mexican system, the pension management companies, known as Afores, offer the specialized retirement investment funds, or Siefores.
The industry's rapid growth in its first three years and the lower returns experienced by the pension funds over that period created the need for a broadening of the horizon, said Vicente Corta, president of the savings commission, which is known as Consar.
Eduardo Silva, president of the pension fund association Amafore, said while the new regimen is not a substantial break from tradition, "it improves risk management and signifies that the financial operations of the Siefores will be safer, with greater possibilities for longer-term investing and improved returns."
Given the calm that ensued following Mexico's presidential elections in 1999, interest rates of government bonds eased considerably and real pension fund returns gradually sank from 13% in the 12 months ended Jan. 31. 2000, to just 7% in the 12 months ended Jan. 31, 2001. They have risen somewhat through this year, mostly because of collateral effects of the crisis in Argentina.
The only other investments permitted for the Siefores up to now have been government debt issued in foreign currency (maximum 10%); debt securities issued by private, pre-approved companies (35%); and instruments issued or guaranteed by global banks (10%). The funds have been and still are obligated to invest at least 65% of the holdings in government treasuries.
The Consar's authorization of Siefore investment in debt of state-run companies - such as the petrochemical concern Petr¢leos Mexicanos and public electric companies - has caused a great deal of controversy, as the "non-government-debt" investment alternatives being proffered by the Consar can be viewed as just new ways for the private pension system to help finance the state. The use of worker savings is an extremely sensitive political issue in Mexico, as labor parties decry any appearance of misuse of these funds or putting them at risk.
Cautious step forward
Consar's Mr. Corta, who came under attack earlier this year when he hinted the Consar was considering approving investments in equities, defended the recent authorizations as a cautious step forward. "What we are doing is opening the regimen to those sectors that Afores are interested in, without forgetting the principles of prudence and return," he said. "Among the measures adopted, there are clearly some that will facilitate the acquisition of debt instruments that have the necessary level of security and yield, for example the sectors of energy and municipal and state government infrastructure."
House Rep. Jose Mar¡a Rivero Cabello, who is secretary of the Social Security Commission, said he was comforted by Mr. Corta's comments that the pension system is not designed for financing any one project in particular. "Using worker assets to finance government entities has already proven ineffective. These Soviet-style ideas must be analyzed very carefully."
Amafore's Mr. Silva, for his part, cautioned the industry would oppose any regimen that tends to sway the Siefores toward investments only in certain industries or instruments, as it runs counter to the funds' risk-control and self-preservation guidelines.
In the background, the Mexican Congress is reviewing a new pension fund law that might affect certain investment limits, although no major changes were suggested.
Meanwhile, Mr. Corta noted that Siefores should not yet be permitted to make equities allocations "when we see that in the debt market, there are still many aspects that must be taken care of." He recently pointed out, however, that should a second, less conservative type of investment fund be authorized in 2002, this fund could incorporate high-yield debt and perhaps even equities.