MEXICO CITY - It is a watershed year for Mexico's private corporate pension plans and their managers, as international consultants and energetic regulators attempt to shine some light on a business that for years has operated in the corners of the country's financial system.
While Mexico's Afore private pension fund system motors toward $35 billion in obligatory social security contributions in its fourth year of existence, the country's corporate pension plans quietly have amassed an estimated $10 billion to $15 billion in voluntary worker and corporate contributions.
The Finance Ministry is looking to implement new regulations aimed at encouraging sponsors to invest in longer-term instruments, use third parties and allocate assets to mutual funds and insurance companies instead of banks and brokerage houses, said Guillermo Babatz Torres, director of Insurance and Securities at the Mexican Finance Ministry.
This presents opportunities for international managers, which likely will be given the opportunity to launch Mexican money management companies that can create local funds to invest in offshore funds, according to declarations from the Securities and Banking Commission.
The gradual professionalization of the market, spurred on by declining interest rates, multiple-manager allocation strategies and a shift toward individualized accounts through defined contribution plans is creating opportunities for international firms.
Large privatized Mexican corporations, such as Telefonos de Mexico S.A. de C.V., account for perhaps half of the $15 billion in corporate assets, according to industry estimates. A large chunk of the remainder consists of plans of multinationals operating in Mexico. The assets can be managed internally or can be outsourced to banks, brokerage companies and fund managers. According to Sergio Covarrubias Blasquez, director of institutional investments for the brokerage house Grupo Burs til Mexicano, 80% of the assets are held in defined benefit plans, although most newly created plans use defined contribution schemes to ease corporate risk.
Also helping the push toward defined contribution is pension managers' ability to offer personalized service to plan participants. According to Mar¡a Luisa Fern ndez D¡az, director of private pension plans for MetLife Genesis Seguros y Pensiones, business has expanded rapidly since mid-2000, when the company imported systems from the United States and began offering individualized worker accounts to corporate clients. The company today manages assets of some 55 Mexican-based companies, half of which have defined contribution plans. MetLife also offers laid-off workers a plan through which accumulated savings and severance benefits can be tax deferred.
In addition to MetLife, ING Investment Management and Citigroup Asset Management are staunch competitors in the market, especially for managing defined benefit assets. The sponsors, in turn, use the services of pension consultants Watson Wyatt Worldwide and Towers Perrin, which conduct periodic risk and return surveys of third-party managers in order to establish performance benchmarks. In this increasingly competitive market, it is now common for managers to lose mandates after a year or two, as plan sponsors weed out underperformers.
While Afore pension fund managers - which manage mandatory social security savings of most Mexicans - are entangled in a complex web of regulations, managers of corporate pensions are bound by few rules. Just one paragraph in the Capital Markets Law acknowledges this activity, and the Income Tax Law sets some limits on plan sponsors' aggregate holdings. These include a limit of 10% in the sponsoring company's shares and a minimum of 35% in either government securities or local mutual funds. Historically, plan sponsors had to use trusts to reap tax breaks, Mr. Babatz noted. Today, however, mutual funds and managed accounts are the chief vehicles, he said.
Mr. Babatz acknowledges that little information exists on plan sponsors and their managers. For example, despite the size of the industry, regulators have no data on the number of private pension plan sponsors (active or otherwise), the number of employees covered by the plans or the portfolio composition, returns and assets of each plan. Nor is any regulatory body charged with overseeing the activities of funds and their managers.