In the wake of the collapse of the Argentine AFJP system, concurrent congressional debates in other Latin American countries are weighing the need for international diversification in each country's private pension fund area.
In Brazil, regulators and industry leaders are brushing aside concerns about potential collateral damage from neighboring Argentina's default and devaluation, while acknowledging that sending money offshore continues to be politically and fiscally unfeasible given Brazil's intensifying need for internal financing and its shrinking capital markets.
Beginning in late 2000, the Argentine government called on the private AFJP pension managers to help it meet its debt obligations, despite provisions that capped at 50% AFJP exposure to government debt. Through creative regulatory changes and goading by the government, the AFJPs in 2001 used inflows to buy little else but government instruments, and even sold off private-sector securities to increase their overall exposure to government debt to more than 80% of their US$21 billion in assets as of December 2001. That's when Argentina declared default and converted to pesos all existing dollar debt issued in Argentina. The measures in effect translate to a return to social security system dependent on the government's ability to honor its obligations - a terrible blow for the AFJP system, which was created in part to avoid such a dependency.
Argentina provoked some legislators in Mexico to completely change their thinking with regard to investment alternatives available to Mexico's US$29 billion Afore system, which consists of 12 privately managed companies that oversee the lion's share of the social security assets of future retirees. Groups representing labor unions lobbied in 2001 against allowing the Afores to invest in local equities, saying they were too risky. However, these same groups - fearful of the impact of a crisis on the size of worker retirements - now favor allowing 20% of Afores' assets to be put in international markets.
Current law prohibits investment in foreign securities of non-Mexican issuers. The Senate is now considering legal reforms approved by the House of Representatives in April that would give the pension fund board of governors the authority to determine eligible foreign instruments and levels of exposure up to 20% of overall assets. This 15-member board of governors, known as the Junta del Gobierno de la Consar, comprises officials from Consar, the pension regulator; finance ministry; securities and insurance commissions; social security agency; and worker groups.
Isaac Volin, vice president of planning at the Consar, said if the Senate approved the measure, there was a "good possibility" the issue of international investing would be discussed by the Junta del Gobierno in the second half of 2002, although there is no guarantee of approval. He stressed the board takes action only if there is unanimity among members.
"In the Consar we see this possibility as something very positive," Mr. Volin said. "I am sure the Argentines would feel a lot better if they knew a least a portion of their assets had been invested overseas." Referring to the prior consensus that in Mexico 100% of pension assets should be invested locally, Mr. Volin said: "Sometimes real experiences change minds."
Although their investment options gradually are being augmented, the Afores have targeted their allocations toward short-term government debt. As of April 30, more than 86% of system assets was in public sector instruments, compared with about 12% in private sector securities.
In Peru, two congressional subcommittees are analyzing a measure that could increase to 40% the amount local AFP private pension funds can allocate to international instruments. Members of the economic and social security subcommittees of the single-chamber Congress say a decision on the bill could be reached before the legislative session ends July 15.
Despite the apparent legislative support for increasing the limit, the Central Bank has called for only a mild boost, pointing out that 40% of the AFP system's US$3.9 billion in assets translates to possibly siphoning $1.5 billion out of the financial system. The upper limit on foreign allocations has been 10% since mid-2000, when the AFPs were first authorized to invest overseas. Nevertheless, the Central Bank has permitted the AFPs to invest a maximum of only 7.5%.
The Superintendencia de Bancos y Seguros, which regulates pension fund activities, expressed its support of regional diversification in general. Making a reference to the Central Bank's reservations, Lorena Masias Quiroga, assistant superintendent of AFPs, said in an interview that "the issue seems to always come down to an adequate pension vs. development of the capital markets." Another benefit of allowing additional offshore investing is return-related, she said - forcing the AFPs to invest locally could tend to saturate Peruvian markets, driving interest rates to artificially low rates, thus worsening AFP returns.
Twelve mutual fund managers already have registered products with Peruvian authorities: Morgan Stanley Investment Advisors Inc.; BNP Paribas Asset Management SAS; Legg Mason Funds Management Inc.; State Street Bank and Trust Co.; Bank of New York; Alliance Capital Management LP; Brinson Advisors Inc.; Mellon Global Management Ltd.; Janus International Ltd.; Putnam Investments Ltd.; Clariden Investment Management Ltd.; and Franklin Templeton Investment International Services SA.
Of these, seven have been chosen by the AFPs, with State Street, Morgan Stanley and Bank of New York leading the way. As of April 30, investment funds occupied a bit less than half of the 7.5% allocation limit to offshore instruments, with U.S. Treasury bills the other major item in this category.
Resolution 223 of the Superintendencia de Bancos y Seguros sets strict limits for the types of funds that can be purchased by the AFPs. Funds must be domiciled in countries with AAA debt ratings, invest 90% of their assets in AAA-rated countries, have US$50 million in assets and shares denominated in dollars.
Despite public-sector debt in Brazil that totals 74% of gross domestic product, weakening fundamentals brought on by the global recession and investor wariness toward Latin America in general, there are few pension fund managers fighting for the right to diversify in international instruments. The likely victory in November's presidential election of Luis Inacio Lula da Silva, Brazil's most prominent leftist and an outspoken critic of free trade pacts espoused by First World countries, has chilled any major changes to the status quo.
The high interest paid by relatively short-term fixed-income securities - projected to yield 18% in 2002 - makes it hard to get pension fund managers to consider other securities, noted Glenn Johnston, executive director of Citigroup Asset Management, Sao Paulo. On a real-return basis, including 8% to 10% projected inflation, returns still come in at 9% a year with relatively no risk. Given that the pension funds' benchmark is inflation plus 6%, few managers are clamoring for alternatives.
But pension funds' smaller allocations to Brazilian equities are rarely predictable, given the volatility of the stock market. So allocating to a basket of international stocks could be attractive to fund managers.
"If you could lock in more return with less volatility, it would make projections easier and reduce your funding rates," said Mr. Johnston, whose firm manages nearly $2 billion of local pension fund assets.
He said Brazil depends heavily on pension funds and mutual funds for financing but lacks fundamental characteristics of other countries, such as Chile, open to international markets: investment-grade status, saturation of local capital markets and a stable long-term bond environment.
Jose Roberto Ferreira Savoia, who heads Brazil's Secretaria de Previdencia Complementar, the country's supplemental pensions department, said there is no current government initiative to expand pension fund investments abroad nor have there been demands from the industry.
"We don't believe that we are on the verge of fiscal crisis in Brazil," said Mr. Savoia, fending off comparisons to Argentina. "Our situation is very stable, and we are in very good economic shape."