MEXICO CITY - Long-overdue regulation of complementary pension schemes should benefit Mexico's Afore pension managers, which already oversee more than 359.58 billion pesos ($34 billion) in obligatory social security savings.
Since they were launched in 1997, Adminstradoras de Fondos para el Retiro - the private money management companies authorized to manage Mexico's social security savings - have not been able to manage part of the estimated $6 billion in complementary corporate pension plans. The corporate schemes predate the existence of the Afores, and are managed through local mutual funds and trusts set up by local banks and insurers. They are loosely regulated by the Finance Ministry.
But a year ago, a voluntary pension fund was created, offered only to individuals. This plan offered no tax incentives for saving, and there were no withdrawal penalties.
Now, the executive committee of the pension fund regulator, the Consar, recently approved the creation of pension accounts through which not only workers, but also their employers, could contribute on a tax-deferred basis. The accounts will supplement the obligatory social security savings. Because of this change, the Afores can offer their funds at the corporate level.
Pending are rules from tax authorities regarding the fiscal treatment of the contributions, and the setting of penalties and exemptions for early withdrawal.
A study by Buck Consultants, Mexico City, in late 2002 concluded that the size of the complementary pension market was $6 billion, with nearly 70% managed by banks, 20% by brokerage firms and 10% by insurers. While the older plans are defined benefit, the more recent plans are defined contribution.
The study found that 65% of sponsors are large firms with 100 or more employees based in the Federal District or the state of Nuevo Le%F3;n, near the Texas border. Large privatized Mexican corporations, such as Telefonos de Mexico SA de CV, account for perhaps half of the assets, according to industry estimates, while a large chunk of the remainder comprises plans of multinationals operating in Mexico.
But corporate participation remains low: just 6% of the companies registered with Mexican social security authorities report sponsoring a plan, according to Buck. This reality - combined with actuarial studies showing that middle- to upper-income workers making obligatory contributions for 30 years will receive a pension equivalent to just 20% to 50% of their last year's salary - have spawned a push for credible, well-crafted voluntary schemes.
Up to now, the Afores have been able to offer a voluntary savings plan directly to their affiliates, not to companies. This had limited success because the government provides no tax incentive for saving, said Francisco Gonzalez Almaraz, president of the Asociacion Mexicana de Afores. Worse, it allows investors to withdraw assets after just six months, he noted. Just $200 million was managed via the voluntary plan through May 2003.
The 2,000 peso monthly cap on obligatory savings will force upper- and even middle-income workers to save through voluntary vehicles, deferring taxes until retirement. Mr. Almaraz, who also directs one of Mexico's largest pension funds, Afore Bancomer, estimated that some 200,000 upper-income individuals would be prime targets for voluntary retirement plans.
The Afores will no doubt have competition for the voluntary contributions - from companies or workers - given the powerhouse firms that already participate in the corporate pension, insurance and mutual fund areas. Firms such as ING Investment Management, MetLife Genesis Seguros y Pensiones and Principal Financial Group Inc. are already managing complementary pension assets and are awaiting the announcement of fiscal incentives. The ability of local mutual funds to invest 100% of their assets in international vehicles - authorized by the National Banking And Securities Commission in December 2002 - is fueling the interest of firms such Skandia Mexico in the pension arena.
Skandia plans to include offshore funds of global managers in the portfolios of mutual funds it is registering locally in Mexico, according to Marten Andersson, director of Skandia Mexico. Up to now, insurance vehicles previously set up by Skandia have been allocated exclusively to local asset managers.