Argentine plan may boot out managers

An Argentine government proposal to nationalize nearly $30 billion in pension assets puts in doubt the future of money managers operating in that country.

Some experts say it would mean the end of business for most, if not all, of the 10 companies offering private plan alternatives to the government's social security system.

Argentine President Cristina Fernandez de Kirchner signed a bill Oct. 21 that would allow the Administración Nacional de la Seguridad Social, the country's social security system, to take control of 94.4 billion pesos (US$29.3 billion) of assets from the private funds. The measure still needs approval from the Argentine congress, where Ms. Fernandez' party has a controlling majority.

Pilar Teixeira, spokeswoman for ING Groep NV, Amsterdam, said until congress acts, it is too early to comment on the future of the plans, known as Administradoras de Fondos de Jubilaciones y de Pensiones.

“Nobody has the answer” to what will happen, Ms. Teixeira said. “At this point, ING is just assessing the situation.”

In December 2007, ING bought Origenes AFJP SA, which had pension assets of $5.3 billion as of Sept. 30, according to records obtained on the website of the Superintendencia de AFJP, which regulates Argentine private pensions.

Malcolm Wallis, spokesman for HSBC Holdings PLC, London, declined to comment on what might happen with HSBC's Maxima SA AFJP, which had assets of $3.4 billion as of Sept. 30.

Spokesmen at Metropolitan Life Insurance Co., New York, did not respond to several requests for comment on the fate of that company's Met AFJP SA, Argentina's largest with $5.4 billion.

The other AFJP managers, with assets as of Sept. 30, are: Consolidar SA, $5.3 billion; Nacion SA, $4.4 billion; Arauca Bit SA, $3.1 billion; Unidos SA, $800 million; Previsol SA, $750 million; Profesion + Auge SA, $425 million; and Futura SA, $400 million.

“They'll (likely) be taken out of their businesses,” said Nick Chamie, global head of emerging markets research at RBC Dominion Securities Inc., Toronto, with C$150 billion (US$119 billion) under management. Given the government's cash-strapped status, “I can't see (the government) offering much in the way of compensation” to the managers.

“The AFJPs themselves see it as the end of their business and private pension schemes,” said Thomas Ciampi, director of Fundpro.com, a market analysis, news and research site for mutual fund investors in Latin America. “They'd be without any funds to manage.”

The move also would deal a blow to the South American nation's struggling economy, adding to unemployment and further alienating Argentina from world lenders, among whom memories of the government's January 2002 bond default are still fresh.

The AFJP system was established in 1994 as an alternative to social security to ease the government's fiscal burden. Argentine workers could opt out of social security and into an AFJP, but contributions were to be mandatory.

In proposing renationalization of the funds, Ms. Fernandez said the AFJPs could continue as managers of annuities or other funds to manage voluntary savings.

But that argument is misleading because few people save beyond the minimum level, said Joaquin Cottani, partner at investment adviser DFC Associates, Washington. Voluntary savings could support just one or two companies, not 10, he said.

The AFJPs invest primarily in Argentine government debt. At the end of September, more than 55% of the AFJPs' total 94.4 billion pesos in assets was invested in government debt. Other allocations included: 10.9% domestic stocks; 6.5% international stocks; 4.7% in each mutual funds and structured financial trusts; 4% futures and options contracts. The remainder is in other local investments.

A renationalization move not only would bring that debt back under government control, but also bring the government approximately $4 billion a year in pension contributions.

“That's what they're really looking at, having guaranteed revenues from these paycheck withholdings,” Mr. Ciampi said of the government.

“It could cover the needs that they have,” Mr. Cottani said. “They might find in one or two years that even this is not enough. But with it they bought time.”

Early last year the government attracted 1.3 million new participants to social security by establishing a minimum pension, regardless of contribution levels, Mr. Cottani said. Also in 2007, the government temporarily allowed participants in private plans to switch to the government's plan, nearly doubling its payout benefits as a lure. Finally, the government required some workers — including teachers, scientists and judges — to switch from AFJPS to social security.

This is not the first clash of the government and AFJP providers. In 2003, under former Argentine President Nestor Kirchner, Ms. Fernandez' husband, the government renegotiated so-called guaranteed notes the AFJPs held in U.S. dollars, including switching the investment to pesos, quickly lowering the value because of an ever-weaking peso, and taking away a hedge against Argentina's rampant inflation.

Contact Drew Carter at [email protected]