Despite the raging pandemic, some Latin American countries managed to overcome the fallout and make significant progress in strengthening their retirement systems last year.
By some accounts a star performer on that score was Mexico, where in 2020 the government, business groups and labor unions managed to agree on a plan to complement employees' 6.5% contributions to work-related retirement accounts with a new contribution by employers that will grow to 9% by 2030. The increase will more than double total contribution rates to Mexico's defined contribution Administradoras de Fondos para el Retiro, or Afores, to 15%.
It was a "really great breakthrough," capable of improving retirement outcomes for generations of Mexicans while delivering other substantial benefits, such as strengthening the country's capital markets, said Eric Shimp, vice president of global government relations at Principal Financial Group in Washington.
Sources said Afores support Mexico's capital markets, adding about 2.5 percentage points of GDP per year in inbound investment flows back into Mexico's private sector and are an important tool for financing Mexico's private sector.
The Finance Ministry in Mexico deserves a lot of credit for helping to promote that discussion among key constituencies and arriving at "a really good social compact," Mr. Shimp said.
The reforms, which were approved toward the end of 2020, also increase access to the basic pensions in the Mexican system by reducing the total amount of time workers are required to make contributions over their lifetimes in order to qualify — a change that will help more women access retirement savings despite the years they spend out of the workforce raising families, Mr. Shimp added.
Under the reformed rules, Mexicans who work a minimum of 15 years can receive a retirement benefit — down sharply from the previous 24-year requirement. Retirement benefits will also be allowed to be taken as a combination of lifetime annuity or a drawdown of funds, rather than either of the two options, according to an August note by Willis Towers Watson PLC.
Mexico's Afores, which manage about $170 billion in assets, have also avoided a big impact from hardship withdrawals compared with their Latin American peers such as Chile or Peru, thanks to an early withdrawal mechanism for unemployed workers that was specifically introduced for shock periods, sources added.
Jesus Togno, regional director, Latin America at FTSE Russell in Mexico City, believes that on a relative basis Mexico has been the least impacted by withdrawals among other Latin American countries. Data from the Organization for Economic Cooperation and Development show that hardship withdrawals at the end of June in Mexico amounted to 0.2% of the country's retirement assets. By comparison, in Chile that proportion was 7.4% at the end of September and in Peru was 13.9% at the end of July. The OECD compared assets as of the end of 2019 for the three countries.
But while Mr. Togno also praised the government for increasing plan sponsors' contributions, he said other proposals such as a reduction of management fees charged by Afores is contentious. Mr. Togno said that regulators should consider reducing Afores' fees gradually. Under the current proposal, Afores are also expected to also be able to increase investments in foreign securities, currently capped at 20% of equity and fixed-income investments.