MEXICO REPORT FIFTH FIAP MEETING
Santiago de Chile, March 2001 I. Introduction The year 2000 was crucial for Mexico’s development. On the political front, Vicente Fox Quesada, from the National Action Party (PAN) was elected President in unprecedented elections, loosening the Institutional Revolutionary Party’s 70year grip on power. On the economic front, Mexico’s GDP growth was higher than 7 per cent. Inflation decreased to 8.96% while the peso remained stable against the dollar, in part due to the central bank’s dollar put option policy. For the first time in many years, the country did not experience the usual end-of-administration economic crisis, nor is a crisis expected in the future. In this context, the Mexican Pension System and Retirement Fund Managers (AFORES) recorded positive results with the number of affiliated workers and their contributions continuing to grow throughout the year. Also, if we look at the return on investments, the return on Specialized Retirement Mutual Funds (SIEFORES) outperformed other financial retail-level investments in the market. II. Main events in 2000 a) Centralizing Account The Mexican Pension System will be on its fourth year of operation this coming July 1st. According to the provisions of the Retirement Savings System Act, workers whose individual accounts are currently in the Bank of Mexico’s Centralizing Account will be allocated to the 13 AFORES available for managing and investing their funds, if they have not chosen one themselves before that date. This is why in August last year, the Commission for the National Retirement Savings System (CONSAR), together with a number of AFORES and the Mexican Association of Retirement Fund Managers, issued guidelines and procedures for allocating more than 7.8 million individual accounts, taking into account the AFORES’ efficiency and financial situation, and the profits yielded by SIEFORES.
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b) Investment Regulations Additions and modifications were made to SIEFORES’ investment regulations to enable them to invest workers’ funds in debt instruments, in either domestic or foreign currency, or in Investment Units (UDIs), issued or endorsed by the Federal Government, the Bank of Mexico, credit institutions or private companies. SIEFORES specialize in maintaining workers’ purchasing power. Now that investment options have been diversified, today, up to 35% of SIEFORES’ total assets can be bonds issued by private companies. Also, SIEFORES are now able to invest from 10 to 20% of their funds in single bond issue. It was also established, as a mandatory requirement, that securities bought by SIEFORES would have to be certified by at least two rating companies, except for securities issued, endorsed or accepted by the Federal Government or the Bank of Mexico. c) Investment in Private Companies Last year, SIEFORES considerably increased their total investments in securities accepted or endorsed by private companies, as shown in the table below. These investments have increasingly been channeled to finance development projects that promote economic growth in Mexico.
JAN FEB 2000 2000
AUG MAR APR MAY JUN JUL AUG SEP OCT OCT NOV DEC 2000 . 2000 2000 2000 2000 2000 2000 2000 2000 2000 2000
DEC. 2000
2000
Figures in millions of dollars
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d) Voluntary Savings During the same period, voluntary contributions of both workers and employers to their Voluntary Savings sub-account, or “third pillar”, significantly increased from US$ 45.6 million to more than US$ 117.9 million, as shown in this table:
140 120
113.08
64.73
54.03
80 60 40 20
92.60
99.78
0JAN.2000 JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC 2000 2000 2000 2000 2000 2000 2000 2000 2000 ENE. 2000 FEB. 2000 MAR. 2000 ABR. 2000 MAY. 2000 JUN.2000 JUL.2000 AGO. 2000 SEP. 2000 OCT. 2000 NOV.2000 DIC. 2000 2000 2000 2000
44.86
84.49
Figures in millions of dollars
e) Second SIEFORE As a result of the increase in workers’ voluntary contributions to their Voluntary Savings sub-account, in August 2000, the Commission for the National Retirement Savings System (CONSAR) issued the general rules that would allow AFORES to invest these funds in SIEFORES, provided their investment regulations guaranteed workers their capital was safe and that they would have a reasonable return on their income, as well as the necessary liquidity for this type of savings. Limits were established on the investment of funds in order to try to reduce market and creditrelated risks. In November, three AFORES began operating their SIEFORES, specializing in the investment of funds from voluntary contributions. The incorporation of these new mutual funds is just the beginning. It is expected that in the near future, all AFORES will have their own SIEFORE to offer members different types of investment and different criteria for risk management.
107.55
100
72.33
78.75
82.71
117.89
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f) Survey For the third year in a row, market research was carried out from July to August 2000, holding personal interviews at homes randomly chosen in five cities of the Mexican Republic. The results show a high level of satisfaction with the current Pension System and that a much larger number of workers prefer it to the previous Pay as you go System. If we compare these results with the 1999 Survey, we see that the level of satisfaction has dramatically increased. This is largely due to the fact that information is now available through Account Statements, summaries received at home and Customer Service Calling Centers, and that formalities can be easily carried out.
III. Figures for Pension Funds a) Affiliated Workers At the close of the year 2000, AFORES had a total number of 17 844 956 members, or 2 025 348 more than in December 1999. The following table shows the increasing affiliation of workers:
17,844,956 17,619,851 17,424,421 17,193,889 16,998,774 16,776,209 16,574,262 16,380,131 16,198,106 16,049,884 15,872,994 15,711,801
DIC. 2000 DEC.2000
NOV 2000 NOV. 2000 OCT 2000 OCT. 2000 SEP 2000 SEP. 2000 AUG 2000 AGO. 2000
JUL. 2000 JUN. 2000 MAY. 2000
APR 2000 MAY 2000 JUN 2000
JUL 2000
ABR. 2000
MAR 2000
MAR. 2000
FEB 2000
FEB. 2000
JAN 2000
JAN.2000 ENE. 2000
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b) Active Workers Under the Mexican Pension System, workers are considered as paying or active members if their employer’s’ contribution to retirement, old age and severance at old age is paid to the Mexican Social Security Institute every two months. IMSS is a public decentralized agency of the federal government and a basic instrument for the country’s social security. The following table shows amounts and trends:
6° BIMESTER 2000 6° BIMESTRE 2000
10,379,823
1° BIMESTER 2000 1er BIMESTRE 2000
9,701,327
9,200,000
9,400,000
9,600,000
9,800,000
10,000,000
10,200,000
10,400,000
C) Mexican Pension Fund System
As of December 31, 2000 the system counts with approximately 29 billion dollars, from which more than 17 billion are under management by Afores through their Siefores (investment funds), the remaining funds, about 12 billion are under a housing sub-account, manage by Infonavit (National Fund Institute for Workers Housing) and generate investment income determined by the Institute itself.
HOUSING
11,776
SIEFORES
17,012
4.85% PIB
TOTAL FUNDS OF THE SISTEM
28,788
0
5,000
10,000
15,000
20,000
25,000
30,000
5
10%
15%
20%
25%
30%
35%
0%
4.71% 20.61%
Agosto 97 Agosto 98
5%
Julio 97 - Junio 98
2.33%
18.92%
Octubre 97Octubre 98 Diciebre 97 Diciembre 98
3.89%
21.01%
5.62%
25.02%
Febrero 98 Febrero 99
7.08%
26.73%
Abril 98 - Abril 99
8.65%
28.21%
NOMINAL
Junio 98 - Junio 99
10.84%
29.88%
IV. Evolution of the Fund’s Profitability
Agosto 98 Agosto99
12.86% 31.35%
REAL
Octubre 98 Octubre 99
13.35%
30.09%
Diciembre 98 Diciembre 99
13.07%
26.86%
Febrero 99 Febrero 00
13.51%
25.23%
Abril 99 - Abril 00
12.30%
23.12%
Junio 99 - Junio 00
9.39%
19.54%
Agosto 99 Agosto 00
10.19%
20.08%
Octubre 99 Octubre 00
8.64%
18.13%
Total funds invested in SIEFORES amounted to more than US$ 17.391 billion, generating an average nominal return of 16.69% in 2000, or in a real return of 7.21%. SIEFORES thus continued to offer returns well above those of other investments in the Mexican market.
The following table shows the performance of SIEFORES’ returns throughout the life of the pension system:
Diciembre 99 Diciembre 00
7.21%
16.69%
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V. Investment Figures for Funds per Type of Instrument As described in this table, funds have mainly been invested in government securities. However, SIEFORES are increasingly investing in securities issued by credit institutions and private companies, to develop the fledgling debt instrument market currently existing.
3.04 5.50 6.14 8.67 9.31
100%
9.80
80%
60%
40%
96.96
94.50
93.86
91.33
90.20
90.69
20%
0%
Feb. 2000 Apr. 2000 Jun. 2000 Private Aug. 2000 Oct. 2000 Dec. 2000 Government Gubernamentales
Privados
Goverment % % 11,257 11,957 12,551 12,455 12,579 12,603 13,818 14,255 14,268 14,540 15,407 15,428 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 11,739 12,332 13,166 13,180 13,621 13,427 15,055 15,608 15,855 16,122 16,906 17,012 TOTAL
Private % Jan-00 Feb-00 Mar-00 Apr-00 May-00 Jun-00 Jul-00 Aug-00 Sep-00 Oct-00 Nov-00 Dec-00 4.10% 3.04% 4.67% 3.69% 7.65% 6.14% 8.22% 8.67% 10.01% 9.80% 8.87% 9.31% 481 375 615 725 542 825 1,238 1,354 1,587 1,581 1,500 1,584
95.90% 96.96% 95.33% 94.50% 92.35% 93.86% 91.78% 91.33% 89.99% 90.20% 91.13% 90.69%
Figures in millions of dollars
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VI. Evasion and Transfers a) Evasion One of the main characteristics of the Mexican Pension System is its centralized collection scheme, devised right from the beginning to prevent AFORES from collecting social security contributions from their members themselves. This allows both employers and workers to better meet their obligations under the pension system. According to the provisions of the Regulation for the Payment of Fees, established by the Mexican Social Security Institute (IMSS), these contributions must be paid through banking institutions authorized by the latter as receiving agencies. It is worth mentioning that the IMSS has independent financial powers to collect social security contributions from employers and workers on a regular basis. Also, as set forth in the relevant legislation, the IMSS is entitled to take the necessary measures to expedite this collection. For these two reasons, there is minimum social security contribution evasion from both employers and workers. b) Transfers Under the Mexican Pension System, workers are entitled by law to transfer their personal account to another AFORE for three reasons: first, due to a change in the schedule of commissions charged by their current AFORE; second, due to modifications in the investment regulations of the SIEFORE in which their funds are deposited; and third, at will, provided they have remained with the same AFORE for at least twelve months. However, the transfer of individual accounts from one AFORE to another is not that significant, if one takes into account that more than 18 million individual accounts are handled by AFORES, as shown in the table below:
Total number of accounts: 139,226
9,784 10,690
8,680
6,949
6,511
8,000
5,511
6,193
6,000
4,000
2,000
0
JAN ENE. 2000 2000
FEB FEB. 2000 2000
MAR APR MAY MAR. ABR. MAY. JUN JUN. JUL JUL. AUG AGO. SEP SEP. OCT NOV DEC OCT. NOV. DIC. 2000 2000 2000 2000 2000 2000 2000 2000 2000 2000 2000 2000 2000 20002000 2000 2000 2000 2000 2000
4,997
7,304
10,000
7,791
7,974
9,305
12,000
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VII. Coverage At present, 17.8 million workers have joined an AFORE and 7.2 million workers are still in the Centralizing Account, but will be allocated to the 13 operating AFORES as of the first of July this year. In total, there are more than 23 million workers in the Pension System, while the Economically Active Population (PEA) is 40 million. The reason for this is that only workers registered with the IMSS can benefit from the Mexican Pension System, on the basis of a personal savings and capitalization scheme. However, there are two other groups of Economically Active People who are not included in the System. The first group is made up of workers who are not currently covered by any social security plan and therefore, do not benefit from any pension scheme. This group includes independent or free-lance workers, workers in the informal economy and workers from other sectors. The second group is made up of workers who are currently covered by various schemes, all of which fall under the same category known as Pay as you go System. This group includes workers from the federal, states and municipal governments. The Mexican Association of Retirement Fund Managers is actively working to submit the amendments needed to our legislation to include independent/freelance workers and workers from other pension systems, so they can benefit from the current Mexican Pension System, based on a personal savings and capitalization scheme. VII. Current Challenges of the Pension System The main purpose of the Mexican Pension System is to give workers access to a dignified standard of living when they retire. However, the benefits they will receive correspond to the contributions made by each worker to his/her individual account. The system is thus facing a number of challenges that must be overcome. One of them, and a very important one, is that workers obtain adequate returns. So far, this goal has been met. Returns are by far higher than inflationary rates. However, more needs to be done to diversify SIEFORES’ investment portfolios and to improve the risk-profit ratio. In order to achieve this diversification, work is required on several fronts: In the area of investments, we must find the best way to incorporate new mutual funds, so that workers can choose the best option according to their specific characteristics in terms of age and salary. Current investment regulations for SIEFORES should be revised to allow greater diversification and transparency.
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The domestic financial market must offer long-term instruments. Although both SIEFORES and Insurance Companies specializing in Life Pensions or Annuities have the resources to invest in such instruments, they are having a hard time looking for the appropriate instruments. Also, in order to meet the goals set by the System, the funds deposited in the Housing sub-account 1, which is an integral part of the worker’s Individual Account, must yield similar profits to those of SIEFORES. It is essential that the System raises and promotes awareness of the importance of saving among Mexicans. This means, among other things, that it must widely comunicate the characteristics and benefits of the System so that workers are aware of its scope and long-run benefits. Also key for AFORES, both now and in the future, is incorporating cutting-edge computing and communications technology, in order to increase the system’s product range so as to benefit workers and meet their needs in a more dynamic way.
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Each Worker’s Individual Account is compounded with three sub-accounts: the Retirement, Severance at Old Age and Old Age sub-account, which is managed and invested by the AFORES, the Housing sub-account, which is managed by the National Fund Institute for Workers’ Housing, which determines the profits yielded by the latter, and the Voluntary Savings sub-account.
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