Many blame artificially high commissions, an ailment afflicting much of Mexico’s financial system. Mexican funds, which manage some $65 billion – making them the country’s biggest institutional investor – generated an annual real return of 8% over the past decade. However, sector regulator Consar says investors see only about half of that because of the commissions. That compares with a 17% return in Chile’s private pension system in 2006. Peru’s top-performing pension fund, Prima, generated returns of between 18% and 30% with two of its portfolios last year. Mexico’s competition commission says the high fees charged by afores have almost wiped out the funds’ hard-won gains since 1997.
Low yield
Mexico can hardly complain that it lacks investment opportunities. The Mexico City bourse rose almost 50% last year but pension funds put most of their money into safe but low-yielding government bonds. Pension funds were also granted permission to invest in fast-developing financial products such as derivatives, as well as allocate more money abroad in such markets as Lima and Bogotá, two of the world’s most profitable bourses last year.
Consar’s chairman, Moises Schwartz, is rallying against the funds’ disappointing performance, which he says threatens Mexican workers’ ability to build up decent pensions. He accuses pension funds of cutting commissions artificially to attract workers and blames a Mexican law that allows workers to switch between funds as many times as they choose. “A fund promoter can show a worker that his commissions are much lower for a certain period but because every case is different, switching over may not benefit the worker,” says Schwartz.
Some 4 million Mexicans switched pension funds last year, which Schwartz says is a waste of time for the industry, while pointing out that funds spend half their annual budget in promotion.
Mexico only offers two types of funds, compared with three in Peru and five in Chile, limiting workers’ ability to choose their risk level and limiting their returns.
Pension funds say they are improving the system, urging workers to contribute more to the afores than the current 3.5% of annual salaries. “It is an amount undoubtedly insufficient to pay out an appropriate pension … We have to raise the percentage,” Francisco Gonzalez, chief executive of BBVA Bancomer’s pension fund, told a recent industry forum in Mexico City. The funds are also increasing equity holdings and aim to reach the 15% limit on equity exposure imposed by Consar later this year, up from 11% level.
