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Mexico pension funds: High pension fund commissions lead to anaemic returns

Latin American markets have proved to be a fine investment in recent years, although not, it seems, for Mexican private pension fund managers. Pension funds, afores as they are locally known, are coming under increasing scrutiny for failing to provide the kind of stellar returns posted in Chile and Peru, despite new freedoms to diversify investments.

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.

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