Amafore: Pension savings to reach 20.6% of GDP in 2020

Obligatory pension savings in Mexico are expected to reach 20.6% of GDP by 2020, up from 5.51% today, pension fund association Amafore chairman Francisco Gonzalez told press Thursday morning. Amafore's projection assumes a 5% real annual rate of return on pension fund assets and GDP growth of 3.5%. "With long-term resources [managed by fund managers] that won't be withdrawn tomorrow or in five years, we can make long-term investments, which is something this country needs," Gonzalez said. "We could invest in projects like roads, ports, electricity, telecommunications - in any project that is sufficiently safe and profitable." "There isn't a lack of project financing in Mexico, rather a lack of projects and entrepreneurs to take on the risk. If someone takes the risks and pays us an attractive interest rate we'll invest in anything," he added. Mexico adopted a private pension system in 1997 to replace the state funded system managed by social security agency IMSS. Under this model, workers contribute 6.5% of their gross salary to pension fund managers, or Afores, which then invest that money through special investment vehicles called Siefores. At the end of July, the country's 12 Afores had assets under management of 368bn pesos and a real rate of return of 8.54% since July 1, 1997. The total number of affiliates reached 30.7 million in August, according to regulator statistics, of which only 40.5% contribute to their individual retirement account on a regular basis. Creating a culture of voluntary pension savings is critical if retirees are to enjoy higher pensions. "If we contributed 7% of our salary during 25 years and then expect a pension for 30 years it is impossible for that pension to be very high," he said. "For that reason it is important that a worker save in his voluntary pension account." Afores will start offering voluntary pension accounts at the end of the year that come with tax incentives. Contributors will be able to put up to 10% of their salary into these accounts. However, getting Mexicans to contribute on top of their obligatory contributions will be a tough sell in a country where nearly half of the population lives in poverty. About 56% of the workers affiliated with an Afore earn the equivalent of 3.5 minimum wages (about US$13 a day) or less, according to government statistics presented by Amafore. Opening up new areas of investment for Siefores is also on the top of Amafore's agenda. Siefores currently invest exclusively in public and private sector debt instruments, of which government bonds and papers account for nearly 80%. "The Mexican government needs less funding and we need to find new financial instruments to invest our resources, whether it be in Mexico or abroad," Gonzalez said. Siefores will start investing in derivatives this year, he said, but equity investments on the local stock exchange will hinge on regulator Consar drafting the necessary regulations and improvements in corporate governance. "The most important thing is to ensure that we can enter as minority shareholders and when we want to exit a share we can do so because the market has sufficient liquidity," he said. "Maybe at the end of next year we could see something." Other issues on Amofore's agenda include the incorporation of all of the country's workers into the pension system and the creation of employer sponsored retirement accounts.