Recent developments in the
Mexican pension system and challenges ahead
Carlos Ramírez Fuentes Presidente de la CONSAR
15 de Noviembre, 2017
Contents
2
I. Introduction
II. Recent evolution of Mexico´s Pension System
III. How can pension funds invest in infrastructure
IV. Opportunities ahead
V. Challenges
VI. Conclusions
3
Dependency rate (Mexico and Europe)
(population 0-19 and 65+/population 20-64)
Fuente: United Nations, Department of Economic and Social Affairs, Population Division (2015). World Population Prospects: The 2015 Revision,
Mexico´s demography will change
dramatically
50.0
70.0
90.0
110.0
130.0
150.0
1950 1957 1964 1971 1978 1985 1992 1999 2006 2013 2020 2027 2034 2041 2048 2055 2062 2069 2076 2083 2090 2097
México Europa
Demographic bonus
4
Mexico Pension Reforms
The pensions system was reformed in 1997 for private workers and in 2007 for public service workers transforming the traditional defined benefit (DB) system into a mandatory defined contribution (DC).
The system is mandatory for all private and federal government workers.
Workers contribute 6.5% of their monthly salary to their pension fund (private sector workers).
The National Commission for the Retirement Savings System (CONSAR) regulates and supervises the Pension Fund Administrators (AFORE)
5
I. Introduction
II. Recent evolution of Mexico´s Pension System
III. How can pension funds invest in infrastructure
IV. Opportunities ahead
V. Challenges
VI. Conclusions
Contents
3.1 6.0 9.0 13.617.7
22.126.3
32.339.8
45.751.5
63.3
76.186.1
104.6
112.7
130.4
169.7
139.6
0
20
40
60
80
100
120
140
160
180
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-97
Jan-
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ay-9
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Dec
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May
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Figu
res
in U
S bi
llion
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r 201
7
154.3
6
Pension Funds’ assets under management
US $169.7 billion.
Figures in US billion. Currency exchange constant. Data as of september 2017.
Source: CONSAR.
Mexican Pension Funds’ assets under management
Pension Fund’s asset under
management represent 25.49% of
domestic savings
During the last 10 years, Pension Funds’ assets under management have increased 13.94% annually.
Pension Funds’ assets under management represents 15.10% of the GDP
Evolution of Pension funds
Investment Framework
7
1/ Foreign Debt from 2005. Subordinated Debt from 2009. Structured Debt & lower than investment grade debt (local scale) from 2010.
Debt with exposure to and guarantee by real assets and rights from 2013.
2/ Only USD, Euros & Yens until 2010. All other currencies were allowed from 2010.
3/ When launched this investment vehicle was a capital protected note
4/ The first FIBRA was issued until 03/2011, though.
5/ The prior financial and legal structure of the current SPV was issued on 08/2008.
Portfolio Diversification
Portfolios of SIEFOREs
( %)
8
Sep-2005 Dec-2011 Aug-2017
As a consequence, portfolio diversification has improved although much
remains to be done
82.8
0.120.9
16.1
58.8
2.72.9
8.1
9.6
17.90.27
51.35
6.561.13
6.61
14.65
19.42
Commodities Goverment Securities Alternative Investments
International Bonds Equity (Domestic) Equity (International)
Local Bonds
Contents
9
I. Introduction
II. Recent evolution of Mexico´s Pension System
III. How can pension funds invest in real assets
IV. Opportunities ahead
V. Challenges
VI. Conclusions
Type of
CKDs and
CERPIs
Project
Finance
Infrastructure Real Estate Private
Equity
Financial
Assets
CKDs/CERPIs can be used to finance:
Different stages of the development of a real project
Any economic sector or activity
And financial structures can be adjusted
The projects must be developed in Mexico
10
CKDs and CERPIs are very flexible investment vehicles
How can Mexican pension funds
invest in real assets
11
Type of CKD
As a % of
investment by
AFOREs
Infrastructure (Including Energy) 34.3%
Real Estate 27.3%
Capital 25.2%
Financial Services 11.43%
Forestry 1.82%
Through the investment of CKDs, AFOREs have financed a growing
range of projects and firms
investments in CKD’s by sector
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
180,000
200,000
jul-0
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ar-0
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-17
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12
4 CKD’s
1 Fibra
Evolution of CKDs and FIBRAs
Positions of AFOREs
(millions of pesos)
Alternative investments by afores
TOTAL: 205,027 MXN million
AFOREs finance 87% of total CKDs/CERPI (147 billion pesos) and 36%
of FIBRAs (58 billon pesos)
9 CKD’s
2Fibra
3 CKD’s
4 Fibra
7 CKD’s
4 Fibra
16 CKD’s
1 Fibra
10 CKD’s
2 Fibra
7 CKD’s
1 Fibra
RECENT REGULATORY CHANGES
13
CONSAR regulation has pushed pension funds’ to focus on increasing their internal capacities:
o Improvement of due-dilligence for the selection of manager
o Increase human capital
o Better use of technology: risk system
o Deepen the understanding of the non-financial risks: legal, technological, political, operational, social, environmental, etc.
o More regulatory space to invest in equity, Reits, and alternatives
o Less restrictive investment limits on alternatives (CKDs and CERPIs): pension funds may now acquire the total amount of the issuance, regardless of its size.
o New prudential measures for CKDs and CERPIs: more responsibility to the Board. AFORE may now set their own prudential limits regarding concentration limits in a project, GP and issuance as well as eligibility policies on co-investors.
Contents
14
I. Introduction
II. Recent evolution of Mexico´s Pension System
III. How can pension funds invest in infrastructure
IV. Opportunities ahead
V. Challenges
VI. Conclusions
Fuente: CONSAR
Structural reforms are opening up new and
major investment opportunities for AFOREs
15
Structural reforms:
Energy 4.
1.
2.
New business opportunities will
open up in several sectors
Financial sector 3.
Pension funds will continue to play a
fundamental role in financing long term
projects
Telecommunications
Competition
16
OPPORTUNITIES AHEAD
It is expected that total AUM of AFOREs will continue to grow* at a
significant pace
*Projections are solely used for the presentation purposes and should only be used as a guidance
17
Mexican pension funds urgently need more diversification
OPPORTUNITIES AHEAD
Fuente: OCDE, 2015.
18
Historic real returns of Mexico’s pension system
(2003-2017)
• ¿Where will future returns come from?
OPPORTUNITIES AHEAD
OPPORTUNITIES AHEAD
19
New investment
opportunities and new
government with
infrastructure needs
Favorable moment to
boost long term
investments
Growth of assets under
management by
SIEFOREs
An environment of
lower returns and
needs for major
diversifications
Favorable environment to boost long term investments:
Contents
20
I. Introduction
II. Recent evolution of Mexico´s Pension System
III. How can pension funds invest in infrastructure
IV. Opportunities ahead
V. Challenges
VI. Conclusions
Demand-side obstacles
21
CHALLENGES FOR PENSION FUNDS
LONG TERM INVESTMENTS
Demand constraints Supply constraints
1. Short term focus: commercial bias 1. Depth of Mexican financial markets
2. Analytical capabilities of AFOREs
// insufficient competition
2. Scarcity of good projects and managers
3. Legal restrictions // pension funds
have to invest through public
offerings
3. Political/social/ legal risks
Supply-side obstacles
• Challenges for long term investment projects in the Mexican Pension
System
Structural challenges ahead
22
Nonetheless, key structural challenges remain:
o Low level of mandatory savings
o Increase coverage
o More flexibility to invest
o Link pillars
o More competition: returns and fees
o Increasing cost of DB systems
Contents
23
I. Introduction
II. Recent evolution of Mexico´s Pension System
III. How can pension funds invest in infrastructure
IV. Opportunities ahead
V. Challenges
VI. Conclusions
CONCLUSIONS
• Mexico’s current conditions offer significant opportunities for the AFOREs to participate actively as Mexico´s main institutional investors in long term projects.
• Recent regulatory changes by CONSAR to the pension system seek to: o More flexibility for active pension funds o Offer more opportunities for diversification o Strengthen the industry´s human capital o Expand investment horizons of the AFOREs industry o Strengthen AFOREs’ corporate governance
• It is imperative to continue with the development of internal capabilities in the
pension fund industry
• Mexico urgently needs another pension reform: opportunity and challenge for new government
24
Recent developments in the
Mexican pension system and challenges ahead
Carlos Ramírez Fuentes Presidente de la CONSAR
15 de Noviembre, 2017