Afore Investment Needs to be Strengthened by 2050

In 1992, when pension system reform was being discussed in Mexico, the World Bank recommended that developing countries should introduce mandatory pension funds as a formula for stimulating the development of their financial markets. A defined contribution system has been operating in Mexico, through individual accounts, since 1997. Pension assets are invested in several financial securities through Investment Companies, called Siefores.

In December 2018, assets managed by SAR represented 15% of the Gross Domestic Product (3.3 billion pesos), distributed over more than 62 million accounts. Although the investment regime has allowed the introduction of new securities, the percentage of investment in government debt has barely changed, remaining at levels of around 50%. Siefores invest approximately 85% of their assets in Mexican stocks and bonds.

Afore’s equity investment in relation to the total outstanding has grown 1.75 times, from 8.17% in 2013, to 14.32% in 2018. Moreover, government debt investment increased 1.29 times, from 19.78% in 2013, to 25.50% in 2018.

In coming years, the continued growth of pension assets in Mexico could represent a financial risk to markets due to the high concentration of investment in local securities, as well as the possibility of price manipulation or bubbles.

To determine the level of demand for national financial securities resulting from the growth of pension assets, I developed a projection model for SAR accounts and assets, taking into consideration the investment restrictions in the current Investment Regime applicable to Siefores. Through this model, I estimate the required demand and determine whether the financial market is sufficiently prepared to meet it.

Using information on registered workers (IMSS, ISSSTE and self-employed) and assigned workers with assets in Siefores, I projected the growth in the number of accounts with assets managed in SAR by Siefore. By 2050 there will be approximately 70 million accounts. SAR assets will continue with an upward trend, reaching an estimated 14 billion pesos by 2050, which would represent around 35% of the Gross Domestic Product.

If the growth trend observed in SAR continues and the investment regime remains unchanged, by 2050  pension assets could require around 7.4 billion pesos in government securities (1.11 times of the total current outstanding) and 4.9 billion pesos in equity securities issued through the Mexican Stock Exchange (nearly 60% of the total current outstanding).

Since this growth could represent a risk to financial markets, it is crucial to consider the possibility of gradually opening the Afore investment regime to international financial markets. The later would facilitate diversification, while taking pressure off local investment markets and obviating the issuance of government debt securities to meet the demand generated by pension funds.

The recent SAR reform proposal seeks to increase the acquisition of international securities authorized by Consar (National Commission for SAR). This type of investment could provide an opportunity to diversify investments.

Additionally, Mexico needs a sweeping reform to its pension system, which should consider increasing mandatory contribution for retirement. Additionally, it should implement measures to restrain pension expenditure, increase voluntary retirement savings and improve the product system for the decumulation stage.