Challenges and Opportunities for the Pension Funds System in Mexico

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1 Challenges and Opportunities for the Pension Funds System in Mexico MEXICO PE DAY AMEXCAP June, 2014

2 Contents I. Introduction II. Overview of the Mexican Pension System (SAR) III. Investment regime IV. Challenges for long-term investments in Mexico V. Concluding remarks 2

3 Mexico is in the process of overcoming two of its main obstacles for growth March 1. 1 Healthier level of financial savings 70% 60% Financial savings (% of GDP) 68.2% 50% 40% 32.6% 30% 20% 14.2% 10% 0% Domestic Savings / GDP Retirement savings / GDP 3

4 México is building new and multiple investment opportunities 2. 2 Modernization of its legal framework Reforms and investments plans launched by President Peña Nieto 1. Energy Reform Telecommunications and Competition Reform Infrastructure National Plan Open new opportunities to businesses in different sectors AFOREs can and must play a main role as investors in infrastructure projects and private equity 4

5 Contents I. Introduction II. Overview of the Mexican Pension System (SAR) III. Investment regime IV. Challenges for long-term investments in Mexico V. Concluding remarks 5

6 Mexico s Pension System development In 1997, the pension system for private sector employees was amended from a pay-as-you-go scheme to a defined contribution structure based on individual accounts managed by private agents known as AFOREs. In 2007 new public sector employees were incorporated to the individual accounts pension system. AFORES, through their funds, invest the employees mandatory savings complying with the investment regime defined by CONSAR. 6

7 From 2008 to date, pension funds assets under management (AUM) have increased more than double 2,500,000 2,000,000 AFORE s AUM 126.3% growth 163,725 million dollars 1,903,227 2,050,847 2,143,166 1,500,000 1,384,897 1,566,241 1,151,186 1,000, , , , , , , , , , , ,466 56,693 6, abr-14 Assets invested by SIEFOREs represent 14.2% of Mexico s GDP Figures in million of MXN at the end of april Exchange rate at April 30, 2014: pesos per dólar. 7

8 51.1 million workers save for their retirment in AFOREs Accounts (millions)

9 11 AFOREs participate in Mexico s pension system Accounts (thousands and market participation) Assets under management (million pesos and market participation) XXI Banorte 11, % XXI Banorte % Banamex 7, % Banamex % SURA Coppel Principal Profuturo GNP Invercap PensionISSSTE Inbursa Metlife Azteca 6, % 5, % 3, % 56.4% 68.2% 3, % 3, % 1, % 1, % 1, % % 0 5,000 10,000 15,000 Miles de Cuentas SURA Profuturo GNP Principal Invercap PensionISSSTE Inbursa Coppel Metlife Azteca % % % % 57.4% 69.6% % % % % % mmdp

10 Contents I. Introduction II. Overview of the Mexican Pension System (SAR) III. Investment regime IV. Challenges for long-term investments in Mexico V. Concluding remarks 10

11 The investment regime has been gradually liberalized Deuda Privada: 402,191 mdp RV Nacional: 197,962 mdp 11

12 Compared to 1998, siefore s portfolio is highly diversified Evolution of the portfolio composition of the SIEFOREs February 2014 September 2005 January 1998 Government Securities 97.7% Private Corporate Bonds 1.7% Repo 0.5% Banking Securities 0.1% 12

13 An increasing amount of pension savings Is Financing productive projects, generating a virtuous circle Workers savings Competitive returns to savings Investment in productive projects MEXICO S PENSION SYSTEM Macro Stability Employment Economic growth 13

14 30-dic mar jun sep dic mar jun sep dic mar jun sep dic mar jun sep dic mar jun sep dic mar jun sep dic mar jun sep dic mar jun sep dic-2013 Investment in domestic productive activities is growing rapidly, benefiting firms of different sizes 800, , , , , , ,000 Total as of April 2014 = 51,672 million USD Structured Securities: 6,899 million USD Total as of April 2012 = 37,530 million USD Structured Securities: 4,007 million USD Private Debt: 22,971 million USD Private Debt: 31,296 million USD 100,000 - Local Equity: 10,553 million USD Local Equity: 13,477 million USD Local Equity Local Private Renta Variable Nacional Privados Nacional Estructurados TOTAL (April, 2014) = 51,672 million USD Structured Securities *Exchange rate at April 30, 2014: pesos per dólar. 14

15 The investment regime allows AFOREs to invest in infrastructure, housing, and private equity though diverse vehicles 1 CKDs Aimed for the development of projects and companies 2 FIBRAs Specialized in the acquisition, construction and financing of infrastructure and real estate 3 REITs Similar to FIBRAs, but listed in eligible countries 4 Debt linked to real assests Debt whose source of payment are real assets or projects 15

16 Pension funds investment in these vehicles was approved in the limits have been gradually relaxed Evolution of the investment limits in Structured Securities The bucket of Structured Securities has two sub-limits related to the underlying projects: Current limits of Structured Securities SB1 SB2 SB3 SB4 Global Limit 5% 15% 20% 20% Infrastructure or Housing n.a 10% 13% 13% Others n.a 5% 7% 7% 16

17 AFOREs have invested USD $5,000 millions in CKDs CKDs can finance a wide range of companies, projects and sectors Type of CKD s Forest Projects Infrastructure Financial Assets Real Estate Private Equity Energy Development and commercialization of plants and wood in Campeche Hospitals Universities Highways Airports Logistic platforms Subordinated/ Mezzanine/ Convertible Loans Loan Portfolios Malls Retail/office properties Housing E-commerce Health industry Touristic services Food and restaurants Hydroelectric power stations Oil platforms AFOREs have the regulatory capacity to invest USD $20,000 millions more in CKDs 17

18 Contents I. Introduction II. Overview of the Mexican Pension System (SAR) III. Investment regime IV. Challenges for long-term investments in Mexico V. Concluding remarks 18

19 Billions of MXN Retirement savings growth will allow afores to keep playing a main role as investors 4,000 3,500 3,000 Actual and Estimated Net Assets (Conservative scenario) USD 225 billions 2, ,500 2,000 1,500 2,213.7 USD 169 billions 1,

20 AFOREs must be ready to take advantage of the opportunities brought by Mexico s current moment Growing size of AFORE s Assets Under Management New investment opportunities in strategic sectors Historical moment for AFOREs CONSAR is currently modifying pension funds legal and regulatory framework to allow AFOREs to be ready to invest in these opportunities 20

21 there is still space available for diversification 21

22 Regulatory reforms i. Inclusion of new assets and vehicles in the investment regime Some recent regulatory reforms: i. Portfolio benchmarks ii. Substitution of VaR for a methodology that incorporates leverage through derivatives iii. Lengthening of the horizon of the Net Return Index to align it with SIEFORE s investment horizon 22

23 Legal reforms i. Performance fee Pending reforms to Mexico s Pension Fund System Law ii. Further expansion of the investment regime iii. Corporate governance strengthening iv. More faculties to execute a risk based supervision v. Private offerings 23

24 Private offerings have clear advantages for AFOREs, however their risks should be mitigated through regulation Advantages Risks 1 Active participation in new projects derived from the Energy Reform and the National Plan of Infrastructure (APPs) 1 Conflicts of interests 2 Specialized co-investors in large-scale projects 2 Fund selection skills 3 Expand the universe of investment opportunities to SIEFOREs 3 Transparency of fees 4 Cost reduction to both, issuer and investor 4 Valuation 5 Security of savings is preserved 5 Corporate governance 6 International practices from other pension systems would be adopted 24

25 Contents I. Introduction II. Overview of the Mexican Pension System (SAR) III. Investment regime IV. Challenges for long-term investments in Mexico V. Concluding remarks 25

26 Pending Issues i. Increase in contributions Pending issues ii. Relaxation of SIEFORE s investment limit in international assets iii. Relaxation of SIEFOREs investment limit in equity 26

27 Concluding remarks Mexico s growth of finacial savings and intense agenda of structural reforms are opening new opportunities to businesses. AFORE s growing assets and long term investment horizon provide them of a unique position to continue playing a relevant role as strategic investors. CONSAR is modifying the legal and regulatory framework to allow AFOREs to be ready to invest in these opportunities: Inclusion of new vehicles in the Investment Regime. Strengthening of AFORE s corporate government. Aligning incentives for long term investment. 27

28 Challenges and Opportunities for the Pension Funds System in Mexico MEXICO PE DAY AMEXCAP June, 2014

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