When Humberto Allendes writes a pamphlet for his new pension fund, he asks his office security guard to read the text. Few Mexicans have a bank account, let alone understand pension funds, so Allendes needs to be sure his leaflet gets the message across simply: that Mexicans will soon have control over how their pension money is invested. The security guard is his best test.
Allendes, the 32-year-old Chilean who heads Banco Santander's pension operation in Mexico, and a dozen others like him want to bring pension funds to the country. Privatizing the creaky state-run pension system, beginning next year, is President Ernesto Zedillo Ponce de Leon's most far-reaching economic reform. The government hopes the new plan will create a pool of domestic savings worth at least $47 billion by 2005. That money could finance projects from municipal sewage plants to small businesses.
DISTRUST. Ideally, the government would like to repeat the system's success in Chile, which pioneered private pensions 15 years ago. Chilean pension funds now represent about $25 billion, or 40% of GDP there. Argentina, Peru, Uruguay, and Colombia have all followed suit. But for the Chilean funds that want to export their marketing expertise and software, Mexico is the biggest challenge yet. "It took 15 years in Chile," says Santander's Allendes. "It could take even more time in Mexico."
That's because Mexican savers are wary of giving their money to people they don't know and trust, particularly the country's discredited banks. Poorer Mexicans have been ignored by banks, while the middle class has seen its bank savings wiped out by inflation or by recurring financial crises. So it will be tough to convince Mexicans that their money will be safe in the new funds, even though they will initially invest in conservative government bonds. Mexico is a lot bigger than Chile, too.
Even if Mexicans go along with the concept, they could short-circuit the system. For example, they could fail to choose a fund, known as an AFORE, for Administradora de Fondos para el Retiro. By default, their payments would go into an account maintained by the central bank. That would deprive private managers of the commissions needed to cover operating costs. "The main risk is that the system won't catch on," warns Eduardo Silva, director general of a fund operated by Chile's No.1 fund, Provida, a Mexican insurer, and a Spanish bank.
Another problem is that Mexican banks have racked up a dismal record managing large numbers of small accounts. A forerunner of the new system failed because workers who changed jobs acquired multiple savings accounts that banks couldn't track. Despite a new computer system to match accounts, many are still lost or divided among several banks. Officials expect the new system to consolidate those accounts as workers sign up for the new AFOREs. "This time, we're starting clean," promises Fernando Solis Soberon, president of Mexico's pension commission.
TEAMWORK. All these hurdles haven't dimmed the enthusiasm of the 20 or so financial institutions that want to get in on fund management. Mexican banks and insurance companies are joining forces with foreign partners to set up AFOREs (table). Citibank's Mexican subsidiary, for example, will invest at least $60 million with Mexico's No.3 bank, Banca Serfin, and Chile's second-largest pension fund, AFP Habitat, to form a pension-fund group. Chile's Provida is joining forces with Mexican insurer Grupo Nacional Provincial and Spain's Banco Bilbao Vizcaya.
The new players say they're investing for the long haul. "This is a business of very small margins," says Juan Fernandez Casas, who heads the Citibank-Serfin-Habitat project. "We are talking about a return on our investment in 6 to 10 years."
The new pension funds will at first sink most of their assets into government debt. More choices should come in time. "The institutional investors will generate a new supply of instruments," says Solis. These could include mortgage-backed securities and municipal bonds, both unheard of in Mexico. But caution, not creativity, will be the funds' watchword to start. With all the startup pains the system is likely to encounter, that's probably the safest strategy.