Changing ideas into reality
Interchange of ideas among professionals within the pension fund industry is crucial, as long as nations don’t forget their own specific realities, according to delegates at the II International Pension Fund Conference held in Santiago, Chile, in March.
The conference, organised by the International Federation of Pension Administrators (FIAP) and the Asociación Gremial de Administradoras de Fondos de Pensiones (AGAFP) attracted representatives from all five continents, who gathered together to discuss the problems and challenges faced by the private pension systems in the different regions around the world.
Although Europe and North America were subject of several presentation the focus on the conference was on Latin America, coinciding with the 20th anniversary of the Chilean system, the earliest first pillar private pension system created in the region.
“Countries from all around the world are now facing the same problems and each region has found the best way to deal with them,” said Pedro Corona, president of FIAP. “In Latin America and eastern Europe we thought that the best solution to deal with social provision was through individual capitalisation savings accounts. This has been our answer to the new demographic reality and it’s now expanding to other countries who are looking at our experience and studying how these systems are developing.
“Interchanging experiences is the best way to find out how to be more efficient in dealing with such important issues and we are here to work towards the universalisation of social provision.”
Kees van Rees, chairman of the European Federation of Retirement Provision (EFRP), said: “It’s a fact of life that demographic problems won’t go away and the different nations of the world have found different ways to face these issues.
“Some would close their eyes believing that these problems would go away and others have been through such economic stress that they had to do something. But in between there are many nations who have been fairly affluent and who think they can wait or just face today’s problems without dealing with those of tomorrow.”
He continued: “But they all have something in common which is that whatever measures they take these should always be related to their cultural and social-economic realities so it shouldn’t surprise us that countries are following different routes because there is no way you can transfer European solutions to Latin America as well as there is no way to translate the Latin American approach to North America.”
In terms of investment, the way pension fund portfolios are being invested in the different regions is linked to the reality of each system, and affects in different ways the countries’ economies.
“The private pension systems have helped developing the Latin American capital markets,” said Horacio Lopez-Santiso, vice president of the Mercosur Zone. “If the funds accumulated are invested in the right way this can contribute to economic growth but not all countries are investing these assets properly.”
He added: “In the beginning, when the different systems were established the majority of the assets were invested in government bonds, which gave good returns at a very low risk, but other strategies are being put in place which is contributing to the growth of the economy, thus reducing unemployment rates. As a consequence of these the number of affiliates to the system is growing as well as the assets under management.”
However, in the Latin American region pension funds portfolios continue being extremely conservative, and, although it is true that in some of the countries involved the economic development following the pension reforms is a reality, there is still a long way to go .
“With the exception of Chile and Peru, more than 50% of the resources are invested in public debt issued by central governments and other organism of the public sector,” said Rodrigo Galarza, vice president of the Colombian Pension and Unemployment Funds Administrators Association (Asofondos). “This is making the concentration of the issuer risk unjustifiably high and at the same time it
makes evident the precarious development of capital markets and the lack of political will of those who regulate these matters.”
He continued: “Despite the relative importance reached by the pension funds, there is an obvious regulatory preference for intermediated financial models as opposed to the non-intermediated models or of instruments, where the regulation does not have the same quality.”
Galarza explained how the precarious participation of pension funds in the stock market of most countries in Latin America makes evident the institutional weakness of the different stock exchanges. “It should be noted, however, the relatively importance of these markets in Brazil, Argentina and Chile, as opposed to Ecuador, El Salvador, Mexico and Uruguay where, according to statistics, the pension funds’ participation in this market does not exist.” Galarza concluded: “In terms of foreign investments those take place only in Chile and Argentina and this goes against affiliates interest since the lack of access to liquid, deep and efficient international markets punish in the long term better profitability and therefore better pensions.”
Delegates also discussed the implications of the creation of the World Pension Association, established last year in Madrid during the first International Conference of Pension Funds. “The objectives of the association are to facilitate the exchange of information achieving a better understanding of the different pension systems and the development of retirement provision systems,” said Angel Martinez-Aldama, director of Inverco.
“Since the creation of the WPA we have made contact with other associations and we have conducted reports as well as developing relations with international institutions. The latest development has been to set up a web
site to facilitate exchange of information and communication among members” he said.
EFRP’s van Rees welcomed this initiative but he warned that nations have to have in the back of their minds that each case is different. “If you are aware of this health warning, then you can learn from other cases and people will learn from you.
“We are not just people who get together from time to time to discuss these issues. We are all practitioners with long experience in doing our jobs. We know that we all have different systems and we are not here to tell people what to do but to exchange ideas.”
Van Rees noted that the focus for the future should be the beneficiaries of the systems in all the different regions of the globe. “We have to look at costs and transparency because we all know that when there is money there are always ugly procedures going on and we can’t forget that we are here for the benefit of the beneficiaries.” IPE