At the beginning of the 1980s, a revolution took place in Latin America. Unlike many other event s in the revolutionary history of the region, this time there were no ‘guerrillas’ involved. Instead it was the dictatorial regime in Chile, which decided to radically change the old pension system, introducing a fully funded privately managed scheme with individualised mandatory savings accounts. Since then, other Latin American countries have followed the approach taken by the Pinochet government, reforming their social security systems in a more or less radical way.
In 1996, 15 years after the pension reform in Chile, during an international seminar held in Santiago, the International Federation of Pension Funds Administrators (FIAP) was created to promote, co-ordinate and unify the activities of private pension funds administrators in different countries across the world.
Based in Santiago, the FIAP was originally focused on Latin American countries, but now has members in Europe and Asia. Its president, Pedro Corona, strongly believes that the reforms of the pension systems have helped the countries involved to developed their economies, improve quality of life for workers and boost the financial markets of the region.
“The old pension systems are collapsing all around the world,” says Corona. “The reason why Latin American countries have pioneered these reforms is behind their economic conditions. We are talking about poor countries where the situation was simply unsustainable and something had to be done.” He adds: “Europe is facing the same problems regarding social security systems but its wealth has permitted it to more or less maintain this situation. We just couldn’t wait any longer.”
Corona is also president of AFP Cuprum. AFPs are Chilean investment management companies that are allowed to manage only pension fund assets. The AFPs are now managing more than $180bn (e210bn) in assets for pension funds covering more than 45m people across Latin America.
“In Chile since the reform we have increased the coverage of social provision significantly,” Corona explains. “In 1980, 48% of workers were not covered and in 1997 the figure had increased by 25%, with a total of 65% of workers covered under the new system.”
“Obviously there has been a cultural change,” he adds. “Now workers know that the money they contribute to their pension is their money. When the new system came into force it was a big shock because nobody could really understand how the whole thing was going to work, but the reality is that, after 20 years, employees have changed from being proletariats to owners of $38bn, which represents more than 50% of the country’s GDP.”
Taking into account the size of the market, the pension fund industry in Latin America is playing a crucial role on the financial development of the countries involved. Although pension fund investments are still quite conservative, a greater liberalisation is entering the market. “Every country has its own investment guidelines and limits depending on the maturity of the system,” he says. “Almost in every country its allowed to invest between 30–40% in equities, but in terms of foreign investment the limits are quite different from country to country. In Chile, for instance we have a limit of 16% for investing abroad and we now have more than $6bn invested outside the country, but in other countries it’s much less than that and in some cases foreign exposure is not yet allowed.”
“As the market becomes more developed the need for diversification increases,” he adds. “You can’t only depend on the economy of your country and when you start investing abroad other countries begin to invest and the market becomes more solid. And this is what we need in order to grow,” Corona says.
Corona comments: “I think that regulators are understanding more and more that these systems have to operate in stable and wide markets. Our philosophy is that we could invest up to 50% in foreign stocks. It wouldn’t be a prudent approach to invest more than that abroad because pension funds represent a very high percentage of GDP, and all to do with investment exposure have to be carefully supervised by the fiscal authorities and central banks of each country.
“In my opinion, the legal investment framework has to be broader but always taking into account the specific circumstances of each nation,” he says. “If the authorities consider that the limit for foreign investment should for instance be 30% instead of 50%, it should be that way.”
The growth of the market is also attracting foreign asset managers who see in Latin American the right place to expand their business further. “We can’t say that foreign players are trying to be leaders in the Latin American market because they already are,” Corona says.
Four large international firms – Banco Bilbao Vizcaya Argentaria (BBVA), Banco Santander Central Hispano (BSCH), Citibank and Aetna – are already present in almost every country and gaining market share. The strong historical and cultural links with Latin America have helped the two Spanish financial institutions, BBVA and BSCH, to obtain very important presence in the market. “And it’s not only the banks, but also the Spanish telecommunications, electricity and oil companies which are very strong in every Latin American country and will grow further because there is still room for growth,” Corona says.
He believes this whole process is a consequence of globalisation which means a ‘shock’ that is affecting the social security and the employment market.
“Globalisation brings big opportunities but also big challenges,” he says. “In the pre-globalised world legislation promoted the inmobility of the workers, but now everything has changed. Labour legislation should tend towards flexibility and mobility to avoid unemployment and the new systems put in place in Latin America through the pensions reform are better prepared for this reality than the old social security system.”
“Europe is now facing the challenge of finding the best solution to guarantee security to workers operating in this global environment and in my opinion the best solution is the one we’ve been using for some time now,” he says.
The other challenge is education. “This issue has already been addressed in Chile for the last years. We are taking information about the new system and its implications for the schools so people are familiar with these concepts when they start their working lives,” Corona comments. “Education is crucial to face the cultural changes that the collapse of the old social security systems involves. In this sense, I think all the Latin American countries which have already transformed their pension systems are in a better position to face the challenges of the near future than many countries in other continents, including Europe and North America.”