By Marcela Valente
November 26 2008
Pension funds in Latin America have suffered sometimes drastic losses as a result of the global financial crisis. Argentina decided to nationalise its private pension funds, and in Chile, Colombia and Mexico there are voices urgently calling for reforms.
Many of the private sector pension plans, created mainly in the 1990s under the influence of neoliberal, free-market reforms and structural adjustment policies, followed the model adopted in 1981 by the dictatorship of Augusto Pinochet (1973-1990) in Chile.
In 1993, Argentina adapted the model, without eliminating the parallel public system, which allowed workers to choose either one. But on Nov. 20, the Argentine parliament eliminated the private pension funds, which were in a state of collapse.
It is not yet clear how the financial crisis will affect private pension funds in Bolivia, Chile, Colombia, Costa Rica, the Dominican Republic, El Salvador, Mexico, Peru and Uruguay.
According to the International Association of Latin American Pension Fund Supervisors (AIOS), the 10 Latin American countries that make up the association had 76 million pension fund affiliates as of late 2007, but only 32 million — 37 percent of the economically active population — made regular payments.
The largest number of members of private pension plans — 39 million — were in Mexico. This was followed by 9.5 million in Argentina (who will now go into the public social security system), and by Chile and Colombia, with around eight million each.
The AIOS reported that in late 2007, private pension funds in the region held 275 billion dollars, equivalent to 16 percent of the 10 member countries’ GDP.
“We are going to keep a close eye on what happens in Chile, the pioneer of the model,” said Jorge D’Angelo, chairman of the Inter-American Conference on Social Security’s (CISS) commission on the elderly. “We’ll have to see how bad the crisis gets, and whether Chile will be able to weather the storm,” he told IPS.
In Chile, which has the highest proportion of retirees in private pension plans in the region, the average monthly pension stands at 264 dollars, just over the minimum monthly wage. In the rest of the countries, pensioners draw even more meagre amounts. In Chile, the Central Unitaria de Trabajadores (CUT) central trade union and citizen, social and political groups are demanding alternatives to the private pension funds. CUT is calling for a public social security system based on the principle of solidarity.
Senator Alejandro Navarro, who recently left the co-governing Socialist Party, is pushing for the creation of a public administrator of individual retirement accounts.
Between Oct. 31, 2007 and Oct. 31, 2008, Chile’s private pension fund assets shrank from 94.3 to 69.1 billion dollars.
In 2002, the private pension administrators created five different funds, classified as A, B, C, D and E, ranging from high to low risk, for workers to choose from. So far this year, profit margins have shrunk by 40.9 percent in the A funds, 30.1 percent in the B funds, and 18.6 percent in the C funds, to mention the sharpest falls.
And since the creation of Chile’s multi-fund system in 2002, returns have ranged between 2.8 and 4.2 percent, depending on the level of risk exposure. But if measured since 1981, returns have averaged 8.8 percent
“The worries of workers are logical and understandable,” Fabio Bertranou, a Chilean expert on social security with the International Labour Organisation (ILO), told IPS. “The value of the funds has shrunk due to the sharp drop in the value of their financial assets.”
Chile accounts for 35 percent of the region’s private pension fund assets that are invested in equities abroad.
“It is difficult to predict how long it will take for the value of the assets to rally,” admitted Bertranou. “We have to issue a call for reflection and reassess how individual retirement savings accounts work during times of crisis, in order to take the necessary precautions. There isn’t a great deal of experience in the matter.”
Early this year, the Chilean government passed a new law that created a system built on three pillars: a pay-as-you-go guaranteed minimum pension funded with help from the government, a solidarity system, and voluntary individual savings.
The most notable aspect was the creation of the “basic solidarity pension” and the “solidarity pension contribution” for the poorest of the poor.
That reform “has taken a fundamental step towards the creation of a mixed social security system. The incorporation of the solidarity pension component will give workers, especially low-income workers, a more secure future,” said Bertranou.
In his view, “the decline in the value of pension funds is not the only problem. It is also necessary to address the drop in occupational coverage that will result from the economic slowdown, and the subsequent fall in income and job creation and stability.”
Uruguay’s system, unique in Latin America, seems to be the one least affected by the crisis so far.
Under the mixed or multi-pillar system, contributions and benefits are linked to both a state-managed pay-as-you-go system and privately managed individual retirement accounts. Workers contribute to each, depending on where they fall within a salary level band, and receive two pensions when they retire, with the exception of those who earn less than 715 dollars a month, who are not required to pay into an individual savings account.
Alongside the mandatory individual capitalisation system, the public sector maintains a basic minimum pension under the pay-as-you-go regime.
In the quarter that ended in September, private pension funds went down 2.6 percent, due to the drop in value of the debt bonds in which most of their assets are invested. But since the system began to operate in 1996, returns have ranged between nine and 11 percent, depending on the currency in which they are measured.
Nearly 38 percent of workers paying into private retirement accounts in Uruguay chose an administrator that is run by three state banks. By law, the pension fund administrators can only invest a limited amount of their assets abroad.
Pension fund returns depend partly on where the assets are invested. In some countries, a majority have been placed in equities in foreign companies that are now in crisis, while others are invested in public bonds, whose drop in value varies from country to country.
“In Argentina, the debate had become abstract, because the decline in the value of private funds was so steep that when beneficiaries were ready to retire, the state had to step in to help pay their pensions, since their savings were too small,” said D’Angelo.
According to the superintendency of private pension fund administrators (AFJPs) in Argentina, only 3.6 million of the 9.5 million members of the private system were actually making payments. And of the six million workers still affiliated with the public social security system, only two million were contributing.
In October, total AFJP assets plunged 17 percent with respect to the previous month. And the returns over the last year have reflected a loss of 25.4 percent — compared to an average annual profitability rate of 6.6 percent.
Given that situation, the government of Cristina Fernández proposed the creation of an integrated pensions system and the elimination of the private funds. Within less than a month, the new law made it through both houses of Congress, approved by the legislators of the governing Justicialista (Peronist) Party and some opposition lawmakers.
The drop in the value of the funds has also been drastic in Mexico, whose current pension system began to operate in 1996. According to the national commission of the retirement savings system, between May and October, the value of the individual retirement accounts of 39 million workers fell by 3.36 billion dollars.
The national union of social security workers is demanding that the Mexican Congress review the laws on private pension funds and intervene so that limits are set on the proportion of assets that can be put into high-risk equities abroad.
People in Colombia, where reforms incorporating a private pension system went into effect in 1994, are worried too. According to the Colombian association of pension fund administrators, losses climbed to more than 94 million dollars in the first six months of the year.
“We are much worse off than they are in Argentina,” Saúl Peña, president of the union of Colombia’s Social Security Institute workers, told IPS. “Our problems are more serious because of the low level of wages, the labour instability and the low profitability.”
There are currently 12,000 retirees in Colombia’s private pension system, and nearly all of them now draw a monthly pension equivalent to the minimum wage, he said. “The only thing that can be done now is to wait and see whether we will recover in the long-term, maybe in 2009, or 2010. It’s chance, it’s a gamble,” he said.
* With additional reporting from Daniela Estrada in Santiago and Helda Martínez in Bogotá.