By Martha León Alvarado, professor at EGADE Business School,
and Beatriz Mota Aragón, professor at the Metropolitan Autonomous University
Since 1997, the defined contribution pension system has been operating in Mexico. Through individual accounts (Afores), the funds from the contributions made by the employer, the worker and the government are invested in various financial instruments, both in the Mexican market and in international markets, through pension funds called SIEFORE .
The introduction of the defined contribution pension scheme in several countries, promoted by the World Bank in the mid-1990s, brought with it an increase in the number of institutional investors within the financial markets of the countries that implemented this new system.
Although today it is considered that pension funds play an important and positive role in the capital markets and the economy of countries, there are several studies that try to identify if there are differences in the impact that pension funds have had in developed and emerging countries.
Improve retirement conditions
The reforms to the pension systems implemented in Mexico since 1992, and in particular, the entry into operation of the Retirement Savings System (SAR), allowed the improvement of the country’s financial sustainability. Nevertheless, it is necessary to strengthen the conditions in which workers retire. For this, some reforms to the system are required to adjust the retirement conditions to the labor and demographic dynamics of the country.
According to the Inter-American Development Bank (IDB)[1]it is important to consider reform proposals organized around three strategic axes:
- Improve system governance
- Increase the coverage and level of present and future pensions
- Reduce imbalances in the transition between systems
Power system savings with artificial intelligence
Within these three strategic axes, there are additional proposals to promote savings in the system, such as reduce operating costs, establish an automatic voluntary savings mechanism and improve savings efficiency by improving the investment regime.
In this sense, it becomes increasingly important for pension funds to have more tools and models that allow them to optimize their portfolios according to their objectives and needs. Therefore, for this type of institutional investor, the correct long-term portfolio management is the most important decision.
After the introduction of machine learning models (machine learning), long-term portfolio management has changed. Now the large institutional investors have found a way to manage their portfolios that seems to be more adapted to their needs, compared to traditional models, arising from financial theories.
Today, many of these institutional investors have already adopted artificial intelligence for their portfolio management and diversification decisions.
Additionally, in the case of pension funds, there are studies that, supported by machine learning techniques, not only seek to solve portfolio management optimization problems, but also attempt to forecast the behavior of accumulated resources and estimate the date on which each worker will decide to retire from working life.
For example, in addition to data analysis technologies, a machine learning tool called boosted decision tree -due to the proximity of this technique applied in the financial forecast- to estimate in a personalized way the resources accumulated in a member’s pension fund according to their own economic levels and growth aspirations. This model was even validated with a pension fund manager in Peru, and the results yielded a very good approximation.
In addition, some insurers have also been interested in machine learning to detect early the withdrawal of resources at a given time, having adequate planning. Algorithms such as machine vector, logistic regression Y random forest with data from private pension plans to predict whether a person retires before or after the age of 65, based on their individual characteristics and macroeconomic factors.
Finally, due to the demographic conditions in Mexico, where the economically active population will continue to increase progressively, SAR assets have grown rapidly and are expected to continue to growit becomes crucial to analyze the impact that the growth of SAR assets will have on the equity and debt financial markets of Mexico, since this allows visualizing the improvements required by the current investment regime.
*The content of this article is based on a chapter we authored on pension funds in emerging markets, included in the book Data Analytics Applications in Emerging Markets (Springer 2022).
Editor’s note: This text belongs to our Opinion section and reflects only the author’s vision, not necessarily the High Level point of view.
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[1] Diagnosis of the Mexican pension system and options to reform it (2019)https://publications.iadb.org/es/diagnosis-of-the-mexican-pension-system-and-options-to-reform-it