Barely two months have passed since the Retirement Savings Fund Administrators (Afores) have recorded additional and progressive income as a reflection of the increase in employer contributions left behind by the historic reform of the country’s pension system.
As is known, starting this year, employers must make additional contributions to workers’ accountswith the goal of increasing the replacement rate to approximately 80 percent from a current average level of 40 percent.
The Afores are key in this sense since, in addition to being the recipients of these savings, they must invest them to make them grow and generate enough money that, in addition to being able to pay a better pension, generate the necessary financial benefits. , although in this sense the task faces obstacles such as market conditions.
One way or the other, the benefits that from now on the Afores registerand Mexican workers, can be measured with classic tools used in this type of case and other institutions.
Goldmine
The Afores will manage an authentic “gold mine” for the next few years that will make it possible to finance the pensions of millions of Mexican workers in the coming decades. According to figures from Bank of America (BofA), the progressive increase in employer contributions will increase the total contribution base for retirement by 100 base points year after year starting in 2022. to go from 6.4 percent to 15 percent in 2030.
Thus, the assets managed by the Afores will go from representing the equivalent of 19 percent of GDP at the end of last year, to 32 percent of GDP of the country at the end of the decade or the beginning of the following one, that is to say, in 2030.
In absolute pesos, the Afores will go from managing 5.2 trillion pesos in 2022 (equivalent to 282 billion dollars), to a total of 9.9 trillion pesos in the year 2030 (equivalent to 534 billion dollars).
Successful pension reform
This “gold mine” is the national wealth of millions of workers. This is a figure that the system generated thanks to the reform that began this year and that is the product of a very relevant change, perhaps the most important since the system began in 1997 and after 25 years that it operated under the initial rules.
There are many figures that show how relevant the pension reform was, but when projected into the future they show that they will be beneficial in every way.
For example, the BofA points out that without the pension reform that began to be applied this yearthe resources managed by the Afores would have reached the equivalent of 25 percent of GDP in 2030, that is, 5 percentage points less than projected already with the application of the reform. This translated into money, would represent 2 trillion pesos less in resources that would not exist and that would have sentenced millions of Mexican workers to rickety pensions, as in fact still exist in the system, since it has only been operating for a few months under the new rules.
They will trigger growth in local markets
National markets are very small compared to others in the world. However, the experience of other latitudes indicates that these grow as the assets managed by the pension funds develop and increase.
The predominant investments in pension funds are focused primarily on local markets; This is how it has been around the world for decades when the first funds were born and to this day. Consequently, the money supply expands and stock holdings increase, as well as paper and local companies, Mexico will not be the exception.
According to BofA’s projections, the estimated increase in investments in Mexican shares should add up to around 17 billion dollars between 2022 and 2030, only due to the increase in contributions to workers’ accounts and the income generated.
Chile in Latin America, the United States and Canada in North America, as well as almost all European nations, are reliable proof of what BofA assures: the increase in liquidity in the general markets.
“We believe that greater liquidity will flow to the instruments most owned by the Afores, such as the 10 most liquid names in Mexico, the NAFTRAQ and the investment allocations for Fibras and Real Estate instruments. Also, if managed resources were to double in the next 7 years, we estimate that the Exchange could obtain additional income related to trading, debt, clearing and custodywhich represents 2 percent of additional income per year, plus additional income if new share prices materialize”, explains the BofA in its report.
The US bank considers that among the 10 institutions that currently operate in the market, Afore Banorte will be a key beneficiary, as it owns the largest fund manager in Mexico (has 20 percent of the market share).
We are barely at the beginning but, just as the errors are pointed out, the successes are also recognized. The pension reform started in 2023 was successful, the Afores have a lot of potential to generate wealth with the savings, owned by millions of Mexican workers. It was a success not to have re-statized the system and let it operate under the general conditions in which the current administration found it, promoting a transcendental change now and with the passage of time. If BofA’s projections come true, in the future we will have a pension system that will give those who have worked all their lives a fair pension.. I hope so.
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