- In this document, we analyse the pension reform approved by Congress in 2020 and its implications on Afores’ assets under management (AUM) and local market dynamics. Besides the reform’s impact on the labour market, the flow of money to Afores will certainly affect the supply-demand dynamics of local financial markets because Afores’ increased resources would mean additional demand for investment assets.
- The reform aims at mitigating two main problems: 1) low contribution and substitution rates, and 2) a long time requirement for workers affiliated to the social security system in order to be eligible for a pension. Starting in 2023, the contribution rates will increase from 6.5% to around 14.7% in 2030, and the required enrolment time will be lower. The employer’s contribution will rise gradually up until 2030. Before the reform, this contribution was set at 5.15% of salaries for all workers; now, it will increase progressively towards 2030 to a maximum of 13.875% for workers earning more than four UMAs.
- We calculated the additional flow of money to Afores resulting from this reform. According to our simulation, the weighted average contribution rate for all workers would be 8.95% in 2023, gradually increasing to 14.7% in 2030. We also estimated the annual flow to Afores at around MXN400bn in 2023, rising gradually to around MXN1,200bn in 2030.
- Hence, Afores’ AUM are expected to soar from 18% of GDP to around 34% in 2030 (a jump in assets from MXN5,300bn in 2022 to MXN15,067bn in 2030). Bear in mind that our AUM estimate already considers Afores’ investment gains net of their pension outflows.
- This higher AUM means that the additional flow would open the door to further demand of Mexican/external financial assets, depending on whether current Siefore investment guidelines are changed. As of January 2023, Siefores’s total assets were mostly invested in local sovereign debt. Hence, the scope for increasing Afores’ demand for assets other than sovereign debt, such as equities or corporate credit, is ample overall.
- Finally, we think that the reform implications in terms of sovereign debt would be positive as the additional contributions would mean higher demand for government bonds should the investment profile remain relatively stable. This is relevant for the government's debt management as the additional Afore contributions would warrant the continuation of a relatively stable local financing of the budget deficit.