Mexico's pension landscape has been through reform, while Chile's still requires it. Plus, a warning of a looming Generation X pensions crisis
by Bethan Rees
The largest pension fund provider in Mexico, Afore XXI-Banorte, has been undergoing transformation for the past five years, says its chief investment officer Leonardo Villa Reynolds in a World Finance article. He says that "establishing a sound and replicable investment process has been one of the main challenges for the team" and changing its culture towards long-term investing has been its focus.
Afore XXI-Banorte is a collaboration between Mexico's Banorte Bank and the Mexican Social Security Institute and, notes Villa Reynolds, is "rightly held to extremely high standards of responsible investing". The pension fund, a signatory to the UN Principles for Responsible Investment, has an awareness of environmental, social and governance (ESG) issues, "which are increasingly important both to corporations and individuals investing for their pension", he says.
In 2020, Mexico approved pension reform aiming to address urgent issues in the system, such as reduction in management fees, and more than doubling the pension contribution rate in the next four years. "All of this will help address the most important challenge in achieving a higher replacement rate (the proportion of an individual’s pre-retirement income they continue to receive after retirement), and perhaps the greatest obstacle to this is informality in the workforce," Villa Reynolds says. He explains that in Mexico, workers come in and out of formal work throughout their lives and this can reduce the number of contributions they make. "A Mexican may spend 40–60% of their professional life in the informal market, which will not include a structure to save for pensions," he adds.
Women in Mexico live to an average of 79.2 years, compared to 74 for men, and "they tend to take on a greater proportion of domestic and child-rearing responsibilities", meaning less time in formal work. This could mean that they find themselves in a difficult financial situation later in life. The pension fund provider is hoping to make pension savings accessible to all, and pension reform is a "step in the right direction", he writes.
World Finance article
Pension withdrawal in Chile
During the Covid-19 pandemic, Chile's government has allowed people to access and withdraw from their pension funds, but this could be a crucial decision leaving people in their later life without enough to live on, writes Odette Magnet for Al Jazeera. "So far, Congress has approved a total of three withdrawals of up to 10% of the funds a person has saved. As of June 2021, some US$49.9bn has been withdrawn by beneficiaries from their individual accounts, according to government figures," she says. The Central Bank of Chile has warned that this could result in "significant increases in the risk profile of the Chilean economy”.
There are concerns that these early pension withdrawals could impact Chile's economic stability. Magnet, quoting figures from the International Monetary Fund, says as of February 2021, the withdrawals amounted to 14% of the country's gross domestic product.
Carolina Zillman, a 59-year-old Chilean woman, told Al Jazeera that she takes on landscaping jobs and rents out a cabin to add to her income. So far, during the pandemic, she has made two withdrawals from her pension fund of one million pesos (US$1,317) each to cover expenses and make home repairs. However, she is now left with less than six million pesos (US$8,000) with one year to go before she is eligible for retirement. She is not worried as she expects to receive an inheritance soon, but this will not be the case for many other Chileans.
Chile's pension system was "trailblazing", writes Magnet, as it was the first country to shun government-backed pensions for mandatory private retirement savings, and has served as a "model for dozens of emerging markets" since this came into force 40 years ago.
The current system in Chile is designed to benefit the constantly employed, formal workers who are able to make regular payments, therefore the large informal economy is often left facing retirement shortfalls, she says. This accounts for one-third of the working-age population. Some 80% of pensioners in Chile receive less than minimum wage per month from their retirement fund.
This inequality hasn't gone unnoticed and sparked nationwide protests in October 2019. A poll published in June finds pension reform is still a top priority for Chileans, says Magnet.
Al Jazeera article
Generation X’s impending pension emergency
Liz Field, CEO of the Personal Investment Management & Financial Advice Association, warns in a Money Marketing article about a looming pension emergency for Generation X (born roughly between 1965 and 1980). "While the baby boomer generation has benefited from unprecedented house price growth, high interest rates on their cash savings and generations of secure wealth backed up by ‘gold-plated’ pensions, Generation X has not fared so well," she writes.
Impacting around 14 million people, entering the job market when they did could be a reason for this, as they would have been too late to take advantage of defined benefit pensions, but too early for automatic enrolment, says Field. The 2008 recession has also had an impact, with an insecure work market and an increase in house prices to earnings. She says around 37% of Generation X are at risk of retiring without adequate incomes, and could expect to work past state pension age. "Additionally, more than a quarter of Generation X-ers still working expect to either mostly or completely rely on the state pension in retirement or do not have any pension savings at all."
The FCA has suggested that there might be financial help for those with £10,000 of assets, while Royal London research finds that some advice firms might "turn a potential client away unless they had closer to £50,000 to invest", according to Field. "In fact, 20% of the firms spoken to said clients would need as much as £100,000 before their firm would take them on."
Field suggests three ways to approach this issue. First, address the wider affordability constraints "using structural solutions beyond the pension system, such as the provision targeted workplace solutions, which encourage liquid saving or indeed, advice and guidance solutions". Second, improving the pensions system by overcoming the "inertia to saving". Third, to increase engagement and awareness of retirement planning for Gen X-ers, making information more accessible.
Money Marketing article
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