INSURANCE AND PRIVATE PENSIONS COMMITTEE SPECIAL ... · Insurance and Pensions Week: 50ty...

50 YEARS OF THE OECD

INSURANCE AND PRIVATE PENSIONS COMMITTEE SPECIAL ANNIVERSARY MEETING

Special anniversary roundtable on the contribution of insurance and pensions to growth

9 June 2011

Mexico City, Mexico

Role of Pension Funds in economic growth

Jorge Sicilia, BBVA

1

Role of Pension Funds in economic growthin economic growth

Insurance and Pensions Week: 50ty Anniversary IPPC-OECD

Special discussion on insurance and pensions and their contribution to economic growth

June 9th 2011, Mexico DF.

Jorge Sicilia │[email protected] │ june 2011

Role of Pension Funds in Economic Growth/ June 2011

Section 1

Index

Sizing pension funds in the mexican economySection 2

Pension funds and short and long term growth

Section 3

Pension funds and infrastructure investment

Section 4

Conclusion

Page 2

2


Section 1

Pension Funds have achieved an important role in the Mexican economy

Mexican Pension Funds’ Assets under Management Evolution of Contributors and AffiliatesMexican Pension Funds Assets under ManagementSource: Consar

US $117 billion

40

60

80

100

120

Evolution of Contributors and AffiliatesSource: Consar

10.000

15.000

20.000

25.000

30.000

35.000

40.000

45.000

Page 3

Pension Funds’ assets under management represent 10.6% of the GDP

Jan-

07

Mar

-07

May

-07

Aug

-07

Oct

-07

Jan-

08

Mar

-08

May

-08

Aug

-08

Oct

-08

Jan-

09

Mar

-09

May

-09

Aug

-09

Oct

-09

Jan-

10

Mar

-10

May

-10

Aug

-10

Oct

-10

Jan-

11

Mar

-11

0

20

0

5.000

199

7

199

8

199

9

200

0

200

1

200

2

200

3

200

4

200

5

200

6

200

7

200

8

200

9

Contributors Affiliates


Section 1

Central role in the development of Capital Markets

Investment Portfolio Local financial System (market share)Investment PortfolioSource: CNBV, CNSF y CONSAR.

State Sector61.1%

Foreign Sector

8.2%

AvailableAssets, 4.1%

FinancialSector, 2.0%

13.4%

9.6%

11.4% 6.2%

4.1%

Pension Funds (SIEFORES)

Development Banks

Mutual Funds

Insurance Companies

Brokerage Houses, 4.1%

Non-Bank Financial Companies, 3.5%

Others,1.4%

Local financial System (market share)Source: Consar

Page 4

BusinessSector

24.7%Banks

50.4%

3


Section 1

Introduction of the pooling investor: multifunds

Portfolio structure by SieforeS CSource: Consar

30%

40%

50%

60%

70%

80%

90%

100%

Page 5

0%

10%

20%

Siefore 1 Siefore 2 Siefore 3 Siefore 4 Siefore 5 AdditionalSiefores

Total

National Equity Foreign Equity Private National DebtStructure International Debt Government Debt


Section 1

Afores as competitive institutions in generating sustainable returns

Yields observed, by Siefore (last 36 months, closing in April 2011)Breakdown of SAR balance funds (Thousand of million pesos) , y ( , g p )Source: Consar

Breakdown of SAR balance funds (Thousand of million pesos)Source: BBVA Research with data from CONSAR

7 2

7.4

7.6

7.8

8.0

8.2

8.4

8.6

200

400

600

800

1,000

1,200

Page 6

The management of the Siefores is yielding significant returnsThis signifies that the performance management of yields has a greater importance on the balances accumulated

7.0

7.2

Siefore 1 Siefore 2 Siefore 3 Siefore 4 Siefore 5

0

Dec

-97

Dec

-98

Dec

-99

Dec

-00

Dec

-01

Dec

-02

Dec

-03

Dec

-04

Dec

-05

Dec

-06

Dec

-07

Dec

-08

Au

g-0

9

Cummulative return net of fees Contributions in the periodInitial balance

4


Section 1

Pension Funds: major projected resources

Projected Private Pension Funds Accumulated Balance • The Pension Fundsj(% of GDP) Source: BBVA Research

The Pension Funds (PFs) will administer a large quantity of resources over the next decades

• The PFs can be an appropriate source of savings to partially cover the financing needs15%

20%

25%

30%

35%

40%

45%

Page 7

0%

5%

10%

200

5

2010

2015

2020

2025

2030

2035

2040

2045

2050


Section 1

Index

Sizing pension funds in the mexican economy

Section 2

Pension funds and short and long term growthSection 3


Section 4

Conclusion

Page 8

5


Section 2

Pension Funds contribution to economic growth

Private

Pension Funds GDP

Financing Infrastructure

Projects

Savings

Fiscal

Deficits

Page 9

Labor Markets

* Conditioned to other factors (e.g. market rigidities)

*


Section 2

Pension Funds contribution to economic growth

• A 10 percent increase in the sizeNational savings rate (as a % of GDP) A 10 percent increase in the size of the pension funds has an impact of one tenth in aggregated savings

• Corbo y Schmidt-Hebbel (2003) found that a one percent point increase in pension funds, relative to GDP, has an impact between 1 and 5 points of GDP in savings

g ( )Source: Cobo &Schmidt-Hebbel (2003)

PF Stock (as a % of GDP)

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

Page 10

in savings

Observed.Forcasted-12.0

-10.0

-8.0

-30 -15 0 15 30 45 60

*Variables ortogonales a la tasa de dependencia demográfica y el grado de educación.

6


Section 1

Index


Section 2


Section 3

Pension funds and infrastructure investmentSection 4

Conclusion

Page 11


Section 3

Long term growth factor: Infrastructure investment

Since the original Aschauer(1989a 1989b 1989c) papers economic Since the original Aschauer(1989a, 1989b, 1989c) papers, economic literature has found various correlations between infrastructure and economic growth

“Law of diminishing returns” shows an infrastructure optimal accumulation path, which is different for each country (Canning & Pedroni, 1999)

Empirical evidence in LATAM shows that the infrastructure effect on growth is positive

Page 12

7


Section 3

Infrastructure investment and economic growth

Asia has strongly invested in infrastructure and has reached high sustainable levels of economic growth Latin American countries lie, on average, below the global trend of infrastructure investing As a consequence, Latam runs the risk of restricting growth if it does not find financing for infrastructure projects

Asia and Latam investments

• China and Vietnam, two economies with high growth, are investing around 10% of GDP in infrastructure. (Straub et al 2008). Whil th i GDP th t f th

Competitiveness Ranking of Infrastructure StockSource: BBVA Calculations with World Bank data

50

60

70

80

90

100

mpe

titiv

enes

s

Page 13

While their GDPpc growth rate, for the same countries, reached 7% (World Bank)

• Latin America and the Carribbean, however, only have been investing 1% of GDP, and their GDPpc growth rate has reached 3.5% (World Bank)

0

10

20

30

40

Hon

g K

ong

Kor

ea

Chi

le

Chi

na

Uru

guay

Bra

zil

Mex

ico

Arg

entin

a

Peru

ranking 2010-2011

Hig

her

Com


Section 3

How to combine the needs of both parties?

Government

• Fiscal consolidation or a tax burden reduction. Possible if government resources for investment in infrastructure are replaced by private resources

• Improved efficiency and effectiveness in the budget process. Estimation is achieved by shifting costs to the beneficiaries/users

• Achieve optimal planning of long-term portfolios (Inderst, 2009)

• To reduce political and regulatory risks (Vives, 2000)

• Proper design of a financial investment project in the long term offers a good ratio of risk/returnI t t ithi th t d

Pension Funds

Page 14

beneficiaries/users• It is necessary to find a partner to

substitute public investment if there are cyclical problems in order to redirect resources to other social expenditures

• Improved quality and reduced total costs of infrastructure projects

• Investment within the country reduces some financial risk, such as exchange rate risk

• Pension fund investment in infrastructure can be viewed as favorable to the public as it in turn increases the quality of life

8


Section 3

Infrastructure and Pension Funds

Three key elements from the pension fund perspectiveThree key elements from the pension fund perspective

Improvement in the risk-return profile for the total Pension Fund portfolio due to asset contribution in infrastructure investments

Fiduciary duties and prudential investment analysis under the scheme provided

Feasible cash flows of infrastructure assets. Unfortunately, not all infrastructure projects are necessarily successful for various reasons: technical, operational, economic, political, etc

Page 15


Section 3

Why would Pension Funds be interested in investing in infrastructure?

The Risk Profile in infrastructure is among that of stocks and bonds. However, the ratio of risk/return is more similar to investments in bonds

AssetsExpected

returnAnnualized

volatility5% of the worst

returnsRatio

Risk/Return

Bonds (5 years) 5.20% 4.40% 3.10% 1.18

Stocks 8.10% 18.20% 1.10% 0.45

Assets according to estimated risk and returnSource: Morgan Stanley-Liability model (data as of May 2007)

Page 16

Real Estate 7.00% 9.50% -1.30% 0.74

Infrastructure 9.30% 7.90% -1.50% 1.18

Private capital funds 10.00% 30.20% -7.30% 0.33

9

The final decision to invest in infrastructure should be left in theThe final decision to invest in infrastructure should be left in the hands of the Pension Funds, which must be the result of rigorous analysis of optimal portfolio management and the relevance of their fiduciary role (the funds are of the future retired)


Infrastructure investment by the Pension Funds (FPs)

Section 3

How much is invested?

y ( )Source: ASOFONDOS, Syperintendency of Pensions in Chile, Consar

15.70%

4 40%

6.60%6.54%

6%

8%

10%

12%

14%

16%

18%

20% 18.70%

10.28%

7.64%

11.10%

Electricity-EnergyIncluding Mining and Ecopetrol

Electricity

Housing

Energy

Page 18

4.40%3.40%3.50%

0.78%

2.25%

0%

2%

4%

Colombia Chile Mexico Peru

Infraestructure invesment as % of FP Infraestructure invesment as % of GDP

10


Section 3

Mexican case: Investment in Infrastructure

As a percentage of GDP, pension funds in Mexico Infrastructure Investmentp g , phave increased from 1.4% at the end of 1998 to 10.2% by the 2010 year end (USD $114.24 billion)

The main form of investment, indirect, is conducted through stocks and company bonds related with infrastructure (including hotels, steel, transportation, infrastructure, telecom and housing) (USD $6.6 billion – 0.6% of GDp by the end of 2010)

Direct investment through structured instruments among them the CKD´s, represents 0.2% of GDP by the end of 2010 (USD $2.1 billion)

CONSAR figures from December 9th 2010 note that

Direct Investment

76%

24%

Indirect Investment

Source: BBVA Research

Page 19

CONSAR figures from December 9th, 2010, note that $2.34 billion had been placed in CKD’s, the participation of the SIEFORES in CKD’s endorsed productive projects worth $2.11 billion and were in the process of positioning and analyzing around 20 new projects


Certificates of Capital Development (CKDs)• The Certificates of Development (CKDs) are trust

Section 3

Mexican case: Investment in Infrastructure

p p ( )Source: Consar

The Certificates of Development (CKDs) are trust certificates intended to fund one or more projects. There are two types, one directed toward private capital which in turn invests in projects and another directed only to projects, mainly in infrastructure

• Among the principle CKDs related to infrastructure there are: Macquirie and Red de Carreteras de Occidente (RCO). Macquarie is the first infrastructure investment fund launched in Latin America by an Australian bank Macquarie. RCO was the first project that issued CKDs (October 2009) and is mainly

102

140

128

60

193

334

125

234

201

200

Capital Inmobiliario

Vertex Real Estate

EMX Capital

MARHNOS

Infrestru. Insit itucional

NAVIX

Artha Operadora

PLA Inmuebles Indust.

PROMECAP

AMBMexico Manager

Page 20

that issued CKDs (October 2009) and is mainly responsible for the Maravatío-Zaplotanejo Highway, Autopista Guadalajara-Zaplotanejo, and others

200

212

93

296

50

640

169

AMB Mexico Manager

Nexxus Capital IV General Partner

Atlas Discovery Mexico

MACQUARIE

WAMEX Capital

Red de Carreteras de Occidente

Agorpecuaria Sta. Genoveva

Pension Funds Total Outstanding

11


Section 3

Portfolio of infrastructures investments in México

The investment in the infrastructure sector throughThe investment in the infrastructure sector through different vehicles has contributed to achieving highly diversified portfolios with a value of US $117 billion

Zero coupon bonds

5%

Floating rate bonds

3% Other5%

Local equity8%

Foreign equity10%

Structured securities

3%

18%

Fixed rate bonds

21%

Inflation linkedbonds

24%

Page 21

The final beneficiaries of good investments in infrastructure will be pensioners, both as its users and through their contribution to increase their pensions

Zero coupon bonds Floating rate bonds Other

Local equity Foreign equity Structured securities

Local private debt Foreign debt Fixed rate bonds

Inflation linked bonds

79.5%

Fixed Income

17.8%

Equity

2.6%

Structured Securities

20.5%

Local private

18%

Foreign debt3%


Section 3

What we see in the PFs-Infrastructure relationship?

Strong Points

• Gradual advances in regulation on the participation of the Private Sector in infrastructure investing. History is building.

• Pension Fund participation in infrastructure and other special instruments has begun.

• Lack of a clear process for the integral development of concessions and the participation of different actors.

• Fragmented legal bodies in different economic sectors and government levels.

• Administrative and judicial restrictions that limit the decisions of key actors in the concession process.

Weaknesses

Page 22

p• Limits on the degree of authority given to

principal decision makers in the process • Risks are not accurately

allocated/assessed in many countries.• Obsession to rush and involve Pension

Funds in infrastructure, which could generate perverse incentives.

12


Section 3

How to create a framework for infrastructure investing with the participation of Pension Funds

To do this, a comprehensive approach and the improvement of each stage in , p pp p gthe process is necessary

a) Identify bottlenecks, comparing the views of various stakeholders

b) Projection models for institutionalized cost-benefits

c) Regulation, concession and control laws should be effective and insure efficiency

d) Appropriately allocate the risks of the markets and financial assets for investors, and comply with existing regulations (or cause changes that involve improvements). The institutional investors must have a voice in this design

Page 23


Section 3

How to create a framework for infrastructure investing with the participation of Pension Funds

e) Develop clear instruments to mitigate risks. A risk outline that allows a favorable environment to

Proposal: to search for comprehensive approaches for reform in

receive good credit ratings of the instruments involved, and the participation of relevant stakeholders

f) For the case of pensions, it is important to evaluate the risk-return performance of these instruments which are considered appropriate within the multi-fund schemes of the industry

g) Necessity to consolidate the model of Project Finance

Page 24

each country by neutral agencies (Multilateral Organizations)

13


Section 3

Opportunity cost of not investing in infrastructure…

The minor improvements in Mexico are due to the lower contribution rates in this country that accumulates lower balances than the other countries and therefore fewer resources are available to be invested in infrastructure

Opportunity cost of not investing in infrastructure

Potential benefit of investing in infrastructure

Gap % between GDP per capita in a scenario with higher infrastructrue investment vs historical

investment, % each year

Discounted Present Value/GDP (2005)

2020 2030 2040 2050 2005-2050

Mexico 0,8% 1,0% 1,1% 1,1% 24,1%

Title TableSource: SEE BBVA

Page 25

, , , , ,

Chile 1,8% 2,7% 3,2% 3,6% 89,3%

Colombia 0,9% 1,4% 1,8% 2,2% 49,15

Peru 1,6% 2,3% 3,0% 3,6% 103,3%


Section 1

Index


Section 2


Section 3


Section 4

Conclusion

Page 26

14


Conclusions

The individual capitalization Pension Systems in Latin America, and specifically Mexico, have reached significant l l f l d f dlevels of accumulated funds

This causes immediate and very positive effects by creating conditions necessary for economic growth– The deepening of the Capital Markets can provide the additional financing to various productive sectors

– Generates incentives to contribute and reduce informality in the labor market

– The availability of resources that will likely be invested in generating long term economic growth, such as investments in infrastructure

– Support the long term fiscal sustainability, solving existing problems of the traditional PAYGO systems

The pension funds seek assets (like the investment in infrastructure) that have a good risk/return relationship and conveniently adapt to the life cycles of the affiliates, optimizing the portfolio management

The participation of the AFORES-AFPs in financing infrastructure could be mutually beneficial between the State

Page 27

p p g yand Pension Funds if the necessary and sufficient conditions are presented to develop good projects, benefiting the savings of the affiliates and helping to reduce the gap of funds towards infrastructure in the region. However, the ultimate decision to invest in these types of assets should be at the discretion of the AFORES and the prudential management of their portfolio

In this regard, in recent years, Mexico has taken significant steps in the right direction with the innovation of financial assets linked to infrastructure (like the CKDs), which can be very successful as a means of investment

The opportunity cost of not developing the full investment potential in infrastructure by the AFORES has been quantified as 24.1% of GDP in present discounted value to 20503

Th kThank you…

Jorge Sicilia │ [email protected] │ June 2011

15


Growth Accounting Model

Appendix

Opportunity cost of not investing in infrastructure…

gAccording to Ashauer (1989a, 1989b, 1989c)

ttttt GLKAY

11 )1( ttt KsYK

Production function

Stock of capital

Other stock of physical capital

PFT Labor Force

1

Page 29

11 )1( tttt GAPsYG

Stock of capital

Stock of capital in infrastructure

Current public and private investment

Pension Funds contribution to infrastructure

s = savings rate

= depreciation rate

Date post:	24-Mar-2020
Category:	Documents
Upload:	others
View:	6 times
Download:	0 times

INSURANCE AND PRIVATE PENSIONS COMMITTEE SPECIAL ... · Insurance and Pensions Week: 50ty...

Documents