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
Role of Pension Funds in Economic Growth/ June 2011
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
Role of Pension Funds in Economic Growth/ June 2011
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
Role of Pension Funds in Economic Growth/ June 2011
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
Role of Pension Funds in Economic Growth/ June 2011
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
Role of Pension Funds in Economic Growth/ June 2011
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
Role of Pension Funds in Economic Growth/ June 2011
Section 1
Index
Sizing pension funds in the mexican economy
Section 2
Pension funds and short and long term growthSection 3
Pension funds and infrastructure investment
Section 4
Conclusion
Page 8
5
Role of Pension Funds in Economic Growth/ June 2011
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)
*
Role of Pension Funds in Economic Growth/ June 2011
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
Role of Pension Funds in Economic Growth/ June 2011
Section 1
Index
Sizing pension funds in the mexican economy
Section 2
Pension funds and short and long term growth
Section 3
Pension funds and infrastructure investmentSection 4
Conclusion
Page 11
Role of Pension Funds in Economic Growth/ June 2011
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
Role of Pension Funds in Economic Growth/ June 2011
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
Role of Pension Funds in Economic Growth/ June 2011
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
Role of Pension Funds in Economic Growth/ June 2011
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
Role of Pension Funds in Economic Growth/ June 2011
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)
Role of Pension Funds in Economic Growth/ June 2011
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
Role of Pension Funds in Economic Growth/ June 2011
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
Role of Pension Funds in Economic Growth/ June 2011
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
Role of Pension Funds in Economic Growth/ June 2011
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%
Role of Pension Funds in Economic Growth/ June 2011
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
Role of Pension Funds in Economic Growth/ June 2011
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
Role of Pension Funds in Economic Growth/ June 2011
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
Role of Pension Funds in Economic Growth/ June 2011
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%
Role of Pension Funds in Economic Growth/ June 2011
Section 1
Index
Sizing pension funds in the mexican economy
Section 2
Pension funds and short and long term growth
Section 3
Pension funds and infrastructure investment
Section 4
Conclusion
Page 26
14
Role of Pension Funds in Economic Growth/ June 2011
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
Role of Pension Funds in Economic Growth/ June 2011
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