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MEXICO CITY-Mexico's shift from a state-run, pay-as-you-go pension system to one based on private retirement savings officially is under way, with workers allowed to make their first contributions to private savings plans as of July 1.
Two of the primary concerns being raised since the private system began last month are the amount of management fees workers will pay to the private fund managers and whether older workers will be disadvantaged by the switch.
The privatization of Mexico's pension system ultimately will provide for more secure pensions for employees, said Guillermo Montes Avila, director of human resources at Eli Lilly Cie De Mexico in Mexico City.
"There was a fiscal problem with the social security system in Mexico, and the possibility of the government defaulting on the payment of pensions in the future was high," he said.
The problem of maintaining a heavily burdened, government-sponsored defined benefit plan has now been alleviated by replacing it with a system of mandatory private pension plans for all working Mexicans.
As under the state pension system, retirement funds will be built up through contributions from the government, employers and employees. Employers contribute 3.15% of a worker's total salary, employees 1.125% and the government 0.226%. Contributions will be deducted from workers' paychecks, but the contributions will be deposited to accounts handled by private asset managers, Administradoras del Fondo para el Retiros, or AFOREs, that have been established by financial institutions to administer workers' retirement accounts.
The heavily regulated AFOREs will strive to secure superior investment returns to attract workers' funds. As a result, workers are expected to receive larger pensions than those that would be paid under the old state pension system, Mr. Montes said.
Yet despite the competitive market forces, the AFOREs are charging large commissions for their services, said Jesus Molina, director of personnel at Hewlett Packard de Mexico S.A. in Mexico City.
The more than one dozen AFOREs that have been established earn commissions in a variety of ways, and each of them released its final structure last month.
One common commission structure is to charge up to 1.7% of a worker's salary as a commission. Another is to charge up to 30% of the investment gains an AFORE manages to attain for a worker. In effect, the AFOREs charge more than 20% of the workers' contributions.
"They justify that by promising high returns," Mr. Molina said. Many workers are concerned that the AFOREs may be promising higher returns than they will be able to deliver, he added.
The high commissions are necessary to properly service the accounts, according to Eduardo Silva, director general of Profutoro, an AFORE owned by insurer Grupo Nacional Provincial in Mexico City. Profutoro charges each of the 1 million workers in the AFORE a commission of about 1.5% of salary.
"It's a large commission, but it is the only charge that we impose and we need it to manage the funds," he said.
The commission levels are comparable to those charged in Chile, which has a pension system similar to the one just implemented in Mexico, Mr. Silva said.
The new system could also cause problems for workers who are nearing retirement and will not have had enough time to save sufficient retirement funds in the AFOREs to fund an adequate pension, said Ignacio Cano, director of employee benefits services at Tillinghast Towers Perrin in Mexico City.
Under the regulations released in March, the new scheme ostensibly allows workers to re-enter the old social security system when they retire if calculations show that they would receive a larger benefit with a state pension than under the new private system. In reality, though, some of the details of the law will prevent a large number of workers from re-entering the old system, said Mr. Cano.
To re-enter the system, the workers must give their AFORE contributions to the state and then the state will pay the old level of pension. However, in order to re-enter the system, workers must have made at least 24 years' pension contributions, under either or both systems.
"In Mexico, we have a very large, informal economy and people go in and out of the formal economy," Mr. Cano said. Consequently, on average workers only contribute to the social security system for 16 years over the course of their working lives, he said.
As a result of this provision, Mr. Cano said, many older workers will not be able to re-enter the system and will suffer a reduction in pension benefits.
"In macro-economic terms, the new system will encourage long-term savings, and we need to create long-term savings in Mexico, but in terms of benefits. . .there will be some reduction under the new system," he said.
Also, workers are not confident that, even with 24 years of contributions, the government will make good its promise to allow them to re-enter the old system when they retire, said Mr. Molina of Hewlett Packard.
During the transition period between relying partially on the old system and partially on their savings in the AFOREs, workers will likely suffer some reduction in retirement benefits, he said.
But, over the long term, the new system "is the right thing to do," Mr. Molina said.
"New workers and people leaving college now will really benefit," he said.
The state-run death and disability system was also changed on July 1 and the new system should significantly boost insurance premiums in Mexico.
Under the new system, pensions paid to disabled workers, widows and orphans will now be paid through private insurance company annuities, which will be funded through a lump sum payment from the government.
The beneficiaries will be able to choose the insurance company from which the annuities will be purchased.
The change will lead to a significant increase in business for insurers, said Jose Monroy, sales manager at Pensiones Comercial America, a subsidiary of Seguros Comercial America S.A. de C.V. in Mexico City.
"This market is around 30,000 cases a year," he said.