Peru’s private pension fund administrators, AFPs, stand on a “very solid” financial footing that will allow them to weather the global financial crisis, according to Pedro Pablo Kuczynski, former finance minister and cabinet chief under President Toledo.
“I believe that we have to emphasize that (Peru’s) four AFPs and their shareholders, for example Scotiabank, ING and the Banco de Credito (BCP), are very solid financial institutions,” said Kuczynski in comments to RPP.
“But maintaining economic growth is key,” he added. “Obviously this year will be slower, but the latest statistics indicate that Peru will have the greatest growth rate in Latin America in the coming year… what’s important is that inflation decrease, and it is decreasing.”
In the U.S. this week, Calpers, the California Public Employees’ Retirement System, reported that the value of its assets has fallen by $50 billion since late February due to stock market falls and other investment losses.
And on Tuesday, Argentina’s President Christina Kirchner proposed to take over her country’s 10 private pension funds, which manage a total of $35 billion, to protect retirees ahead of the global financial crisis. The proposal, which has to be approved by Congress, is considered “madness” by the opposition, given that the pension funds already, by law, have 55% of their investments in government treasury bonds that are paying very low interest rates.
Peru’s pension funds, meanwhile, are estimated to have lost $6.7 billion over the past 12 months, according to the Banking and Insurance Superintendency.
But, according to Kuczynski, given that Peru’s economy is much stronger than that of Argentina and that investments have been made on the long-term, there is no cause for alarm.
“We must not panic,” said Kuczynski. “Pensions aren’t going to be paid out tomorrow or the day after. For most contributors, they will be paid out in 10, 15 or 20 years.”
Kuczynski, who will be lecturing on Latin America in the global economy next Tuesday at the University of Wisconsin-Madison’s Division of International Studies, is a senior partner and advisor in the emerging markets Rohatyn Group, and president and executive director of the Latin American Enterprise Fund LP.
Peru’s private pension fund system began in 1993 with some eight funds. Mergers resulted in the current four funds – Integra, Horizonte, Prima and Profuturo – which have a total of 4.15 million affiliates.
The larger portion of AFP investment is in Peru, in large infrastructure projects, utilities and stocks. Although the Central Bank in April this year raised the limit of investment abroad from 17% to 20%, total investment by the funds at the time was only 12%.
However, some analysts consider that the funds’ investment in hedge funds remains a cause for concern because of the instability of financial markets, and the lack of regulation associated with these types of funds.
“The AFPs represent losses for millions of contributors,” said economist Jorge Guillen of the Catholic University’s Centrum MBA school. “If people could choose, more than 90 percent would abandon the private pension system. It’s a monopoly.”
The Banking and Insurance Superintendency announced the creation of a Fund 4, designed to protect the pensions of affiliates who are 60 years of age and older by investing in debt instruments. It is also recommending that older affiliates transfer to the lower risk Fund 1.
“The measure is a mistake and is only an immediate response to Argentina’s move to nationalize its system. It is trying to hide the real situation of the AFPs,” said economist and former Central Bank director Kurt Burneo.
Burneo said the problem in Peru is that, contrary to regulations in other countries, the commissions charged by the funds are exempt from sharing risk.
“Therefore, they never lose,” said Burneo. “Their profits increase daily while the contributors’ funds decrease. Profits must be controlled and risks shared.”
However, AFP Superintendent Lorena Masías was quick to disagree. “The contributors’ investments are intact,” said Masías, “and losses have been registered only on accumulated profit.” Everything should go back to normal within a year or two, Masías added.
