2016 Very Good Report by World Bank.pdf

world bank report on mexican pension system

1. ERNESTO BRODERSOHN
[email protected]
[email protected]
WORLD BANK CORE COURSE ON PENSIONS
“PRACTITIONER’S EXPERIENCE WITH PUBLIC PENSION REFORM”
WASHINGTON, DC
MAY 2
nd
, 2016
Public Sector Pension and other
ReformExperiences from Mexico
Public Disclosure Authorized
Public Disclosure Authorized
Public Disclosure Authorized
Public Disclosure Authorized

2. Overall structure
Some facts about Mexico
Structure of the pension system in Mexico since the private
sector pension reform of 1997 (DB to DC)
Public sector pension reform of 2007 (DB to DC)
Implementation steps to migrate public sector to DC scheme
Voluntary savings
Identifying behavioural barriers and policy
Brief overview of
Retirement Saving
System
Structure of pension
system
Public sector pension
reform
Voluntary Savings
Identifying behavioral
barriers and policy

3. Some data about Mexico
Population 120 million
Working age population of 56 million
GDP: $1.2 Trillion US
Growth Rate: ~2-3%
Inflation Rate: 3.6%
Brief overview of
Retirement Saving
System
Structure of pension
system
Public sector pension
reform
Voluntary Savings
Identifying behavioral
barriers and policy

4. In 1997 the Pension System was reformed for the private sector
Level of contributions was set at 6.5% wage
Employees contribute 1.15% wage
Employers contribute 5.15% wage
Government 0.225% wage
Additional social contribution for people earning 15 x Minimum wage
Specific pension fund administrators were created (Afores)
They are different entities from banks, but they can be part of a financial
or economic group
Each Afore administrates a set of funds (Siefores) which must comply
with an investment regime
A central switching entity holding records for every individual was
created (Procesar), but recordkeeping is kept by the Afores
Its main purpose is to facilitate collection of contributions, separate from
tax information and fund flows
Allows employers to contribute to all employees independent of the Afore
they choose
The system transformation was set to have both systems co-exists
A transition generation who can choose the older pension system was
defined as everybody who has contributed before 1997
Since we do not know who will opt between the older Both DB and DC
everybody contributes into their individual account
Brief overview of
Retirement Saving
System
Structure of pension
system
Public sector pension
reform
Voluntary Savings
Identifying behavioral
barriers and policy

5. Overall organizational design of the pension system in Mexico
Brief overview of
Retirement Saving
System
Structure of pension
system
Public sector pension
reform
Voluntary Savings
Identifying behavioral
barriers and policy
BDNSAR
Private Sector (1997)
Employers
DB
Social Security
Agencies
(Housing and Social Security)
PFA Switching
Collection of Contributions
11 PFAs

6. Brief overview of
Retirement Saving
System
Structure of pension
system
Public sector pension
reform
Voluntary Savings
Identifying behavioral
barriers and policy
* Avg return calculated for 72 months (funds 3 and 4), 60 months (fund 2), 47 months (fund 1)
Default lifecycle funds
Every Pension Fund Administrator holds 5 different funds exist which are
age based
Fund 4 –People 36 years of age or younger (avg return 9.29%*)
Fund 3 –People between 37 and 45 years of age (avg return 8.50%*)
Fund 2 –People between 46 and 59 years of age (avg return 6.89%*)
Fund 1 –People 60 years of age or older (avg return 5.55%*)
Fund 0 –Focused on decumulation phase (Programmed withdrawals, partial
withdrawals –started nov. 2015)
Over 99% of the clients have not elected a fund within their Afore
Every year a transfer process exists to change people who qualify
Netting processes helps minimize impact in portfolio turnover

7. Brief overview of
Retirement Saving
System
Structure of pension
system
Public sector pension
reform
Voluntary Savings
Identifying behavioral
barriers and policy
Fund accumulation since 1997
The funds belong to 55 million individual accounts
Over US$150 billion
Asset accumulation is now 14.5% of GDP
Growth of 129%
since 2009

8. Brief overview of
Retirement Saving
System
Structure of pension
system
Public sector pension
reform
Voluntary Savings
Identifying behavioral
barriers and policy
Fees charged by Afores have been decreasing over time
In 2008 the law was reformed specifying that the only income Afores can have
is based on a fee established as a percentage over assets under management
Afores are mandated to submit the rates every year which are approved by
Consar 1.00
1.10
1.20
1.30
1.40
1.50
1.60
1.70
1.80
1.90
200820092010201120122013201420152016
Fees (% over AUM)

9. 2007 public sector pension reform
Main content of reform related to individual accounts
Use the individual accounts that have been established in the private sector,
through the use of the national ID number
Designed to be portable and interoperable with private sector pension
accounts
Use the existing Afore infrastructure to administer the funds
A key differentiator with respect to the private sector reform was that people
had to choose between a reformed DB (parametric) and the new DC scheme
Public Sector defined contribution structure
Employees contribute 6.025% wage
Employers contribute 5.175% wage
Voluntary Contribution match (1 to 3.25) up to 2% wage
Additional social contribution
Brief overview of
Retirement Saving
System
Structure of pension
system
Public sector
pension reform
Voluntary Savings
Identifying behavioral
barriers and policy
Total contributions in the public sector pension system is
much higher than private sector contributions
at 11.2%20.2% including voluntary savings

10. Incorporating the public sector into the existing pension system
infrastructure
Brief overview of
Retirement Saving
System
Structure of pension
system
Public sector
pension reform
Voluntary Savings
Identifying behavioral
barriers and policy
BDNSAR
Private Sector (1997)
Government
Agencies
Employers
DB
Public Sector (2007)
Social Security
Agencies
PFA Switching
Collection of Contributions
11 PFAs

11. Pension System map in Mexico
Brief overview of
Retirement Saving
System
Structure of pension
system
Public sector
pension reform
Voluntary Savings
Identifying behavioral
barriers and policy
IMSS
Private sector
ISSSTE
Public sector
1997 2007
1973 DB can opt for 1997 DC
1997 DC
1992DB 2007 DC
Recognition
bond

12. Implementation went from March 2007 through December 2008
Bi-weekly meetings were held through a special committee
Lead by the Ministry of Finance
All sectors of the government were included
Education, Social Development agencies, Health, Ministry of Interior,
Telecommunications, Transport, Agriculture, Autonomous agencies, State agencies
Recognition bond based on number of years worked and age
Requirement to all government agencies to provide information for
over 2 million people´s employment history
Brief overview of
Retirement Saving
System
Structure of pension
system
Public sector
pension reform
Voluntary Savings
Identifying behavioral
barriers and policy

13. Implementation details –Infrastructure and data interactions
Procesar was set to be the central record keeper of all data
interactions with all government agencies
In charge of collecting all employee history for all workers
Brief overview of
Retirement Saving
System
Structure of pension
system
Public sector
pension reform
Voluntary Savings
Identifying behavioral
barriers and policy

14. Implementation details -Roadshows
Roadshows to all states and government agencies to provide
information about the benefits of the new pension plan
Establishing interactive communication channels with all entities
Transmit benefits to switching to new pension scheme
Brief overview of
Retirement Saving
System
Structure of pension
system
Public sector
pension reform
Voluntary Savings
Identifying behavioral
barriers and policyFECHAZONA SEDE ESTADOS CONVOCADOS HORARIO
03-Mar1 Mazatlán, Sin.
BC Sur, BC Norte, Sonora y
Sinaloa. 10:00 hrs.
04-Mar4 Guadalajara, Jal.
Aguascalientes, Colima, Jalisco
y Nayarit 10:00 hrs.
06-Mar2 Monterrey, N.L.
Coahuila, Chihuahua, Durango
y Zacatecas. 10:00 hrs.
07-Mar3 Durango, Dgo.
Hidalgo, Nuevo León,
Tamaulipas y Tlaxcala.12:00 hrs.
10-Mar5 Morelia, Mich.
Guanajuato, Querétaro,
Michoacán y San Luis Potosí.10:00 hrs.
11-Mar7 Oaxaca, Oax.
Chiapas, Oaxaca, Puebla,
Veracruz. 10:00 hrs.
13-Mar8Villahermosa, Tab.
Campeche, Quintana Roo,
Tabasco y Yucatán. 10:00 hrs.
14-Mar6 Acapulco, Gro.
DF, Guerrero, Querétaro,
Estado de México, Morelos.10:00 hrs.

15. Implementation details –who chose?
Out of 2.1 million total public sector workers
Only 17% voluntarily adopted the pension scheme
Recognition Bond awarded for over 216 billion pesos (16 billion US)
53 billion pesos (4 billion US) in cash equivalent (short term debt)
163 billion pesos (12 billion US) in recognition bonds
35% elected to stay in the old reformed pension scheme
48% did not elect neither the new nor the old pension scheme
Law provided a ficta treatment –stayed in the old reformed pension scheme
Brief overview of
Retirement Saving
System
Structure of pension
system
Public sector
pension reform
Voluntary Savings
Identifying behavioral
barriers and policyEdad/Ant. 1-5 6-10 11-15 16-20 21-
15-20 1,597 9 3 1 5 1,615 0.23%
21-25 27,036 1,856 11 9 15 28,927 4.03%
26-30 49,70326,679 2,304 47 37 78,77010.98%
31-35 28,11344,09128,435 5,440 107 106,18614.81%
36-40 14,92724,17535,13632,580 6,825 113,64315.85%
41-45 9,28915,24024,57834,64648,772 132,52518.48%
46-50 5,663 9,29416,06821,32368,290 120,63816.82%
51-55 3,015 4,703 8,12910,68646,826 73,35910.23%
56-60 1,402 2,019 3,483 4,57524,248 35,727 4.98%
61-65 894 1,517 2,279 2,74518,264 25,699 3.58%
141,639129,583120,426112,052213,389 717,089717,089100.00%
19.75%18.07%16.79%15.63%29.76% Edad/Ant. 1-5 6-10 11-15 16-20 21-
15-20 692 1 0 0 0 6930.25%
21-25 16,615 1,200 1 0 0 17,8166.40%
26-30 35,55017,909 1,119 3 0 54,58119.62%
31-35 20,40329,06312,987 2,456 3 64,91223.33%
36-40 11,36216,97514,71510,527 2,463 56,04220.14%
41-45 6,67610,014 8,624 7,565 9,981 42,86015.40%
46-50 3,937 5,645 5,605 4,851 9,050 29,08810.45%
51-55 1,672 2,365 2,049 1,980 4,192 12,2584.41%
56-60 0 0 0 0 0 00.00%
61-65 0 0 0 0 0 00.00%
96,90783,17245,10027,38225,689278,250278,250100.00%
34.83%29.89%16.21% 9.84% 9.23%
Elected Recognition Bond and Individual Accounts
Elected Old Reformed Pension Scheme

16. What has happened since then with the public sector workers?
Brief overview of
Retirement Saving
System
Structure of pension
system
Public sector
pension reform
Voluntary Savings
Identifying behavioral
barriers and policy
-
50,000
100,000
150,000
200,000
250,000
300,000
Public Sector Individual Accounts Since 2011
-
200,000
400,000
600,000
800,000
1,000,000
1,200,000
1,400,000
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
Accounts with Voluntary Savings (with Matching)
% of Accounts with Voluntary Savings (matching)
vs Individual Accounts

17. Brief overview of
Retirement Saving
System
Structure of pension
system
Public sector pension
reform
Voluntary Savings
Identifying behavioral
barriers and policy
How many have “constantly” (over 60%) been
contributing since 2009?
Only 6.4 millon
workers keep
contributing
regularly
Out of 14.5 millon
workers that were
contributing in 2009
Workers
Bi-monthly contribution
Even if Private sector workers had a contribution density of 100%,
replacement rates at 6.5% contribution levels will only yield 30% replacement
rate
Mandatory Contributions are not enough, specially in
private sector

18. Brief overview of
Retirement Saving
System
Structure of pension
system
Public sector pension
reform
Voluntary Savings
Identifying behavioral
barriers and policy
How do we make 55 million people in the system
contribute to their individual account to increase their
replacement rate
Greater need for Voluntary Contributions
Contributors Non ContributorsIntermittent
- +
Voluntary Contributions or Savings
Increase in
replacement
Rate
Mandatory Contributions (6.5%)

19. Available channels to make Voluntary Savings Deposits
Brief overview of
Retirement Saving
System
Structure of pension
system
Public sector pension
reform
Voluntary Savings
Identifying behavioral
barriers and policy
Each AFORE’s has their own model and most of the times it requires a
worker to go through complex procedures to make these deposits
1
2
3
4
5
6
7
8
9
10
11
Afore 1 Promotes
Promotes
Promotes
Promotes
Promotes
Promotes
Promotes
Promotes
Bank
Branch
Recurrent
debit payments
Electronic
transfer
Payroll
Discount
Retail
Chains
Afore 2
Afore 3
Afore 4
Afore 5
Afore 6
Afore 7
Afore 8
Afore 9
Afore 10
Afore 11

20. Some impressions on public sector pension reform
Brief overview of
Retirement Saving
System
Structure of pension
system
Public sector pension
reform
Voluntary Savings
Identifying behavioral
barriers and policy
TheworkerwillonlyprovidetheRetailChain’scashier:
CURP(cellphonenumberwillbealsoused)
Typeofsaving(PilarI)
DepositAmount
TheRetailChainwillgivetheworkeradeposit’svoucher(in
followingstages,willalsosendanSMSore-mail)
ProceSARwillcentralizetheoperationbetweenAFOREsand
RetailChains3
2
1
Retail Chain

21. I want to make a
Voluntary Savings
deposit, please
Please, give me your
CURP or
cellphone
number
$200 pesos, please
How much would
you wish to deposit
in your Account?
Sure, wait a second
My CURP is
LOMJ750911HDFZTF01
Voluntary Savings collection via Retail Chains

22. Here, this is your
Receipt
You have received a
Voluntary Savings
Deposit for
$200
Voluntary Savings collection via Retail Chains

23. AFORE AFORE AFORE
Voluntary Savings collection via Retail Chains

24. Behavioural barriers to make deposits
Setting up simple voluntary savings channels is the first step, we need to look
at how to make people use new channels and change behavior towards
savings
http://www.ideas42.org/blog/pathway-better-retirement-mexico/
The conclusions of the study pointed to new behavioral implementation
policy currently being evaluated through pilots underway include
New balance statement
SMS reminder messages to make voluntary savings contributions
Using Afore’s sales force to promote voluntary savings
Punch Cards
Brief overview of
Retirement Saving
System
Structure of pension
system
Public sector pension
reform
Voluntary Savings
Identifying
behavioral barriers
and policy

25. Take homes…
Implementing policy reforms
Policy design must carefully consider implementation impacts in order to
make sure full positive effects of policy reform are obtained
Contribution defaults
Private sector reform learnings provided input to encourage opt-in policy
design in the public sector, however uptake on the program has been slow
Voluntary Savings
Opt-in mechanisms are slow to evolve to encourage additional savings
Opt-out or “save more tomorrow” mechanisms may be better suited to
encourage savings
Behavioral research shows promising results:
Short term focused incentives can encourage savings
Better information can facilitate better informed decisions
Pension Fund Administrator and Fund election
Limited financial literacy implies that customers are swayed to switch not
by returns but other factors play into customer decisions
Once they elect an Afore most people do not chose beyond lifecycle fund
defaults
Brief overview of
Retirement Saving
System
Structure of pension
system
Public sector pension
reform
Voluntary Savings
Identifying behavioral
barriers and policy

26. ERNESTO BRODERSOHN
[email protected]
[email protected]
WORLD BANK CORE COURSE ON PENSIONS
“PRACTITIONER’S EXPERIENCE WITH PUBLIC PENSION REFORM”
WASHINGTON, DC
MAY 2
nd
, 2016
Public Sector Pension and other
ReformExperiences from Mexico